Can an Insurance Broker Be Liable if a Loss Is Not Covered by Insurance?
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What happens when, due to a negligent error by the insurance broker, a business suffers property damage that is either not covered, or not fully covered, by what the insured thought was an insurance policy they purchased through the broker to cover the risk? Can the insured look to its insurance broker to cover the uninsured loss? In certain types of circumstances, the answer may be yes, and the insurance broker may be found liable to the insured for such an uncovered loss. This blog provides an overview of Florida law regarding an insurance broker’s duty of care to its client and the types of circumstances where a broker may be found liable for an uncovered loss.
I. The Insurance Broker’s Duty of Care to the Insured
When a broker agrees to obtain insurance for a client, the broker becomes the client’s agent. See, e.g., Bennett v. Berk, 400 So.2d 484 (Fla. 3d DCA 1981). As agent, the broker owes his client a duty of care and a duty to exercise the skill he holds himself out as having, in several respects.
A. Duty to Procure Insurance
An insurance broker who agrees to procure insurance owes a legal duty to the insured to obtain the insurance requested. As explained by one court, an insurance broker “is required to use reasonable skill and diligence, and liability may result from a negligent failure to obtain coverage which is specifically requested or clearly warranted by the insured’s expressed needs.” Warehouse Foods, Inc. v. Corporate Risk Mgmt. Servs., Inc., 530 So.2d 422, 423 (Fla. 1st DCA 1988).
If the broker fails to procure insurance through fault or neglect, the broker may be liable for damages resulting from such failure. A broker who breaches a duty to procure insurance generally is liable to the same extent as the insurer had the insurance been obtained properly. In other words, the broker steps into the shoes of the insurer and is liable to pay the uninsured loss. Commercial Ins. Consultants, Inc. v. Frenz Enterprises, Inc., 696 So. 2d 871 (Fla. 5th DCA 1997).
However, a broker may not be held liable for the failure to procure or maintain adequate insurance coverage where the insured did not request the specified insurance coverage. Willis Ins. Agency, Inc. v. Luckey, 466 So. 2d 1197 (Fla. 3d DCA 1985).
B. Duty to Keep Insured Informed
An insurance broker, as agent for the insured, is also subject to the duty to keep the insured informed. This duty exists when the broker learns facts the principal would desire to know. Nu-Air Mfg. Co. v. Frank B. Hall & Co. of New York, 822 F.2d 987, 997 (11th Cir. 1987). For example, when an insurance policy is cancelled, the broker is under a duty to notify the insured of the cancellation, and if the broker fails to do so, the broker may be held to have breached that duty, unless the insured knew or reasonably could have known of the cancellation from sources other than by being informed by the agent. Robinson v. John E. Hunt & Associates, Inc., 490 So. 2d 1291 (Fla. 1st DCA 1986).
Further, a broker, who is not to blame for the failure to obtain coverage, may become liable for damages if he fails to inform his principal that the requested insurance has not been procured. DeMarlor v. Foley Carter Ins. Co., 386 So.2d 22, 23 (Fla. 2d DCA 1980).
C. Duty to Explain Coverages Being Provided
A broker also has the duty to inform and explain the coverage the broker is providing to the insured and to advise the insured of the changes the broker is making to the policy. Wachovia Ins. Services, Inc. v. Toomey, 994 So. 2d 980 (Fla. 2008). For example, it was held by a Florida court that an allegation that the broker failed to advise the insured that the commercial property insurance policy procured by the broker was inadequate to address the insured’s expressed insurance needs, was sufficient to state a cause of action against the broker for negligent procurement of insurance. Kendall South Medical Center, Inc. v. Consolidated Insurance Nation, Inc., 219 So. 3d 185 (Fla. 3d DCA 2017).
However, while a broker has a duty to explain coverage being provided, the broker generally does not have a duty to advise the insured as to the insured’s insurance coverage needs, such as advising on the amount of coverage needed to protect the insured’s interests. Tiara Condo. Ass’n, Inc. v. Marsh, USA, Inc., 991 F. Supp. 2d 1271, 1280 (S.D. Fla. 2014).
II. Existence of a “Special Relationship” With the Insured Can Create Greater Duties for the Broker
However, an exception to the general rule that an insurance broker has no duty to advise an insured about its insurance needs has been recognized where “an insurance broker encourages and engages in a ‘special relationship’ with its client, thereby triggering an enhanced duty of care to advise the client about the amount of coverage prudently needed to meets its complete insurance needs.” Tiara Condo. Ass’n, Inc., 991 F. Supp. 2d at 1281.
Courts will consider the following factors when determining whether a broker shared a “special relationship” with its client: “(1) representations by the broker about its expertise; (2) representations by the broker about the breadth of coverage obtained; (3) the length and depth of the relationship; (4) the extent of the broker’s involvement in the client’s decision making about its insurance needs; (5) information volunteered by the broker about the client’s insurance needs; and (6) payment of additional compensation for advisory services.” Id.
If a special relationship is found, then the insurance broker will be found to have a heightened duty to not only follow the insured’s direction and explain the coverages requested, but to actively advise the insured about the appropriate insurance necessary to meet the insured’s needs. In such case, the failure of the broker to do so could render the broker liable to the insured for damages.
As can be seen, insurance brokers have certain duties under the law to their insured clients, including the duty to procure insurance requested, the duty to explain the coverages provided, and the duty to keep the insured informed of material information the insured would desire to know. In the case of a loss not covered by insurance due to a mistake by the broker, consultation with any attorney experienced in handling claims involving insurance broker negligence is critical to understanding whether the broker may have some liability for the uncovered loss.