Editor's note: Peter Biging is a partner with the law firm of Goldberg Segalla, LLP

In recent years, fears have been raised that insurance agents' and brokers' “duty to advise” is being so broadly interpreted as to put them at substantial legal risk, in ways no one had previously expected or anticipated.

And a recent court case might be an early indicator that those fears are well placed.

In the mining industry, before the advent of carbon monoxide detectors, canaries were used to warn miners when carbon monoxide had reached dangerous levels. The birds' rapid rate of breathing, tiny bodies and high metabolism conspired to cause them to succumb before the miners did, and their death provided advance warning of the danger the miners faced.

It may be hyperbole to describe a single recent court decision as a “canary in the coal mine” for insurance agents and brokers with regard to the risk they may face, but the recent Florida federal district court decision in Tiara Condominium Association, Inc. v. Marsh USA, Inc., Civ. No. 08-80254, 2014 U.S. Dist. LEXIS 3677 (S.D. Fla. Jan. 13, 2014) is at the very least a clarion call to agents and brokers that a new world is upon us, and if you promote yourself as an expert and promise “risk management” services, you better go in with your eyes wide open.

The case in question

In Tiara Condominium Association, the plaintiff (Tiara) was the corporate entity that managed the Tiara Condominium, an oceanfront 43-story tower located on Singer Island, in Florida. After the Condominium was severely damaged by two back-to-back hurricanes in September 2004, Tiara incurred costs of approximately $130 million to try to repair the damage and restore the properties. Through its broker, Marsh, USA, Inc. (Marsh), Tiara had secured a windstorm policy prior to the loss with limits of just under $50 million and managed to obtain an $89 million insurance settlement from its property insurer, even though the insurer had argued that the policy only covered a single occurrence, and did not “reset” to provide an additional $50 million in coverage for the second hurricane.

However, even with this settlement Tiara was short about $40 million to pay for the losses. To try and address this, in addition to suing the various contractors for negligence and fraudulently inflated billings, Tiara sued Marsh for the balance, claiming it had insufficient coverage due to Marsh's breach of contract, breach of the implied covenant of good faith and fair dealing, negligent misrepresentation, negligence and breach of fiduciary duty.

After discovery was taken, Marsh moved for summary judgment dismissing all of the claims. Marsh said it had purchased the precise limits it had been requested to purchase, based on a two-year-old appraisal Tiara had specifically directed Marsh to use in calculating the limits, and after subtracting out coverage for certain optional coverages relating to interior unit structures (e.g., cabinets, air conditioning units, etc.) that Tiara had specified should be excluded. Marsh argued that Tiara had directed the broker in this manner knowing full well that this could and would likely result in lower limits and thus greater uninsured risk, because Tiara wanted to reduce its premiums. In fact, there was evidence that the appraiser had advised Tiara's insurance committee that it would likely set a value 7-9% below actual value.

Nonetheless two claims, for negligence and breach of fiduciary duty to the extent based on the “failure to advise,” survived after it was determined on appeal that these claims were not barred by the economic loss rule (The claims had initially been dismissed on this basis, but they were reinstated, after the Eleventh Circuit certified the question to the Florida Supreme Court and the court held that the economic loss rule did not apply in this context).

In renewing its motion after the claims were reinstated on appeal, Marsh noted that while it typically encouraged its clients to obtain new building appraisals each year in order to ensure that their coverages were sufficient, it had agreed to use the two-year-old appraisal at the client's specific request. Marsh again pointed out that Tiara had instructed it to reduce the appraisal by backing out the value of the built-in fixtures within each condominium unit for which Tiara didn't want to purchase coverage.

And Marsh pointed out that Tiara's Board had an insurance committee composed of a number of sophisticated businessmen—including a former life insurance executive, an attorney and an accountant, all of whom were directly privy to the information supplied by the appraiser. Furthermore, Marsh's contract provided that “Marsh will not independently verify or authenticate information provided by you necessary to prepare underwriting submissions and other documents relied upon by insurers, and you will be solely responsible for the accuracy and completeness of such information….”

In response, Tiara argued Marsh had a special “duty to advise” Tiara regarding its insurance decisions and had failed to do so.

Tiara pointed to:

• Marsh's promise in its contract to act as Tiara's “exclusive insurance, risk-management and risk-financing advisor and insurance broker.”
• Tiara's several-years-long relationship with Marsh (during which Marsh had an executive regularly participate in Tiara insurance-committee meetings who allegedly “offer[ed] counsel and advice on Tiara's insurance requirements and needs”).
• Marsh having held itself out as an expert in the field of property and casualty as justifying Tiara's reliance on Marsh to advise it with respect to the risks inherent in not having a new appraisal prepared and the risks of underinsuring itself.

Because a subsequent appraisal put the value of the building at almost $20 million more than it was insured for, Tiara alleged that, but for Marsh's failure to advise of the necessity of obtaining an updated appraisal, it would have had more than enough insurance available to cover the loss (i.e., $70 million times two). Tiara also noted that it settled with its property insurer for $11 million less than the coverage that it did have in place due to the threat of having the available insurance dramatically reduced by application of the policy's coinsurance provisions.

Tiara argued that Marsh had a duty to not just advise that it could make do with an old appraisal, but, in its capacity as its risk management and risk financing advisor, it had a duty to advise of the overall risks and potential policy implications of being underinsured.

In denying Marsh summary judgment, the court concluded there was an issue of fact as to whether there was a “special relationship” creating an enhanced duty to advise on Marsh's part, and whether Marsh had breached that duty regardless of whether Tiara's insurance-committee members were aware that using the old appraisal might well leave Tiara underinsured.

In short, the court stated, to the extent there was a special relationship, it wasn't enough to argue that Tiara's insurance-committee members had access to the same information or could read the same policy language as Marsh. This would “not relieve Marsh from its obligation to provide a recommendation on what was the most prudent approach to protect Tiara's insurance needs, and to warn of the financial consequences of diverting from that approach. . . . [T]he burden was on Marsh, as the insurance expert in this equation, to share its professional judgment with Tiara and allow Tiara to make an informed judgment on the basis of that advice.” Id. at *31-32.

What does it mean for brokers?

What is the impact of this case? What does it tell us? What are the lessons to be learned? It is just one case, and it was decided on its specific facts, but it is still a very loud warning shot for brokers who promise “risk-management services,” and at the same time think they can treat their clients as adults. This case says, in big bold letters, “Not so fast.”

If you represent to an insured that you are going to act as the insured's “exclusive insurance, risk-management and financial-risk advisor and insurance broker,” you better be aware that your every move is going to be heavily scrutinized if an insured's coverage either does not respond to a loss or is insufficient. And even where it seems patently obvious that an insured has made a conscious decision to reduce its coverage limits to generate a reduction in premiums, well aware of the fact that it might live to regret the decision in the event of a substantial loss, you need to think long and hard about whether to just go along or whether to paper your file with advice on the risks such a course of action may engender.

Additionally, the case offers a striking argument for giving careful consideration regarding just how broadly and forcefully you want to describe and define the nature of your relationship with your client. The insurance broking business is highly competitive and you need to add value to stand out from your competitors. But if you assume the mantle of a risk-management advisor, there is substantial risk that comes with it.

Lastly, however you may describe the nature of the services you offer, it may make sense to reconsider your standard disclaimers, and ask whether they would protect you in instances such as this. Because the fact is that when a special relationship may be present, it is not necessarily going to be enough to point out the logical consequences of an insured's conscious and intentional decision to reduce its coverages. You may also have to show that you specifically identified each of the risks inherent in pursuing this course, and counseled a more cautious, conservative approach.