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Insurance Agents' Duties to Insureds

Last edited 144 days ago by Ted Broomfield

SUMMARY

This summary of the law pertaining to insurance agents’ duties to insureds is aimed at attorneys practicing in California, and attempts to explain that whose agent the person is, depends on their role and license type, and barring exception by express agreement, holding oneself out as having a particular expertise, or misrepresenting the policy, the agent has a most the “the duty to use reasonable care and diligence in procuring insurance.” Details follow.

DETAILS

General law of agency

"Where an agent is duly constituted and names his principal and contracts in his name and does not exceed his authority, the principal is responsible and not the agent."” Gasnik

v. State Farm⁠

Ins. Co. (E.D. Cal. 1992) 825 F. Supp. 245, 249.

Duties to insured depend if the person is a broker or an agent of the insurer

Whether an insurance agent is the agent of the insurer or insured, generally depends on the status of the agent, either as an “agent,” or a “broker.”

A ”...life and accident and health or sickness licensee is a person authorized to act as a life agent on behalf of a life insurer or a disability insurer to transact any of the following: (1) Life insurance....” Insurance Code section

32⁠

An insurance broker is "a person who, for compensation and on behalf of another person, transacts insurance other than life ... with, but not on behalf of, an insurer." [Insurance Code section

33⁠

; and Insurance Code section

1623⁠

A broker is an agent to the insured, with a very limited scope of duty of reasonable care and diligence in procuring insurance

A broker in securing a policy for a client "acts only as agent for the [in]sured." [

Maloney v. Rhode Island Ins.⁠

Co. (1953) 115 Cal. App.2d 238, 244 [251 P.2d 1027]].

However, the scope of the duties under that agency relationship is extremely narrow, and typically defined as “...other than when handling an insured's money, a broker's duty — whether or not phrased as a fiduciary duty — is no greater than the duty to use reasonable care and diligence in procuring insurance.”

Mark Tanner⁠

Construction, Inc. v. HUB Internat. Ins. Services, Inc., 224 Cal. App. 4th 574, 586.

Whether a duty of care exists is a question of law for the court. [

Jones v. Grewe⁠

(1987) 189 Cal. App.3d 950, 954 [234 Cal. Rptr. 717];

Wilson v. All Service⁠

Ins. Corp. (1979) 91 Cal. App.3d 793, 796 [153 Cal. Rptr. 121].]

“Ordinarily an insurance agent assumes only those duties found in any agency relationship such as "reasonable care, diligence, and judgment in procuring the insurance requested by an insured." [

Jones v. Grewe⁠

(1987) 189 Cal. App.3d 950, 954 [234 Cal. Rptr. 717], citing to 3 Couch on Insurance (2d ed. 1984) Duties and Liabilities of Agent, § 25:37, p. 336.]

Exceptions when an insurance agent has a greater duty of care to the insured

Building on this initial premise, the Jones court concluded an agent has no duty to advise the insured on specific insurance matters. [

Jones v. Grewe⁠

(1987) 189 Cal. App.3d 950, 954]

Nevertheless, the Jones court acknowledged a special duty may be created by express agreement or by the agent holding himself out to be more than an "ordinary agent." [

Jones v. Grewe⁠

(1987) 189 Cal. App.3d 950, 954-955].

A duty to the insured by the agent can be created either by (1) express agreement; or (2) when the insurance agent of the insurer holds himself or herself out to assume a greater duty toward an insured, or by misrepresenting the policy's terms or extent of coverage.

Westrick v. State Farm⁠

Ins. (1982) 137 Cal. App.3d 685, 692 [187 Cal. Rptr. 214].

Westrick v. State Farm⁠

the court found the agent was negligent in failing to inform the insured a six-wheel commercial truck would not be covered under his existing passenger car policy when the insured sought assurances it would be. The

Westrick v. State Farm⁠

court held that based on the insured's inquiries and the agent's superior knowledge of the scope of an automatic coverage clause under the policy, the agent had "the duty reasonably to inform an insured of the insured's rights and obligations under the insurance policy."

Westrick v. State Farm⁠

Ins. (1982) 137 Cal. App.3d 685, 692 [187 Cal. Rptr. 214].

Free v. Republic Ins.⁠

Co. (1992) 8 Cal. App.4th 1726 [11 Cal. Rptr.2d 296] explored one of the exceptions noted in Jones and held an agent has a duty to use reasonable care in responding to specific inquiries from his insured. [

Free v. Republic Ins.⁠

Co. (1992) 8 Cal. App.4th 1726, 1729.] In Free the insurer, through its agent, issued a homeowners policy to plaintiff in 1979. That year, and each year thereafter, plaintiff asked the agent whether the policy limits were adequate to rebuild his home if necessary. On each occasion the agent assured plaintiff the policy limits were adequate. After a fire destroyed his home, plaintiff learned for the first time the coverage provided by the policy was not adequate to replace his home. [

Free v. Republic Ins.⁠

Co. (1992) 8 Cal. App.4th 1726, 1722]. The Free distinguished from

Jones v. Grewe⁠

in that in

Jones v. Grewe⁠

the insured asked what is the desirable upper limit, a subjective question whose answer is unknowable. The type of insurance involved in the Free case involved the amount required to rebuild one's home, characterized by the court as a "specific eventuality" and one that is determinable. [

Free v. Republic Ins.⁠

Co. (1992) 8 Cal. App.4th 1726, 1729].

