Plaintiff Enable to Snare Insurance Broker

By Don R. Sampen, published, Chicago Daily Law Bulletin
[February 21, 2017]

The 7th U.S. Circuit Court of Appeals recently held that an insurance broker that did not actually place insurance coverage in a complex series of real estate transactions involving more than 600 commercial properties, had no statutory or common law liability even if it arguably acquired information suggesting the lack of trustworthiness of the transactions.

The case is M.G. Skinner & Associates Insurance Agency v. Norman-Spencer Agency Inc., 2017 U.S. App. Lexis 63 (7th Cir., Jan. 4, 2017). The plaintiffs seeking recovery, Western Consolidated Premium Properties Inc. and M.G. Skinner and Associates Insurance Agency Inc., were represented by Cozen O’Connor. Hepler Broom LLC represented the broker from which recovery was sought, Norman-Spencer Agency Inc.

Western Consolidated was a risk purchasing group through which the owners or managers of commercial property could purchase insurance. M.G. Skinner was an insurance broker that acted as the program administrator for Western Consolidated. These two entities represented more than 600 commercial properties, having a total insured value of nearly $3.5 billion.

In 2011, M.G. Skinner sought renewal coverage for the Western Consolidated properties. Through brokers and subbrokers, coverage was placed with JRSO LLC. As things turned out, the coverage JRSO issued was not backed by a legitimate insurer. The owner of JRSO eventually was convicted for wire fraud and ordered to pay restitution, including to Western Consolidated.

During the placement process, one of the brokers and JRSO had discussions with Norman-Spencer about its participation in placing coverage.

While Norman-Spencer thereafter did participate in performing certain administrative tasks to allow issuance of an already-bound policy for a group affiliated with Western Consolidated, Norman-Spencer never actually became involved in the Western Consolidated placement itself and never earned a commission for such placement.

Along the way, however, Norman-Spencer learned things that arguably should have been red flags showing JRSO’s lack of trustworthiness. After JRSO’s fraud was revealed, Western Consolidated and M.G. Skinner filed this action against a number of brokers, including Norman-Spencer.

As to that entity, they alleged negligence and breach of fiduciary duty for failing to bring the red flags to light.

The U.S. District Court granted summary judgment in favor of Norman-Spencer. Western Consolidated and M.G. Skinner filed this appeal.

Analysis

In an opinion by Judge James D. Peterson, sitting by designation, the 7th Circuit affirmed. He began by noting that under the Illinois Insurance Placement Liability Act, 735 ILCS 5/2-2201(a), an insurance broker has a duty to exercise ordinary care and skill in renewing and procuring coverage requested by an insured or proposed insured.

He also observed three principles developed under Section 2-2201(a) that have relevance: One is that the broker’s duty extends to subbrokers, if subbrokers are used. A second is that the duty can be breached if a broker fails to disclose information about an insurer that is material to the decision to place the insurance. And the third is that the duty arises once the prospective insured requests specific insurance coverage.

In this case, Western Consolidated contended that three specific communications Norman-Spencer had regarding placement of the coverage established Norman-Spencer’s role as a subbroker for purposes of Section 2-2201. Peterson disagreed, finding that none of the evidence gave rise to an inference that any broker in the procurement chain ever requested that Norman-Spencer serve as a subbroker to procure insurance for Western Consolidated.

Even apart from Section 2-2201(a), however, Western Consolidated contended that general common law concepts required that Norman-Spencer owed a duty of disclosure based on the negligence principle of affirmative undertaking. Peterson rejected the common-law approach due to the reluctance of Illinois courts to expand the duties of brokers beyond those articulated in the statute. And under the statute, the duty arises only after specific coverage is requested.

He thus concluded that Norman-Spencer had no obligation to Western Consolidated under Section 2-2201(a) for breach of the duty of ordinary care.

Western Consolidated also made a claim for fiduciary duty claim under Section 2201(b). Peterson observed, however, that such breaches are actionable under that section only for the wrongful retention or misappropriation of money. Since Norman-Spencer did not receive any money from the Western Consolidated placement, it could have no liability for breach of fiduciary duty.

M.G. Skinner made the additional argument under Section 2201(a) that Norman-Spencer’s duty to disclose the red flags arose by virtue of its performing the administrative tasks to allow issuance of the already-bound policy for the property group affiliated with Western Consolidated.

Peterson rejected this argument not only because of the limited role Norman-Spencer played, but also because M.G. Skinner was not an insured on the policy.

The court therefore affirmed the summary judgment in favor of Norman-Spencer.

Key points

• A broker’s duty to exercise ordinary care under 735 ILCS 5/2-2201(a) arises only after a prospective insured makes a specific insurance coverage request.
• A broker’s duty to exercise ordinary care under Section 2-2201(a) arises only in favor of the insured.
• Illinois courts are unlikely to expand the duties of a broker beyond those specifically set forth in Section 2-2201.
• Claims for breach of fiduciary duty Section 2201(b) are limited to those involving the mishandling of money by the broker.