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The Duty to Audit – Insurance Brokers vs. Insurance Agents

November 19, 2019
Miles A. Kirshner and Morgan Randle
Posted in: General Liability, Professional Liability

The relationship between an independent insurance broker and its business customers is one at arms-length.  Absent evidence of some special consulting relationship, or some level of confidentiality that places the broker in control of the principal’s decision making, under Pennsylvania law, an insurance agency has no duty to audit or analyze the business of its customer to the extent of identifying every potential loss scenario that could ever occur.

The principal case cited in support of this proposition is Wisniski v. Brown & Brown Ins. Co. of PA, 906 A.2d 571 (Pa. Super. 2006).  This was a case brought by a property owner against an insurance agency alleging negligence for failure to recommend flood insurance.  The insured contended that its property was within a flood plain. It further contended that it consulted with Brown & Brown and relied upon the expertise of said agency to recommend those insurance products that it would require to protect itself.  Finally, the insured contended that the agency was negligent for failing to inspect the property to determine that flood insurance was needed.

The Wisniski Court addressed whether the relationship between its parties was such that a duty was conveyed upon the insurance agency to have done those things that the insured party later contended were negligently not done. Specifically, the Wisniski Court opined:

First, we examine the nature of the relationship between the Brown Agency and [the insured].  In Basile v. H&R Block, Inc., 761 A.2d 1115 (Pa. 2000), our Supreme Court recognized three categories of relationships between contracting parties. The first is an ordinary, arm’s-length relationship. The second is an agency relationship and the third is a confidential relationship.  Id. at 1120.

Regarding the agency relationship, “[t]he three basic elements of agency are: the manifestation by the principal that the agent shall act for him, the agent’s acceptance of the undertaking and the understanding of the parties that the principal is to be in control of the undertaking.”  Id. (citations omitted). The key and distinctive feature of an agency relationship is the agent’s power to affect the legal relationship of the principal with third parties: e.g., entering into contracts for them, buying or selling goods for them, or subjecting the principal to potential tort liability.  Id.

As the saying goes, “with great power comes great responsibility”: the power of an agent to bind the principal brings with it a concomitant fiduciary duty to act with loyalty and the utmost good faith.  Id.  On the other hand, one important caveat is that “the special relationship arising from an agency agreement, with its concomitant heightened duty, cannot arise from any and all actions, no matter how trivial, arguably undertaken on another’s behalf.  Rather, the action must be a matter of consequence or trust, such as the ability to actually bind the principal or alter the   principal’s legal relations.”  Id. (emphasis added by the Court).

906 A.2d at 576-77.

Similarly, the Opinion of Judge Munley in the U.S. District Court for the Middle District of Pennsylvania in Star Spa Services v. Turano Ins. Agency, Inc. 595 F. Supp. 2d 519 (M.D. Pa. 2009) provides:

To make out a negligence claim, a plaintiff must allege “‘the defendant had a duty to conform to a certain standard of conduct; that the defendant breached that duty; that such breach caused the injury in question; and actual loss or damage.'”  Wisniski v. Brown & Brown Ins. Co. of Pennsylvania, 906 A.2d 571, 575-76 (Pa. Super. 2006) (quoting Phillips v. Cricket Lighters, 841 A.2d 1000, 1008 (Pa. 2003)). The Pennsylvania Supreme Court has held that “the legal concept of duty of care is necessarily rooted in often amorphous public policy considerations.” Althaus v. Cohen, 756 A.2d 1166, 1169 (Pa. 2000). Courts are to balance several factors in determining whether a duty exists: (1) the relationship between the parties; (2) the social utility of the actor’s conduct; (3) the nature of the risk imposed and foreseeability of the harm incurred; (4) the consequences of imposing a duty upon the actor; and (5) the overall public interest in the proposed solution.” Id.

The Pennsylvania Superior Court has addressed these factors in determining the extent of an insurance agent’s duty to inspect a property before advising a person seeking flood insurance coverage. See Wisniski, 906 A.2d at 581 (finding that an insurance broker does not have a “duty to inspect business premises and advise clients based on that inspection.”). The court found that “for ordinary negligence purposes, the relationship between the insurance broker and client is an arm’s-length business relationship.” Id. at 579. While the court found “social utility” in having an agent inspect a property and identify risks, the court also concluded “that insureds can also inspect their own property and come to their own reasonable conclusions about the type and scope of insurance coverage they need.” Id. Next, the court concluded that the nature of the risk imposed and foreseeability of the harm incurred did not justify imposing a duty to inspect since, “[r]isk is the very  nature of insurance . . . individuals take an intellectual gamble when purchasing insurance as they weigh the expense of purchasing insurance versus the amount of coverage they purchase.  Insurance against loss does not mean the industry is 100% guarantor of protection against loss.”  Id. at 580.  Finally, the court found the duty to inspect a property would impose an onerous risk on insurance brokers, who might well be expected to inspect every item eligible for insurance or face lawsuits after a loss occurred.

