Steven Plitt, Expert Witness Steven Plitt, Expert Witness
Insurance Bad Faith Claim Handling Expert Serving Clients Nationwide

INSURANCE SUBBROKER HELD TO NOT OWE DUTY TO WARN OF AN INSURANCE COMPANY FRAUD DURING THE PLACEMENT OF INSURANCE

Under Illinois statutory and common law an insurance broker owes a duty only to the named insured who has purchased insurance from the broker. Recently, the question arose under Illinois law regarding whether a sub broker, who played an administrative role in the placement of a large and complex risk involving a chain of brokers and subcontractors, but did not place any insurance on the behalf of the named insured or received commissions from the placement owed any type of duty to warn the named insured of potential "red flags" suggesting that the insurance company under which the program was placed was untrustworthy and that its polices issued might be worthless.

In M. G. Skinner & Associates Insurance Agency Inc. v. Norman-Spencer Agency Inc. 845 F. 3d 313 (7th Cir. 2016) (interpreting Illinois law) the insurance coverage under a complex insurance placement was a complete fraud. The case involved a purchasing group, Western Consolidated Premium Property, Inc. (WCPP) which was a risk purchasing group through which more than 600 owners or managers of commercial properties purchased insurance. WCPP's affiliated broker, M. G. Skinner & Associates (MGSA), sought to renew coverage for the WCPP properties in 2011. In order to procure the insurance, a change of sub brokers was put together by MGSA. The coverage was ultimately placed with JRSO. However, the insurance company, JRSO was a complete fraud and the insurance policy issued to WCPP was fictitious with JRSO lacking the capital required to pay potential claims.

Norman-Spencer Agency (NSA) was a defendant in ensuing litigation brought by WCPP. NSA was not part of the sub chain of sub brokers that MGSA put together to place the renewal. The only reason NSA was brought into the transition was because Michael Ward and his insurance company and the final sub broker from the chain were dissatisfied with the work of the program administrator they had used on previous transitions. Because of this, they had agreed to use NSA as an administrative the JRSO insurance program.

Following a meeting between NSA, the sub broker on the program, Ward, NSA's president, met to discuss NSA's potential retention as the JRSO program administrative. The meeting resulted in the drafting of a "Memorandum of Understanding" which outlined the agreement between Ward and NSA. Under the agreement NSA would issue a back log of approximately 64 policies for the sum of $25,000 and then NSA would underwrite and issues policies for the JRSO program thereafter. However, the memorandum of understanding was never signed although NSA was paid the $25,000 and did begin to issue the back law policies. Going forward NSA was not permitted to be involved in the WCPP placement as such NSA never underwrote or bound coverage for WCPP. None of the 64 back law policies issued by NSA covered WCPP.

In the esuing litigation over the fraud, WCPP and MGSA alleged that NSA should have alerted them to the "Red Flags" showing the lack of trustworthiness of Ward and JRSO. However, the district court granted summary judgement in favor of NSA which was affirmed by the 7th Circuit Court of Appeals. The 7th circuit in M. G. Skinner & Associates held that NSA did not owe plaintiffs a duty under either Illinois statute or common law because NSA never participated in the actual placement of insurance on behalf of WCPP nor did NSA receive any WCPP funds from the placement. Regarding the 64 backlogged polices that NSA issued as part of its administrative agreement with Ward, the court found that those policies were bound before NSA got involved and NSA received a flag fee for preforming administrative tasks on all of the back logged policies. Neither WCPP nor MGSA was insured under any of the back logged policies.

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