How brokers can avoid legal liability in the era of COVID-19

Here are some tips to help brokers avoid liability while handling COVID-19 claims.

Insureds tend to expect that brokers will advise them on the types of insurance that may be needed for their business. (Photo: Free Use Image/ALM Media archives)

Insurance brokers may be exposed to liability for a variety of reasons, but the most common mistake that leads to exposure is a failure to procure insurance for an insured.

Normally, brokers have a duty to exercise reasonable care in procuring the insured’s requested coverage, and the broker assumes only those duties found in an agency relationship. Most state laws and regulations require the broker to use reasonable care, diligence and judgment in procuring the insurance requested by an insured.

Typically, it is the obligation of the insured to tell the broker the type or types of insurance required. However, insureds’ obligation is often misunderstood by the insured, and insureds often expect that brokers will and should advise them on the types of insurance that may be needed for their business.

In general, courts take the view that brokers do not owe a fiduciary duty to the insureds.

Special relationship pitfalls

The relationship between a broker and an insured can be fraught with peril for the unwary. In an effort to be helpful and accommodating to an insured, a broker may inadvertently expose themselves to liability.

In general, a broker is only required to procure the coverage requested by the insured, and does not have to advise the insured on the sufficiency — or lack thereof — of their liability limits.

However, if there is a “special relationship” between the broker and the insured, a court may hold the broker responsible for failing to procure the right kind or amount of coverage. It is important that brokers understand that the creation of a “special relationship” that can give rise to liability can be created relatively easily.

Courts have typically looked at a number of factors to determine if a special relationship exists. Some of the factors include:

  1. If the broker misrepresented the nature, extent or scope of the coverage provided;
  2. If the broker receives additional compensation beyond the premium payment;
  3. If the broker answered extensive questions regarding the scope and types of coverage;
  4. If the broker assumes additional duties and obligations by an express contract;
  5. If the broker had broad discretion in handling the insured’s needs; or
  6. If the broker held himself out as having expertise in a specific field of insurance that relates to the insured’s coverage.

Ultimately, the existence of a “special relationship” is a question of law for the court and brokers should inquire into their jurisdictions jurisprudence on what factors are considered to give rise to a “special relationship.”

Brokers may be able to assert the defense to claims brought against him/her that the insured had a duty to read the policy; however, only a minority of jurisdictions have held that an insured’s failure to read the insurance policy is a complete bar on the claim against the broker. Most jurisdictions reject this defense, and others allow for an insured’s failure to read the policy to amount to contributory or comparative negligence. This would become a question of fact for a jury, which would unlikely be resolved until a full trial on the merits of the claim.

Common scenarios exposing brokers to liability

There are a number of ways that a broker can be exposed to liability to an insured related to the procurement of insurance coverage.

Typically, an insured will seek to sue a broker after s/he has suffered a loss that s/he thought was covered under the policy but after the loss learns there is not fully coverage or no coverage at all. The most common scenarios we encounter are as follows:

  1. Insured claims they paid the policy premium to the broker and the broker failed to pay the premium;
  2. Insured asked for a specific coverage and the broker affirmatively indicated s/he would procure that coverage but failed to obtain that specific coverage; or
  3. Broker held her/himself out as an expert in a certain type of insurance or insurance for a particular industry and the broker failed to obtain coverage for that kind of business.

Emerging trends due to COVID-19

The COVID-19 pandemic has delivered a crushing blow to the way we live and the way we conduct business. Governments issued mandatory stay-at-home orders and shut down businesses of all types in response to the pandemic. As a result, many insurers are preparing for a wave of broker E&O claims. Many insureds are attempting to obtain relief from the impact of the pandemic by making claims on their business interruption coverage, only to have their claims denied by the insurer. When the insureds receive their coverage denials, the insured businesses are turning to their broker for failing to provide them with the appropriate coverage.

In many instances, the insureds are shocked at the denial because when they filed their claim with the carrier through their broker, the broker initially indicated the losses would be covered. When receiving a potential claim from an insured, the broker should not make any coverage commitments or offer opinions on the carrier’s behalf related to COVID-19 claims. Brokers should always defer to the carrier on coverage positions. Also, brokers should always submit claims to the carrier, even if the broker believes there is no coverage.

We have provided some helpful pointers to assist brokers in avoiding liability for the handling of COVID-19 claims:

Kelli L. Sullivan is a shareholder with Turner Padget, and Nicholas Stewart is an associate. Both counsel clients involved in professional liability matters like these. They may be reached at www.turnerpadget.com or by phone at (803) 227-4321.

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