The court thus finds that the duty owed by an insurance broker in this context is the same as the duty generally owed by an agent in any other insurance transaction. In addressing the general nature of the duty of an insurance agent to a consumer, courts in Pennsylvania have found an insurer’s duty to consist of “fair dealing and good faith . . . not hand holding and substituted judgment.” Kilmore v. Erie Ins. Co., 595 A.2d 623, 627 (Pa. Super. 1991).

595 F. Supp. 2d at 527-28.

Moreover, “Pennsylvania courts have often stressed that the insured has both the capacity and the duty to inquire about the scope of insurance coverage, rather than rely on hand holding and substituted judgment.”  Wisniski, 906 A.2d at 579 n.6.  “[T]his Court [has] rejected arguments . . . that an insurer has a duty to provide more comprehensive notice and explanation of the benefits provided in the insured’s policy.”  Treski v. Kemper Nat. Ins. Companies, 449 Pa. Super. 620, 674 A.2d 1106, 1114 (Pa. Super. 1996). The Treski Court stated that there is:

[N]o justification in the law to impose the additional burden on insurers that they anticipate and then counsel their insured on the hypothetical, collateral consequences of the coverage chosen by the insured. The basic contractual nature of insurance coverage set forth in [our case law] requires fair dealing and good faith on the part of the insurer, not hand holding and substituted judgment. While we acknowledge insurance is an area in which the contracting parties stand in somewhat special relationship to each other, the relationship is not so unique as to compel this Court to require an insurer to explain every permutation possible from an insured’s choice of coverage. Each insured has the right and obligation to question his insurer at the time the insurance contract is entered into as to the type of coverage desired and the ramifications arising therefrom. Once the insurance contract takes effect, however, the insured must take responsibility for his policy. We, therefore, decline to extend the duties of an insurer to provide ongoing advice concerning the limits of its coverage.

Id. (citations omitted).  The Pennsylvania Superior Court has also ruled in Cohan v. United Servs. Auto Ass’n, 2017 Pa. Super. Unpub. LEXIS 38, 160 A.3d 245 (Pa. Super. 2017) that the defendant insurance association “did not have a duty to advise [Plaintiffs] to purchase higher liability limits on their auto insurance policy” and further that the insurance association “had no obligation to advise [Plaintiffs] of a disparity in liability coverage that they should have been aware of, or to otherwise “coordinate” or “equalize” the liability limits of two different policies.”  Id. at *6.

The Wisniski decision provides that their determination to not impose a legal duty to brokers, is concerned about brokers only, and not “insurance companies or agents.”  Id. at 580-81.  Specifically, to form an agency relationship, three basic elements are required: “the manifestation by the principal that the agent shall act for him, the agent’s acceptance of the undertaking and the understanding of the parties that the principal is to be in control of the undertaking.”  Id. at 577.  “The key and distinctive feature of an agency relationship is the agent’s power to affect the legal relationship of the principal with third parties: e.g., entering into contracts for them, buying or selling goods for them, or subjecting the principal to potential tort liability.” Id. (internal citations omitted).

Additionally, the Wisniski Court specifically reviewed the differences between a broker and an agent, as follows:

[An ‘insurance broker’ is] one who acts as a middleman between the insured and the insurer, soliciting insurance from the public under no employment from any special company, and upon securing an order, placing it with a company selected by the insured or with a company selected by himself or herself; whereas an ‘insurance agent’ is one who represents an insurer under an employment by it. A broker is, in essence, employed in each instance as a special agent for a single purpose, while the very definition of an agent indicates an ongoing and continuous relationship. Since many insureds deal with the same broker for long periods of time, it is, in most cases, the continuity of the agency relationship that differs from the broker relationship; brokers and insureds are ordinarily involved in what can be viewed as a series of discrete transactions, while agents and insurers tend to be under some duty to each other during the entire length of the relationship.

Wisniski, 906 A.2d at 578 (internal citations omitted)(emphasis added).

Should you have questions or concerns as you navigate this issue, please contact the undersigned, or one of our team.