Broker Liability

Is There a Duty to Advise About Adequacy of Coverage?

Author’s note: This month’s column will examine the liability of a broker for an alleged failure to advise the insured about the adequacy of insurance coverage. The next column in the Sept. 1, 2008, issue will look at the liability of a broker for failing to obtain promised or reasonably anticipated coverages.

California has had more than its share of earthquakes, wildfires and other natural disasters. In the wake of those catastrophes, many insureds found themselves without policy limits sufficient to cover their losses. As a consequence, numerous insureds have claimed that their brokers failed to tell them how much coverage they needed.

The liability of a broker for failing to advise an insured regarding the adequacy of coverage is an issue that frequently arises in the context of policy limits for liability policies. However, the reasoning and general principals are applicable to property and casualty policies as well.

The seminal California case addressing this issue is Jones v. Grewe, (1987) 189 Cal. App. 3d 950. In Jones, a minor fell into a swimming pool and seriously injured herself. She brought an action against the owners of the pool for negligence. A judgment was entered against the insureds for $1.5 million. However, the insureds’ policy limits were only $300,000.

The insureds cross-complained against the insurance agent, alleging that the agent had breached his fiduciary duty by failing to ensure that they had adequate liability coverage. The cross-complaint alleged that the insureds purchased insurance from the insurance agent for 10 years, relied on the agent’s expertise and followed his advice on certain insurance matters.

The court, however, held that although an insurance agent has an obligation to use reasonable care, diligence and judgment in procuring the insurance requested by an insured, the mere existence of an agent-insured relationship imposes no duty on the agent to advise the insured on specific coverage matters. The court noted that an insured’s request for “sufficient coverage,” and an agent’s assurance that the policy provided “adequate” coverage, do not, in and of themselves, imply an “expanded principal-agent relationship.” The Jones court thus held that “[i]t is the insured’s responsibility to advise the agent of the insurance he wants, including the limits of the policy to be issued.” [189 Cal. App. 3d at 956].

The Jones analysis was adopted in Shultz Steel Co. v. Hartford Accident and Indemnity Co. (1986) 187 Cal. App. 3d 513, which held that “strong public policy considerations” weighed against the imposition upon a broker of a duty to advise the insured of the availability of coverage beyond what was requested, and advising the insured regarding any alleged inadequacy of policy limits. The absence of such a duty on the part of an insurance agent or broker was likewise adopted by numerous California decisions, such as Pabitsky v. Frager, (1985) 164 Cal. App. 3d 401 and Ahern v. Dillenback, (1991) 1 Cal. App. 4d 36, and is the prevailing view in most jurisdictions. It was most recently reaffirmed in June 2008 in Roberts v. Assurance Co. of America, (2008) 78 Cal. Rptr. 3d 361.

Jones, and its progeny recognize that although, as a general proposition, an insurance agent does not have a duty to volunteer to an insured that the insured should procure additional or different insurance coverage, the rule will not be applied in a variety of circumstances. The exceptions to the rule were articulated in Fitzpatrick v. Hayes (1997) 57 Cal. App. 4d 916, 927:

For example, in Free v. Republic Insurance Company, (1992) 8 Cal. App. 4d 1726, an insurance agent, in response to a specific inquiry from the insured, informed the insured that the fire insurance coverage limits on the property were adequate to reconstruct the house. After the residence was completely destroyed by fire, the insured discovered that the property values had substantially increased in the 10 years since his original policy was issued, and that his $141,000 policy limit was insufficient to replace his home. The court held that the agent was liable.

Clearly [the agents] were not required under the general duty of care they owned [the insured] to advise him regarding the sufficiency of his liability limits or the replacement value of his residence. (Citation omitted). Nonetheless, once they elected to respond to his inquires, a special duty arose requiring them to use reasonable care.

The reasoning of the court in Free is instructive, and needs to be taken in to consideration by every agent and broker when issuing a property policy:

Defendants apprised him of neither option. Nor did they decline to offer an opinion. Rather, they assured the plaintiff his coverage was sufficient. Under the circumstances, the defendants must be deemed to have assumed the additional duties, which, if breached, would subject them to liability.

Simply put, a broker or agent has no duty to advise an insured whether coverage is adequate, but if such advice is, in fact, given, it better be right.

The Sept. 1, 2008 next column will look at the liability of a broker who promises to obtain specific coverage, but then fails to deliver.

Topics California Agencies