No Duty, No Problem: Seventh Circuit Finds Absence of Duty for Insurance Broker to Non-Client in Connection with Fraudulent Insurance Scheme

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The Seventh Circuit recently handed down a decision in which it refused to recognize a negligence claim against an insurance broker which would have expanded the duties of brokers and agents beyond those articulated in the Illinois Insurance Placement Liability Act (IIPLA), 735 ILCS 5/2 2201. In M.G. Skinner & Associates Insurance Agency v. Norman-Spencer Agency, Inc., No. 15-2290, 2017 U.S. App. LEXIS 63 (7th Cir. Jan. 4, 2017), the Seventh Circuit affirmed the district court’s grant of summary judgment in favor of Norman-Spencer Agency, Inc., stating it owed no duty to Western Consolidated Premium Properties, Inc. (WCPP) and M.G. Skinner and Associates Insurance Agency, Inc. (MGSA) under either IIPLA or common law negligence principles.

As background, WCPP is a risk purchasing group for commercial properties, and MGSA acts as the program administrator for WCPP. In late 2011, MGSA sought renewal coverage for WCPP’s properties by contracting, through multiple sub-brokers, with JRSO, LLC to provide insurance. Significantly, one of WCPP’s property groups, Myan Management Group, was split off from the main WCPP group for insurance reasons and was covered directly by JRSO, with Norman-Spencer acting as the program administrator. In addition, Norman-Spencer contracted with JRSO, whereby Norman-Spencer would issue a backlog on 64 already-bound policies, which included Myan’s coverage, but did not include WCPP’s coverage. Notably, JRSO refused to allow Norman-Spencer to be involved with WCPP’s placement.

Along the way, Norman-Spencer became aware of potential red flags, JRSO’s lack of trustworthiness and ability to bind coverage. It even discovered an order of conservation filed against JRSO and irregularities with JRSO’s reinsurance agreement. Norman-Spencer, however, never informed WCPP or MGSA about these problems. As it turned out, JRSO “created a fictitious insurance policy for WCPP that was not backed by a legitimate insurer.” Subsequently, WCPP and MGSA each filed negligence and breach of fiduciary duty actions against, among others, Norman-Spencer for allegedly failing to notify them of the “red flags.” The district court granted summary judgment in favor of Norman-Spencer and against WCPP and MGSA. WCPP and MGSA appealed the district court’s findings with respect to their general negligence claims.

According to IIPLA, “an insurance broker has a duty to exercise ordinary care and skill in renewing, procuring, binding, or placing coverage requested by the insured or proposed insured.” WCPP attempted to show that Norman-Spencer had a duty to WCPP under IIPLA because it was asked to participate as a sub-agent. The Seventh Circuit, however, failed to see how Norman-Spencer was ever asked or agreed to procure insurance specifically for WCPP. Indeed, Norman-Spencer was intentionally excluded by JRSO from placement of WCPP’s coverage because otherwise Norman-Spencer would get a cut of the commissions. Since there was “no evidence that any broker in the procurement chain ever requested that Norman-Spencer serve as a sub-broker to procure insurance for WCPP,” Norman-Spencer had no duty to WCPP under IILPA.

In the alternative, WCPP requested Norman-Spencer be held liable under “common law negligence principles,” but the court patently refused to extend the duty of care required of brokers and agents beyond those already articulated in IILPA. The Seventh Circuit reasoned that a duty to the insured arises only after specific coverage has been requested; yet, when Norman-Spencer offered their placement services, they were denied. Finally, the court summarily dismissed MGSA’s claims against Norman-Spencer for similar reasons and because MGSA was not the listed insured on the Myan policy.

This decision serves as a cautionary tale for policyholders in Illinois: a broker, sub-broker, or agent owes no duty of care unless an offer and acceptance of services has been made. In short, the parties who may be targeted in case of wrongdoing are now more limited — an insurance broker or agent’s duty of care extends only so far.