The Precarious Role of the Broker in Litigation

There is a great deal of discussion about the role of insurance agents and brokers in procuring coverage, receiving or providing notice of claims, and accepting premiums. Typically, these discussions, and the accompanying body of case law, address whether the broker is an agent of the insured or the insurer and whether their representations can affect coverage.1 Another area that merits discussion, and receives little, is the role of the broker in litigation. Outside of the reinsurance context, Texas law does not formally recognize a “broker.”2 “Broker” is used by the courts, and in the insurance industry, in a variety of contexts. “Broker” is used in this article to mean an insurance agent who acts, typically on behalf of large insureds, to procure coverage either directly from companies or through general agents. In this capacity, the broker may owe duties to the insurance company, but also owes duties, and typically feels a sense of loyalty, to the ultimate client—the insured.

When the insured is sued, and especially when coverage is at issue, the role of the broker may become complicated. Frequently, brokers seek to be involved in the process of determining coverage, and act as an ombudsman for the insured. Under the law, however, the broker’s intent in procuring coverage, or the broker’s own opinion regarding a policy interpretation, should be parol evidence, and irrelevant to construing the written agreement. On the other hand, where the broker insists that coverage exists, and the policy is construed otherwise, the broker (and potentially the company) may have exposure under Article 21.213, if this belief in coverage was also conveyed to the insured, and the insured acted in reliance upon the representation that coverage would indeed exist.

A broker may also feel that customer relations require the broker to remain active during the litigation process, ensuring that the insurance company actively and properly defends. Again, the interest of the broker and that of the insurance company may be at odds. The broker may be interested in seeing a case be actively defended, as an indemnity payment will affect loss history. The insurer, on the other hand, may have the benefit of defense evaluations, which suggest that the insured’s exposure warrants settlement. This clash of interests can come to a head when a broker insists on being provided detailed information about the defense of the case, including evaluation reports and reserve information.

Texas recognizes that the “tripartite relationship” between the insurer, insured and counsel, stemming from the duty to defend, extends the privilege for attorney-client communications to the insurer.4 This extension of the privilege, however, is narrowly construed. For instance, courts have rejected an argument of privilege for communications between an insurer and insured, when no suit was filed and counsel not yet retained.5

Even after counsel is involved, it is unlikely the privilege would extend to the broker. No privilege exists where a non-party to the attorney-client relationship is included in the communications, and privilege can be waived by disclosure to a third party.6 The privilege extends to a representative of the lawyer; it is unlikely the broker would qualify, however, as he or she is not employed by the lawyer, and is not assisting in the rendition of professional legal services. Nor is it likely the broker would be considered a representative of the client. Rule 503(a)(2) identifies a representative of the client as “(A) a person having authority to obtain professional legal services, or to act on advice thereby, on behalf of the client,” or “(B) any other person who, for the purpose of effectuating legal representation for the client, makes or receives a confidential communication while acting in the scope of employment for the client.”7

While there may be an argument that the broker, as the agent of the insured or the insurer, is a party to the tripartite relationship, and thus cloaked with attorney-client privilege, there is a more plausible argument that, in most instances, the broker is not actively engaged in defending the case, and any communications to the broker, by the insured or the insurer, lose the benefit of privilege and may be discoverable by the claimant. In National Tank, the Supreme Court recognized that liability insurers typically have authority to retain counsel and control defense. In that instance, the court acknowledged that the insurer’s employees could be considered representatives of the insured, for purposes of the privilege. The court qualified its statements, however, by requiring that the insurer’s employees be those with the authority to hire counsel and to act on counsel’s advice on behalf of the insured.8

In another example, reserve information is generally not discoverable, because it reflects the insurance company’s evaluation of the insured’s exposure. Reserve information that is made accessible to the broker, however, may find its way into the claimant’s file through discovery, or arguments of waiver of privilege. In a more direct example, brokers, acting as a sentinel to protect insureds during the litigation process, may seek to participate in meetings with the defense counsel, to discuss case strategy, or make sure there is no conflict, where defense is under reservation of rights. Despite best intentions, the participation of the broker, at a minimum, gives rise to an argument that the communications in the meeting are no longer privileged.

While the broker’s conduct in the course of litigation against the insured may adversely affect the insured’s interest, the broker’s conduct in coverage litigation may affect the insurer’s interest. The same issues are frequently at stake. The broker wants access to the coverage evaluation, frequently including the reservation of rights and opinion letters. Counsel’s evaluation of coverage, shared with the insurer, is privileged.9 It is unlikely, however, that the privilege extends to a broker. Because the broker is typically not simply the agent of the insurer, however, but enjoys a dual agency relationship, or may be solely the agent of the insured, providing this information to the broker arguably creates a waiver of privilege, allowing the insured to discover the opinion letters in coverage litigation.

The unrecognized and unclarified role of the broker, under Texas law, leads to some murky relationships. It would be wise, however, for all parties—the insured, the insurer and the broker—to carefully consider the impact of a broker’s participation in litigation, or the sharing of information with the broker, as it may have unanticipated consequences.

1 See, e.g., Duzich v. Marine Office of America Corp., 980 S.W.2d 857 (Tex. App.—Corpus Christi 1998, pet. denied) (fact issue existed as to whether broker was agent of insured or insurer, for purpose of receiving notice of claim, based on prior conduct).
2 McKillip v. Employers Fire Ins. Co., 932 S.W.2d 268 (Tex. App.—Texarkana 1968, no writ).
3 Art. 21.21, Tex. Ins. Code.
4 See, e.g., Boring & Tunneling Co. v. Salazar, 782 S.W.2d 284, 289-90 (Tex. App.—Houston [1st Dist.] 1989, no writ) (defense attorney’s report to adjuster was privileged); In re Fontenot, 13 S.W.3d 111 (Tex. App.—Fort Worth 2000, no pet.).
5 See In re Ford Motor Co., 988 S.W.2d 714, 719 (Tex. 1998); In re W&G Trucking, Inc., 990 S.W.2d 473 (Tex. App.—Beaumont 1999, no pet.).
6 Tex R. Evid. 503(b); see, e.g., Osborne v. Johnson, 954 S.W.2d 180 (Tex. App.—Waco 1997, no pet.).
7 Tex. R. Evid. 503(a)(2).
8 851 S.W.2d at 199.
9 Maryland Gen’l Am. Ins. Co. v. Blackmon, 639 S.W.2d 455 (Tex. 1982).

Bradley is a partner in the Dallas office of Thompson, Coe, Cousins & Irons, L.L.P. She is a member of the Insurance Litigation and Coverage Section and leads the firm’s coverage practice. She has represented agents in disputes with policyholders and insurers and routinely represents insurers in evaluating and litigating coverage issues under general and professional liability policies, commercial auto and trucking policies, commercial property policies and homeowners policies.

Topics Lawsuits Carriers Texas Agencies