Arizona high court decision means more litigation against agents
Because malpractice claims are personal, courts will usually not allow them to be assigned to a third party. The Supreme Court of Arizona decided that the general rule does not apply to insurance agents and that the victim of insurance agent malpractice may assign the claim to a third party.

The decision will probably increase litigation against insurance agents and brokers in Arizona and any other states that adopt its decision.
Regardless of the possibility of increased litigation against insurers, the case suggests that the suits will be difficult for the plaintiffs to prove. They will not be able to collude in setting high judgments binding on the agent. The agent's duty to the insured is limited in Arizona to less than that of a fiduciary. The agent owes only a duty of “reasonable care, skill and diligence” in dealing with clients. In an appeal from the Superior Court in Maricopa County, Ariz., the Arizona Supreme Court concluded that under state law, an insurance agent's clients may assert claims for professional negligence against the agent and may assign such claims to third parties.
The case arose after Neal and Gail Berliant bought a liquor store called The Liquor Vault in 2000. To insure themselves, they purchased a business and umbrella liability policy from Victoria Gittlen, a licensed insurance agent. The Berliants alleged that Gittlen did not advise them that they could also purchase liquor liability coverage.
In 2001, The Liquor Vault sold beer to a minor who gave it to another minor. The second youth drove his car into a cement barrier, killing his passenger. The passenger's father, D. Jer? Webb, filed a wrongful death claim against the Berliants and The Liquor Vault. The Berliants tendered the claim to their insurance company, which properly refused to defend because the Berliants lacked liquor liability coverage.
To settle the wrongful death claim, the Berliants stipulated to the entry of a $3 million judgment. Webb agreed not to execute on the judgment, and in exchange the Berliants assigned to Webb their rights to sue both their insurer and their insurance agent and her employers. Webb then sued Gittlen, G&G Insurance Service Inc. and CDS Insurance Agency LLC, alleging negligence and breach of fiduciary duty. The trial court dismissed these claims, citing Premium Cigars International Ltd. v. Farmer-Butler-Leavitt Insurance Agency, which held that claims against an insurance agent for professional negligence are not assignable.
The court of appeals affirmed in a memorandum decision that also relied upon Premium Cigars.
The Arizona Supreme Court, moving in a new direction, considered state case law that generally allows the assignment of unliquidated legal claims except those involving personal injury. The broad prohibition on assignment exemplified the common law view that litigation was vexatious or otherwise socially undesirable. The reasoning was stated by Lord Coke in 1613:

The Arizona Supreme Court noted that as courts became more accessible and litigation a more accepted means for resolving disputes, the prohibition on assignment gradually became the exception rather than the rule. Yet one class of unliquidated claims was excluded from the emerging rule of assignability: personal injury claims. Since Roman times, such claims were considered “personal” to the claimant and could not be asserted by others. Many courts concluded that whether a claim would survive the claimant's death should also determine whether it could be assigned during the claimant's life and applied this test to both personal injury and other claims. This “survivability” test did not itself survive in Arizona after 1955, when the legislature enacted a statute providing for the survival of most causes of action, including personal injury claims.
The Arizona Supreme Court subsequently endorsed and expressly relied on public policy considerations in reaffirming the rule against assignment of personal injury claims. (State Farm Fire & Cas. Co. v. Knapp, 107 Ariz. 184, 185, 484 P.2d 180, 181, 1971.) Public policy considerations have also guided courts in determining the assignability of claims not involving personal injury. For example, the court of appeals has held that legal malpractice claims cannot be assigned, although the principal policy consideration offered has been deference to the attorney-client relationship, not fears about trafficking in lawsuits. The current principles under Arizona law for determining if an unliquidated claim may be assigned can be summarized as follows:
1. Claims generally are assignable, except those involving personal injury.
2. The legislature may specify whether particular claims are assignable.
3. Absent legislative direction, public policy considerations should guide courts in determining whether to depart from the general rule.