Review of an insurance broker’s duties to the insured

"Insurance brokers owe a limited duty to their clients, which is only `to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.' [Citations.] Accordingly, an insurance broker does not breach its duty to clients to procure the requested insurance policy unless `(a) the [broker] misrepresents the nature, extent or scope of the coverage being offered or provided ..., (b) there is a request or inquiry by the insured for a particular type or extent of coverage ..., or (c) the [broker] assumes an additional duty by either express agreement or by "holding himself out" as having expertise in a given field of insurance being sought by the insured.' [Citation.]" (

Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Ins. Services West, Inc. (2012) 203 Cal.App.4th 1278, 1283 [138 Cal.Rptr.3d 294],⁠

italics omitted (Pacific Rim).) "California law is well settled as to this limited duty on the part of insurance brokers. [Citations.]" (Ibid.)

"[A]n insurance broker ... owes no duty to its clients to investigate the financial condition of an insurer before placing insurance with it on their behalf." (

Wilson v. All Service Ins. Corp. (1979) 91 Cal.App.3d 793, 798 [153 Cal.Rptr. 121] (Wilson)⁠

.) The Wilson court reasoned that the Insurance Code prescribes the financial requirements for an insurer and the Insurance Commissioner has the continuing duty to oversee that financial condition, thus it would be "superfluous" and "would create a conflict with the regulatory scheme" to impose on the broker "a similar duty to ascertain the financial soundness of an insurer." (Id. at pp. 797-798.) In the case of self-funded

585⁠

⁠

*585⁠

workers' compensation programs, regulation is by the Department. (Lab. Code, § 3700, subd. (b); see Cal. Code Regs., tit. 8, § 15470 et seq.)

Kotlar v. Hartford Fire Ins. Co. (2000) 83 Cal.App.4th 1116, 1123 [100 Cal.Rptr.2d 246] (Kotlar)⁠

, the court held an insurance broker has no duty to give a named insured notice of the insurer's intent to cancel the policy; that duty rests with the insurer. Relying on Kotlar, the court in

Pacific Rim, supra, 203 Cal.App.4th at page 1284,⁠

held that an insurance broker had no duty to inform an additional insured (a subcontractor) of the insurer's insolvency. In declining to find a new duty on the part of insurance brokers, the Pacific Rim court concluded "that imposition of a duty requiring insurance brokers to inform an insured of `any adverse changes in the carrier's financial capability' postissuance of the insured's policy is properly the function of the Legislature because it would (a) fundamentally alter the nature and corresponding duties of insurance brokers, which would (b) increase the costs of procuring insurance." (

Pacific Rim, supra, 203 Cal.App.4th at p. 1285⁠

(3) "[I]t is unclear whether a fiduciary relationship exists between an insurance broker and an insured." (

Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Associates, Inc. (2004) 115 Cal.App.4th 1145, 1156 [10 Cal.Rptr.3d 582]⁠

(Hydro-Mill).) An insurance broker does act in a fiduciary capacity when he receives and holds premiums or premium refunds. (Ins. Code, § 1733.) In

Eddy v. Sharp (1988) 199 Cal.App.3d 858 [245 Cal.Rptr. 211] (Eddy)⁠

, this court reversed a summary judgment in favor of a broker on claims of negligent misrepresentation and breach of contract. The broker prepared a proposal for insurance that stated coverage was "All Risk," but failed to disclose that it provided no coverage for sewer backups. (Id. at p. 866.) We found there was a triable issue of fact as to whether the broker breached his duty by misrepresenting the terms of the policy. (Ibid.) We commented in dicta that under agency principles, the broker had "not only a fiduciary duty but an obligation to use due care." (Id. at p. 865; see

Westrec Marina Management, Inc. v. Jardine Ins. Brokers Orange County, Inc. (2000) 85 Cal.App.4th 1042, 1045 [102 Cal.Rptr.2d 673]⁠

[defendant brokers were found liable for breach of fiduciary duty and breach of their professional duty in their placement of insurance].) In Hydro-Mill, the court found allegations of the broker's breach of fiduciary duty amounted to a claim of professional negligence. Accordingly, the court applied the shorter two-year statute of limitations, rather than the longer one for breach of a fiduciary duty. (

Hydro-Mill, supra, 115 Cal.App.4th at pp. 1158-1159⁠

.) The court reasoned that since it was established that "an insurer is not a fiduciary, then arguably, neither is a broker." (Id. at p. 1158.) In refusing to expand a broker's duties, the Kotlar court distinguished the broker-client relationship from the attorney-client relationship; lawyers have a fiduciary duty of the highest order and must represent clients zealously within the bounds of the law, while brokers need to use only reasonable care and may represent both the insured and the insurer. (

Kotlar, supra, 83 Cal.App.4th at p. 1123⁠

(4) From these cases we conclude that, other than when handling an insured's money, a broker's duty — whether or not phrased as a fiduciary duty — is no greater than the duty to use reasonable care and diligence in procuring insurance.

SUMMARY

DETAILS

General law of agency

Duties to insured depend if the person is a broker or an agent of the insurer

A broker is an agent to the insured, with a very limited scope of duty of reasonable care and diligence in procuring insurance

Exceptions when an insurance agent has a greater duty of care to the insured

Review of an insurance broker’s duties to the insured

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