Insurance Broker is Only Required to Acquire the Policy Ordered by the Named Insured

Aug 17, 2021

Broker Owes no Duty to Third Party

Posted on August 17, 2021 by Barry Zalma

The Ohio Court of Appeal was asked to determine whether an insurance broker owes a duty of care to investigate and ultimately protect a third-party lienholder’s interest in a property despite the customer’s specific instructions otherwise. In S.L. & M.B., L.L.C., et al. v. United Agencies, Inc., et al., 2021-Ohio-2780, No. 109540, Court of Appeals of Ohio, Eighth District, Cuyahoga (August 12, 2021) the court was asked to find such a duty.

FACTS

In 2011, appellants, S.L. & M.B., L.L.C., sold a horse farm in Kirtland, Ohio to Denver Barry and Oryann, Ltd. (hereinafter “Oryann”). In the sale of the property, Denver Barry and Oryann executed a “Note and Security Agreement” in which they were required to “maintain adequate insurance” on the farm to protect the security interest of S.L. & M.B., L.L.C., and name S.L. & M.B., L.L.C., as a loss payee. At the time of the sale of the farm, Oryann and Denver Barry also purchased the business assets of appellant, Patriot Partners, a partnership d.b.a. Dorchester Farms (hereinafter “Patriot Partners”). The purchase documents were executed by Denver Barry, individually, and Tracy Barry, Denver Barry’s daughter, as the managing member of Oryann. After the sale of the farm, an insurance policy providing coverage for the property was purchased from Westfield Insurance that named S.L. & M.B., L.L.C., as holding an additional interest. Appellants were aware in October 2012, that the policy lapsed.

In November 2012, S.L. & M.B., L.L.C., Oryann, and Denver Barry were involved in litigation over nonpayment of the note and security agreement. A judgment for $460,000 was eventually entered in favor of S.L. & M.B., L.L.C., and Patriot Partners in 2017 against Oryann and Denver Barry.

INSURANCE POLICY AT ISSUE

In 2015, Tracy Barry was residing at the farm. She contacted United Agencies to purchase insurance on the farm. United Agencies is an insurance broker that works with different insurance companies to obtain policies for its clients. United Agencies had its employee, Joann Justus, work with Tracy Barry. In May 2016, in an email, Tracy Barry asked Joann Justus to name S.L. & M.B., L.L.C., as a loss payee on the insurance policy. Two days later in another email, she rescinded that request, indicating her attorney advised her not to name S.L. & M.B., L.L.C., on the policy. United Agencies eventually procured a policy for Tracy Barry from Westfield Insurance in June 2016. The policy did not name S.L. & M.B., L.L.C., as a loss payee.

While United Agencies and Justus were working with Tracy Barry to obtain insurance, neither S.L. & M.B., L.L.C., or its representatives had any contact or communication with United Agencies or its employees. In September 2016, a fire occurred at the residence on the farm where Tracy Barry resided. Westfield Insurance and Kirtland authorities investigated the fire, and Westfield Insurance eventually paid a claim to Tracy Barry.

S.L. & M.B., L.L.C., and Patriot Partners, sued United Agencies and its employee, Joann Justus, for breach of legal duties, tortious interference with contractual relationship, and fraud and misrepresentation, as well as seeking punitive damages.

United Agencies and Joann Justus eventually filed a motion for summary judgment. They alleged they owed no duty to S.L. & M.B., L.L.C., and that Patriot Partners did not have standing to bring an action because it had no interest in the property. They further argued that there was no evidence that Tracy Barry was a party to the note and security agreement that S.L. & M.B., L.L.C., presented as evidence of their interest in the property.

S.L. & M.B., L.L.C., and Patriot Partners, opposed the motion for summary judgment. They argued that United Agencies and Joann Justus knew of the existence of a mortgage but did not investigate the details of that mortgage. As such, S.L. & M.B., L.L.C., claimed that United Agencies and its employee made representations to Westfield Insurance that circumvented the lien it held on the farm by not disclosing the lien to Westfield Insurance. They further argued that there was a genuine issue of material fact as to whether United Agencies and its employees actively committed fraud with Tracy Barry against Westfield Insurance in obtaining an insurance policy in order to circumvent their interest.

The trial court granted summary judgment to United Agencies and Joann Justus without a written opinion.

LAW AND ARGUMENT

Duty Of Care Owed By An Insurance Agent To Third Parties

It is undisputed that the note and security agreement that forms the basis of the complaint was executed by Oryann and Denver Barry. In 2016, Tracy Barry purchased an insurance policy from Westfield Insurance through United Agencies. That policy did not name either S.L. & M.B., L.L.C., or Patriot Partners as a loss payee.

In order to establish a claim of breach of legal duty, it is axiomatic that appellants establish that appellees owed them a legal duty. In general, an insurance agent owes no duty to third parties.

In this case, appellees procured an insurance policy on behalf of the named insured, Tracy Barry. Moreover, Tracy Barry specifically instructed the appellees to not name a loss-payee in the insurance policy. Appellants argue that an insurance agent has a duty to protect the interests of third parties, such as a mortgagee, where a person seeking insurance has an obligation to do so. While appellants may have had a contractual agreement with Oryann and Denver Barry to name appellants as a loss payee in any policy insuring the property, they had no such contract with appellees. Appellants have not shown that without a contractual obligation or other relationship with appellees, appellees owed them any duty of care upon which to base tort claims.

Appellants were not named in the insurance policy and therefore no rights inured on their behalf. They cited no applicable Ohio statutes, regulations, or jurisprudence that establishes they were owed a duty of care by appellees where they were not named in the insurance policy and there was no relationship between appellants and appellees. Because appellants did not establish that appellees owed them a legal duty, the trial court did not err in entering summary judgment in appellees’ favor on appellants’ claims for breach of legal duties and tortious interference with a contractual relationship.

Ohio courts require the insurance contract to expressly provide protection to third parties in order for an action to be maintained in Ohio. In resolving the court of appeal determined that there was no legal duty owed appellants and that appellants cannot maintain their causes of action against appellees.

ZALMA OPINION

Insurance brokers are required by law to transact insurance with, but not on behalf of, insurance companies. In this case the insured ordered insurance in its name alone and instructed the broker – based on the advice of the insured’s lawyer – to name no loss payees. After the fire the named insured collected and the lien holder received nothing to protect its interest. The lienholder failed to protect itself and then sued the named insured’s broker, without any relationship with the insurer, for the benefits it believed it was entitled to receive. This case teaches that a lienholder should carefully establish that its interest is protected and demand copies of the policies to prove it existed or obtain a separate policy of insurance to protect its interest.

© 2021 – Barry Zalma Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at

http://www.zalma.com

and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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Insurance Broker is Only Required to Acquire the Policy Ordered by the Named Insured