I said this in the March 5, 2014 issue of Coverage Opinions: “On one hand, cases addressing whether a policyholder can sue its broker, for failing to obtain insurance to cover a claim, aren’t coverage cases in the true sense of the word. They do not address whether an insurer is obligated to provide coverage, under certain policy provisions, for a specific loss that took place. That being so, it is easy to overlook such cases if your focus is on judicial opinions addressing insurance coverage.
But it could also be said that cases addressing broker liability are nothing short of coverage cases. After all, if a policyholder fails to obtain any, or adequate, insurance from its own insurer for a claim, and, if its insurance broker is legally responsibility for the coverage deficiency can be established, then the broker’s errors and omissions policy may fill the void. Thus, the broker’s errors and omissions policy can sometimes be an insured’s policy of last resort. When you look at it this way, a broker liability case is a coverage case with a different name.
Even if broker liability cases are designed to get the insured to the same place as a traditional coverage case, I still don’t follow them that closely. But sometimes you have to stand-up and take notice of a broker liability decision. Sometimes such cases simply can’t be ignored.”
The Indiana Supreme Court’s decision in Groce v. American Family Mutual Ins. Co., No. 48S02-1307-CT-472 (Ind. Apr. 3, 2014) is in the category of broker and agent liability decisions that simply can’t be ignored.
At issue before the Hoosier high court in Groce was when did the statute of limitations begin to run for a claim against an insurance agent for professional liability. In very simple terms, the Groces obtained a homeowners insurance policy from American Family. On October 27, 2007, their home sustained substantial fire damage. A dispute arose regarding the amount of insurance benefits payable under the policy. The Groces alleged that their agent “negligently failed to obtain a fire insurance policy . . . which would have paid the entire cost of reconstructing their [r]esidence if it was damaged or destroyed by fire.” In essence, the Groces received “replacement cost” coverage, but in an amount capped by the policy limits. The Groces alleged entitlement to the full costs to rebuild and repair their home -- without any limitation due to policy limits. The Groces filed suit against their agent and insurer on June 22, 2009.
The Groces alleged that their agent’s liability stemmed from an August 18, 2003 exchange between the agent and Ms. Groce concerning the coverage to be obtained. [There’s more to it than that but that’s the gist of it for purposes of discussion here.]
So when did the Indiana Supreme Court conclude that the statute of limitations began to run for the Groces’s professional liability claim against their insurance agent? Answer: no later than the time of the alleged statements of the agent to Ms. Groce on August 18, 2003. The court concluded that the statute of limitations began to run on this date because “the Groces, in the exercise of ordinary diligence in reviewing their homeowners insurance policy, could have timely discovered that the company’s replacement cost liability was capped at the dwelling loss coverage limit[.]” Therefore, the court held that the two-year statute of limitations period, for the Groces’s professional liability claim against their agent, began to run at this time. So their 2009 action against the agent was barred.
In reaching its decision, the Groce court relied on the Indiana Supreme Court’s 2008 decision in Filip v. Block, which the Groce court characterized as follows: “The Filip Court began its analysis noting ‘that a claim against an agent for negligent procurement of the wrong coverage begins at the start of coverage if the breach was discoverable at the time through ordinary diligence.’ While the physical loss did not occur until the fire, a policyholder receives protection from risk of loss when the policy is issued, and thus any claim based on inadequacy of coverage generally occurs when the policy is issued. Because the Filip plaintiffs could have ascertained that ‘their policy lacked coverage of nonbusiness personal property and business interruption, and that the building and business personal property coverage had inadequate limits,’ the limitations period began to run as to such claims ‘on or shortly after the activation of the policy.’ An exception to this general rule exists when a policyholder reasonably relies upon an agent’s representations where the agent ‘insists that a particular hazard [is] covered.’ This exception negates an insured’s duty to read part of the policy.”
Why is this decision a blow for policyholders (or underlying plaintiffs) seeking “last resort” coverage and such a big win for brokers and agents? Easy. Many people do not read their policies until after a loss has taken place. So if their policy does not contain adequate coverage, this is the point at which they’ll discover it. But if they could have discovered it earlier, by reading the policy, and the policy has been in place for even a relatively short period of time before the loss, then there’s a good chance that the statute of limitations, for any professional liability action against their agent or broker, will have run by the time such action is filed.
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