The agent argued that claims against insurance agents for professional negligence cannot be assigned because:
1. Claims against lawyers for legal malpractice are not assignable.
2. The court of appeals in Premium Cigars correctly extended this rule to insurance agents, as their relationship with clients is analogous to the attorney-client relationship.
3. Although the legislature has not addressed the assignment of claims against insurance agents, allowing such assignment would violate public policy.
The Arizona Supreme Court disagreed. The cases prohibiting assignment of legal malpractice claims, it opined, do so because of the “uniquely personal” relationship between attorney and client, which gives rise to a “fiduciary relation of the very highest character.”
In Premium Cigars, the court of appeals extended this rationale to professional negligence claims against insurance agents. It held that such claims may not be assigned because the relationship of insurance agent and client is similar to that of attorney and client. An insurance transaction, the court said, “is not simply a commercial transaction but a transaction personal in nature for the benefit of the client.” Furthermore, like attorneys, agents owe a “duty to the insured to exercise reasonable care, skill and diligence” in carrying out the duty to procure insurance.
The Supreme Court rejected the Premium Cigars rationale. The relationship between an insurance agent and client, while certainly important, differs from that between an attorney and client in several critical respects. Attorneys are fiduciaries with duties of loyalty, care and obedience, whose relationship with the client must be one of “utmost trust.” By contrast, insurance agents generally are not fiduciaries, but instead owe only a duty of “reasonable care, skill and diligence” in dealing with clients. Similarly, although clients share personal information with both their insurance agents and attorneys, they typically share much less with their agents. While clients often inform their agents about their medical history, financial information, prior claim history and personal habits, they provide their attorneys more extensive or sensitive information about their private and public conduct, including activities that may expose them to civil or criminal liability.
Furthermore, attorney-client confidentiality protects broader interests than does insurance agent-client confidentiality. It protects the public interest in accessible legal advice by allowing people to consult their attorneys without fear of retribution. It also ensures that clients are effectively represented, which in criminal cases is essential to a defendant's constitutional right to assistance of counsel. Once attorneys receive information, they are also bound by stricter confidentiality duties than are insurance agents. Attorneys may disclose information only to prevent client crimes. Insurance agents, by contrast, are statutorily allowed to disclose client information in 17 different circumstances, including when an affiliate seeks the information for marketing purposes.
Considering the distinctions together, the Arizona Supreme Court found they demonstrate that the relationship between insurance agents and their clients, while perhaps personal, is not “uniquely personal” in a sense comparable to an attorney-client relationship. The differences are substantial and the similarities do not justify holding that claims against agents cannot be assigned.
The Arizona Supreme Court recognized that a stipulated judgment that may bind the insurer arises from the insurer's contractual obligations to defend and indemnify its insured. When the insurer breaches these obligations or reserves the right to deny coverage, insureds are allowed to protect themselves from “the sharp thrust of personal liability.”
In contrast, an insurance agent generally has no contractual duty to defend and indemnify the client. That an insurer may be bound in certain circumstances by a judgment entered against the insured arises out of, and is limited to, the insurer-insured relationship. Absent such a relationship, the court did not perceive any basis for concluding that insurance agents would be bound by stipulated judgments to which they were not parties. Indeed, principles of issue preclusion suggest the opposite conclusion.
Disagreeing with the argument that allowing assignments will flood the courts with litigation, the court said that although allowing assignment may lead to an increase in the number of professional negligence claims that are actually pursued, this is not necessarily a bad result. Insofar as the claims are meritorious, they will serve the goals of affording compensation for the clients who are victims of professional negligence. To the extent that allowing assignment might foster nonmeritorious claims, the court said it believed they will be better deterred by specifically targeted rules against frivolous suits. In short, the policy concerns identified by Gittlen do not support a rule generally barring the assignment of professional negligence claims against insurance agents.
Webb v. Gittlen, 174 P.3d 275 (Ariz. 01/10/2008).
Barry Zalma, Esq., CFE, is a California attorney specializing in providing expert witness testimony and consuling with plaintiffs and defendants on insurance coverage, claims handling and bad faith. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He can be reached at [email protected]. His consulting practice's Web site is www.zic.bz.