Agent or broker?: When an appeals court makes a ‘fundamental mistake’

On May 22, the Illinois Supreme Court heard oral arguments in the appeal of American Family Mutual Insurance Co. v. Krop, 2017 IL App (1st) 161071, in which the 1st District Appellate Court made the fundamental mistake of confusing an insurance agent for an insurance broker.

The former works for the insurance company; the latter works for the prospective policyholder. This mistake led the appellate court to revive a lawsuit that should have stayed dismissed.

American Family denied the Krops’ claim under their homeowners insurance policy and sued for a declaration of no coverage. This would be on the grounds that the policy did not cover their son’s alleged harassment and bullying of a minor.

The Krops brought a counterclaim against American Family and its agent, Andy Vargas, alleging that Vargas negligently procured a policy from American Family that did not offer coverage “equivalent” to the coverage offered under the Krops’ prior homeowners insurance.

Had the Krops simply read the new policy, they should have seen that it was not “equivalent” to the one it replaced, meaning that the two-year limitations period on lawsuits against insurance agents and brokers began to run the day the Krops received a copy of their policy.

The circuit court dismissed the Krops’ counterclaim as untimely under 735 ILCS 5/13-214.4 because the American Family policy was delivered more than two years before the Krops filed suit.

Reversing that dismissal, the appellate court ruled that Vargas owed the Krops a fiduciary duty that excused them from reading their policy. In support of its holding that Vargas owed the Krops this duty, the appellate court characterized Vargas as “their agent” and cited long-standing Illinois law that finds that an insurance broker is the policyholder’s fiduciary.

The appellate court did not explain how Vargas could have simultaneously served both as American Family’s agent and the Krops’ agent when he met with them to offer American Family insurance.

The appellate court was flat wrong about Vargas’ relationship with the Krops. Vargas indisputably worked for American Family. Google his office in southwest suburban Orland Park and you will see the American Family sign on his wall.

The Krops alleged that he was American Family’s agent, as they needed to do in order to hold American Family liable for Vargas’ alleged negligence. That way the negligence suit might effectively get the Krops the insurance coverage that their policy apparently does not afford them.

By alleging that Vargas was the insurer’s agent, the Krops tacitly admitted that he was not their broker. Absent both sides’ consent, an agent cannot serve both his principal and another party in a negotiation between the two.

Thus an insurer’s agent is “engaged in the business of selling [the] insurance. … [A]t no time [is he] engaged in the business of providing information to the [policyholder] for guidance in business transactions.” Hoover v. Country Mutual Insurance Co., 2012 IL App (1st) 110939, ¶ 47. Vargas did not take on any fiduciary duty that a broker might have ever owed his client.

Nor by serving as the insurer’s agent did Vargas take on any other fiduciary duty to the Krops. An insurance agent does owe the policyholder a duty, but it is not a fiduciary one.

Historically, “[w]hereas the insured’s agent or broker ha[d] a duty of care, competence and skill in performing all aspects of the insurance transaction, no such duty [was] imposed upon the insurer’s agent regarding its duties toward a customer of the insurer.” Country Mutual Insurance Co. v. Carr, 366 Ill. App. 3d 758, 763 (App. Ct. 2006).

That changed when 735 ILCS 5/2-2201 took effect in 1997, imposing, for the first time, a duty of ordinary care on insurance agents in favor of policyholders when “renewing, procuring, binding or placing the coverage requested by the insured or proposed insured.” (The same statute eliminates any conceivable fiduciary liability in those circumstances that an insurance producer might owe to anyone, except when a claim payment or premium payment or deposit is allegedly misappropriated.)

“The duty of ordinary care imposed in [Section 2201] is not based on a fiduciary relationship between an insurance producer [which is a broker or an insurance agent] and the insured. Rather, it is a duty to exercise ordinary care that may be applied to any insurance salesperson regardless of whether a fiduciary or agency relationship exists.” Skaperdas v. Country Causality Insurance Co., 2015 IL 117021, ¶ 26.

Whatever the circumstances, an insurance agent necessarily does not owe the policyholder a fiduciary duty. Babiarz v. Stearns, 2016 IL App (1st) 150988, ¶¶ 45-46. Any allegation that an insurance agent owed the policyholder a fiduciary duty is a legal conclusion that no court should ever credit.

Let’s hope that the Supreme Court will correct the appellate court’s error. The Krops should have read their policy, and it is incredible to conclude that Vargas should have read it for them.