Broker not Liable in Fraudulent Policy Scheme because it hadn’t Placed the Policies

In M.G. Skinner & Associates Insurance Agency, Inc. v. Norman-Spencer Agency, Inc., No. 15-2290, 2017 U.S. App. LEXIS 63 (7th Cir. Jan. 4, 2017), the Seventh Circuit Court of Appeals affirmed the trial court’s ruling that Norman-Spencer Agency Inc., an insurance broker, could not be held liable for negligence or breach of fiduciary duty for its role, or lack thereof, in placing what eventually turned out to be fraudulent commercial property policies because it did not owe a duty of care to either of the plaintiffs under both an Illinois statute and common law.

Western Consolidated Premium Properties, Inc. (“WCPP”) was a risk purchasing group through which commercial property owners could buy insurance, and M.G. Skinner & Associates Inc. (“Skinner”) acted as that program’s administrator. The program involved hundreds of commercial properties, including office buildings, shopping centers and multi-unit residential properties. In 2011, WCPP sought, through its various brokers, to renew the insurance for its properties and during the renewal process, one of the brokers suggested using Norman-Spencer as a sub-broker. Ultimately however, although Norman-Spencer expressed interest in becoming involved in the process, it played no role in the actual transactions. WCPP eventually procured insurance for the majority of its properties through a Michael A. Ward and his company, JRSO LLC, and a number of WCPP properties overseen by Myan Management Group separately procured insurance with Ward and JRSO. Norman-Spencer served as program administrator of the Myan program.

In the end, the “policies” that were issued to both WCPP and Myan were a sham and were not backed by a legitimate insurer. Ward was eventually convicted of wire fraud and sentenced to 10 years in prison. He was also required to pay $9 million in restitution to various victims of the fraud, including WCPP.

Once the scam was uncovered, Myan’s coverage was reincorporated into WCPP’s, and the new insurance it was forced to buy cost over $2 million more than the sham policies.

In May 2012, WCPP and Skinner sued Ward, JRSO, Norman-Spencer and several other insurance brokers and all the claims except those against Norman-Spencer were resolved either through settlement or default judgment. As to Norman-Spencer, WCPP sought to hold it liable for negligence under the Illinois Insurance Placement Liability Act (“IIPLA”) and a common-law breach of fiduciary duty claim, because it alleged that Norman-Spencer had failed to notify WCPP of certain “obvious signs that the ultimate provider of the insurance was dishonest.” These “facts” that Norman-Spencer became aware of included orders of both conservation and confiscation issued by a Cook County, Illinois court against Ward and/or JRSO and a “suspicious” alleged reinsurance agreement that Ward had provided to Norman-Spencer after several delays. Skinner made similar claims regarding the placement of the Myan policies.

Norman-Spencer moved for summary judgment on both WCPP’s and Skinner’s claims. The district court granted Norman-Spencer’s motion for summary judgment regarding WCPP’s claims concluding that Norman-Spencer did not owe a duty to WCPP under the IIPLA because neither WCPP nor any broker in the procurement chain ever requested Norman-Spencer’s assistance with that placement. The court also granted Norman-Spencer summary judgment on WCPP’s breach of fiduciary duty claim, concluding that Norman-Spencer could not be liable under that theory because it did not participate in the placement or receive any WCPP funds from that placement.

It also granted the motion as to Skinner’s claims concluding in part that Skinner was not an “insured” on the Myan policy for purposes of the IIPLA and that because Skinner was not the “insured” on the Myan Management policy and did not make any payment toward that policy, Norman-Spencer could not have breach a fiduciary duty.

Both WCPP and Skinner appealed. On appeal, WCPP argued that three different items, an unexecuted memorandum of understanding, an undocumented conversation and an email between Norman-Spencer and another broker, evidenced that Norman-Spencer had participated as a sub-broker and could therefore be liable under the IIPLA. The appeals court rejected that argument because, among other things, there was evidence that Ward had specifically prohibited Norman-Spencer from participating in the placement. As such, Seventh Circuit agreed with the district court that Norman-Spencer owed no duty of care to WCPP because it was never involved in placing insurance on that company’s behalf and that liability under the IIPLA can only arise once an insured has made a request for specific coverage from a broker. As to the Skinner claims, while the court acknowledged that Norman-Spencer had actively procured insurance for the Myan properties, it agreed with the lower court that Skinner could not maintain its negligence claim because Skinner was not listed as an insured on the policy issued to Myan, and therefore, essentially had no standing to bring a claim under the IIPLA.

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