Insurance Brokers Can Be Liable For Negligence And Fraud In Supplying False Information To Insurers
Insurance companies routinely rely on the information provided by insurance brokers in applications submitted on behalf of insureds. The questions arises whether brokers can be held liable for supplying false and misleading information to insurance companies. The court in Liberty Surplus Ins. Corp., Inc. v. First Indemnity Ins. Services, Inc., 31 So.3d 852 (Fla. Dist. Ct. App. 2010) unequivocally held that brokers can be liable for their negligent or fraudulent misrepresentations.
In Liberty Surplus, a law firm applied for professional liability identifying 14 prior claims during the previous five years. Unbeknownst to the law firm, its insurance broker included only three of those prior claims in submitting the law firm’s application to the insurance company, Liberty Surplus.
After the policy was issued, the law firm was sued in a class action lawsuit seeking in excess of $500 million in damages. While the case was pending, the policy came up for renewal. This time, the broker unwittingly included seven of the 14 prior claims in the renewal application. Alerted by the discrepancy, Liberty Mutual soon learned of all 14 prior claims.
The class action lawsuit against the law firm settled for $3 million. Thereafter, Liberty Mutual sued the insurance broker and the law firm alleging that it never would have issued the policy had it known of all 14 of the prior claims. The law firm settled the case against it. The trial court dismissed the cause of action against the broker on the grounds that “the insurer bears the risk of a broker’s error because of the general rule that an insurance broker is the agent of the insured rather than of the insurer.”
The appellate court disagreed. The court initially noted that “an agent can be independently liable for its own fraudulent misrepresentations.” The court then quoted Restatement (Second) of Torts §552 which states that “One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information…” The court reasoned that §552 dictated that “an insurance broker liable for its own negligence in supplying false information on which an insurer justifiably relies in issuing a policy and suffers a pecuniary loss.” Liberty Surplus, 31 So.2d at 858.
The court in Liberty Surplus noted that courts in other jurisdictions similarly applied §552 to insurance brokers. See, e.g., Burlington Ins. Co. v. Okie Dokie, Inc., 329 F.Supp.2d 45 (D.D.C. 2004); Paul Surplus Lines Ins. Co. v. Feingold & Feingold Ins. Agency, Inc., 693 N.E.2d 669 (Mass. 1998).