November 30, 2018

Recent Illinois Decision Appears To Eliminate Liability Of Independent Insurance Agents For Negligent Procurement Of Coverage

Interpreting and understanding the terms and conditions of insurance policies can be a daunting endeavor. Failure to do so, however, can be disastrous for the uninformed policyholder who goes to make a claim, only to find the coverage is inadequate—or that the carrier has issued a denial.

MPS Law is committed to helping our clients fully understand the twists and turns of commercial liability coverage, and we bring a wealth of expertise to the task. As an example, we offer the following article by leading insurance coverage and litigation attorney Jeff Asperger.

A new split decision by the Illinois Supreme Court has limited an insurance policyholder’s ability to sue its agent/broker for alleged failure to secure the coverage requested, holding that the two-year statute of limitations for negligence claims against insurance agents/brokers begins to run on the date the policy is issued.

The 5-2 opinion in American Family Mutual Insurance Company v. Walter Krop, issued on October 18, 2018, calls into question the long-recognized distinction between independent insurance agents/brokers and captive insurance agents, and appears to eliminate liability of independent agents/brokers for negligence in failing to procure requested coverage. In prior cases, liability for negligent procurement was said to be based on the agreement and fiduciary relationship between the independent agent and its principal.

Historically, a cause of action existed for negligent procurement arising from a breach of fiduciary duties [see Black v. Illinois Fair Plan Association, 87 Ill. App.3d1106 (1980)]. In Talbot v. Country Life Insurance Co., 8 Ill. App. 3d 1062, 1065 (1973), the court sustained a cause of action for negligent procurement based on an affirmative undertaking to perform a service to another to either provide the desired coverage or notify the applicant of the rejection of the risk “so that he may not be lulled into a feeling of security or put to prejudicial delay in seeking protection elsewhere.”

In 1996, the General Assembly enacted the Insurance Liability Placement Act, section 2-2201 of which addressed the liability of insurance producers regarding the procurement of insurance. While the statute limited the scope of fiduciary duty claims, it imposed a duty on producers to “exercise ordinary care and skill in renewing, procuring, binding, or placing the coverage requested by the insured or proposed insured” [see 735ILCS 5/2-2201(a) (West 2014); Skaperdas v. Country Casualty Insurance Co.]. In Skaperdas, the Supreme Court acknowledged that the statute limited the scope of fiduciary duty claims, but did not release an insurance producer from liability for negligence. Subsection (a) specifically provides for a cause of action for negligence, reasoning that if an insurance producer cannot offer the coverage requested, it may satisfy the statutory duty by notifying the customer to look elsewhere for coverage. Since the statute specifically provides for a negligence action, the duty as defined in section 2-2201(a) does not depend upon any contractual relationship.

In considering when a cause of action accrues for negligence, tort actions generally accrue at the time of injury, or when facts exist that authorize the bringing of a cause of action: duty, breach, and resulting injury or damage [see Brucker v. Mercola, 227 Ill. 2d 502 (2007)]. The discovery rule provides for tolling of the limitations period until the plaintiff knows, or reasonably should know, that the injury occurred and that it was wrongfully caused [see Knox College v. Celotex Corp., 88 Ill. 2d 407, 414 (1981)]. That is, when the plaintiff sustains a loss which is not covered but would have been covered if the requested insurance had been procured or plaintiff had been timely notified of the rejection of the risk. The rationale was that prior to receiving a denial of coverage, any injury would be purely contingent and speculative.

The Illinois Supreme Court’s opinion in Krop has essentially eliminated the prospective insured’s right to rely upon independent agents/brokers to procure and explain any limitations in the insurance coverage requested. Justice Garman for the majority wrote “We hold that when customers have the opportunity to read their insurance policy and can reasonably be expected to understand its terms, the cause of action for negligent failure to procure insurance accrues as soon as the customers receive the policy.” The opinion rejected the appellate court’s reliance on Broadnax v. Morrow 326 Ill. App. 3d 1074 (2002) and Perelman v. Fisher, 298 Ill. App. 3d 1007 (1998), decisions issued after the new legislation took effect, which had found that insurance brokers have a heightened fiduciary obligation to ensure that customers understand the specifics of their new policies. The majority found that under the plain language of the statute and the facts of the case, the agent did not owe the Krops an elevated fiduciary duty to explain the distinction in the new coverage provided.

The dissenting opinion maintains that the majority decision improperly labeled the Krops’ complaint as a contract dispute rather than a negligence action. Writing for the dissent, Justice Theis opined that if the Krops had sued their agent when they first received the allegedly inadequate policy (before several subsequent renewals), their complaint would not have survived a motion to dismiss “because no actual damages had yet occurred.” The dissent contends that the majority assumes the insured will read past the declarations page of the policy.

The majority did allow that there will be a narrow set of cases in which the policyholder reasonably could not be expected to learn the extent or limitations on coverage simply by reading the policy. Justice Garman acknowledged that “in some cases the insurance policies may contain contradictory provisions or fail to define key terms….In others, the circumstances that give rise to the liability may be so unexpected that the typical customer should not be expected to anticipate how the policy applies.” In those situations, the policyholder would presumably be permitted to assert the discovery rule.

One point is clear. Whatever circumstances trigger the exception to the general rule will be the subject of future appellate interpretations. For now, in the event of a loss and potential claim, policyholders, their agents and/or producers should act promptly to assess their rights and obligations.

1 “Insurance producer” means a person required to be licensed under the laws of this State to sell, solicit, or negotiate insurance.