Posting for

Monday, June 22, 1998

by: Bert Rush

brush@firstam.com

INSURANCE BROKER LIABILITY/AGENTS/PROFESSIONAL NEGLIGENCE

At Regional Counsel meetings over the years we've occasionally commented on reported cases involving claims of negligence against insurance brokers who have failed to obtain special coverages for their clients. Typically these cases have owners of a business as plaintiffs. The business suffers some catastrophic loss--or liability in a lawsuit--for which the business owners are surprised to learn they do not have insurance coverage. Brokers are made liable for such uninsured losses where they have knowledge of the client's business operations and "special needs" for insurance, but fail to adequately advise the client about available coverages.

This is why business insurance brokers carry malpractice insurance.

A case recently decided in Los Angeles provides a good reminder that such claims of professional negligence can also be made against those dealing in other lines of insurance.

From 1974 to 1987 the Frumovitz family had "full coverage" homeowners insurance thru USAA for their home on White Cap Way in Malibu. This included coverage for the full value of the dwelling, contents, other structures and outside living expenses.

In 1987 the Frumovitz coverage changed--a new underwriter took over for fire insurance. Frumovitz contacted his insurance broker to make sure he'd continue to have full coverage. He apparently was given assurances, but in act his coverage was not "full" and his policies were split between two companies.

By January 1993 the Frumovitz coverage was $1 million on the dwelling and $300,000 on contents. Frumovitz got an appraisal of his house at $1,047,000. With the appraisal in hand, the broker increased the dwelling coverage to $1,047,000 but the contents coverage remained at $300,000. There was evidence the contents coverage was inadequate, and $153,000 more coverage was available.

In June 1993 Frumovitz again contacted his broker for assurance he had full coverage homeowners insurance--he wanted contents coverage for $700,000. The broker obtained dwelling coverage at $1,047,000 and contents coverage at $300,000, from Fireman's Fund, and advised this was the fullest coverage available in light of the home's location in an area known for dry brush and windy conditions. Again, there was evidence that more comprehensive ("Wrap Around") coverage was available, at the time, from Fireman's Fund.

On November 3, 1993, fire destroyed the Frumovitz home and its contents. Fireman's Fund reimbursed Frumovitz full value ($1,047,000) for the dwelling, but only $300,000 (the policy limit) for contents There was no reimbursement for other structures or outside living expenses.

Frumovitz sued the insurance broker for negligence and breach of fiduciary duty. After a fourteen-day trial, the jury awarded Frumovitz $473,994--which was the full amount of his uninsured losses--despite the jury's special finding that 30% of fault for these losses was assignable to Frumovitz himself.

The title of the case is William Frumovitz v. GIC, et al.; L.A. Superior

Court Case No. SC033060--decided 3/18/98--reported in the Daily Journal, L.A.'s newspaper for the legal community.

This is a good reminder of the importance of making title underwriting guidelines clear to our employees and agents. It's especially important that they know all that we're willing to do. And the Frumovitz case shows us another good reason (if there need be) for issuing EAGLE coverage as your "default" policy in areas where it's reasonable and practical.

Some states have laws or regulations which require a buyer who chooses not to purchase title insurance to sign a waiver--acknowledging they've been offered an owner's policy and have decided to decline the coverage. Even where this isn't required, a signed waiver (for your file) is a good idea. And, in places where we now have three levels of coverage available (standard, extended and EAGLE), a written record of the customer's choice of coverage becomes even more important to protect against claims of negligence/failure to advise/inadequate coverage.

Comments, questions, argument? Just press the "Reply" button, and send your thoughts to LandSakes.

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Following Monday's posting, Frank Melchior (Iselin, NJ) wrote:

I agree with everything you say . . . . Additionally, however, there are two distinct benefits in obtaining the waiver:

1. In many jurisdictions, the courts will hold that the "reasonable expectation" was that the loss was covered. It is an excellent defense tool to be able to say to the court that the coverage was offered and rejected; and

2. I've sold a heck of a lot of insurance by insisting that a plain English waiver be signed.

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In a further reply to Monday's posting, Alan Rubin (Uniondale, NY) writes:

With respect to the issue of a title insurer's potential liability where a purchaser does not obtain fee insurance, consider the following claim that came into our office in 1993:

In the "main action", a husband, who was purchasing the residence from his ex-wife as a result of an order entered in the matrimonial action, made the decision, with the "help" of his attorney, not to take fee title insurance. The only title insurance purchased was on the mortgage made by the purchaser.

According to the attorney, the decision was based, in large part, on a title report prepared by First American, which failed to raise a Social Services mortgage, and by an alleged representation, by the closer, that there were no liens against the property other than those set forth in the title report. When the Social Services mortgage came to the attention of the uninsured fee owner, the owner commenced a malpractice action against his attorney. Thus, the purchaser and his attorney claimed reliance upon a title report that was prepared only for the benefit of the insured lender.

The attorney turned around and brought a third party action against First American, alleging negligence and misrepresentation regarding the title report and the alleged statement made by the closer.

Handling this matter "in-house", I moved for summary judgment dismissing the third party complaint, contending that there was no privity as between either the fee purchaser and/or his attorney and First American, and, therefore, any reliance by the purchaser or his attorney on the title report or the closer's remarks was misplaced.

The "learned" District Court, Suffolk County (First District) ruled in our favor, dismissing the third party complaint against us. The court stated:

"The existence of privity requirement is also necessary in order to hold First American liable to the defendants for alleged negligence. Since. . . no privity of contract existed between the defendants [third party plaintiffs] and First American, their claim against First American for negligence in issuing a false report must also fail [Citation omitted]."

As suggested, it is important that the fee purchaser be informed of his/her right to fee title insurance. Not only should a purchaser's attorney be sure to raise this issue to the client, but the suggestion that the client sign off on a letter of his/her decision to decline fee insurance is a good one.

Reply to Alan: Unbelievable! Why did buyer's attorney think he was invited to the closing? I know--I'm sputtering. I'll settle down.