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No need for fiduciary relationship between agent and insured



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Donald Isken (“Mr. Isken”) sued Rick Galster III Insurance Agency, Inc. (“Galster Insurance”) seeking monetary damages for negligence, fraudulent inducement and fraudulent misrepresentation. Galster Insurance decided to dismiss the complaint because: (1) Mr. The suit did not allege that Galster Insurance owed him a fiduciary duty; (2) Mr. Isken did not specifically plead fraud; and (3) Mr. Isken relied on representations outside the four corners of the contract.

IN Donald Isken v. Rick Galster III Insurance Agency, Inc., No. N22C-04-170 FJJ, Superior Court of Delaware (Nov. 3, 2022), the court explained the relationship between the insured and the insurance agent.

ACTUAL BACKGROUND

Galster Insurance is a third party brokerage agency that sells, solicits and negotiates insurance on behalf of its clients in exchange for compensation. Mr. Isken owns property in Wilmington, Delaware (the “Insured Premises”).

Nationwide Insurance Company covered the insured premises through a homeowner’s policy (“the Nationwide Policy”) until September 2018, when Nationwide chose not to renew the policy. Mr. Isken contacted Galster Insurance and instructed its agent broker, Rick Galster III (“Mr. Galster”) to obtain new coverage for the insured premises on terms equivalent to the Nationwide policy. Galster Insurance secured an indemnity policy (the “Indemnity Policy”) through Scottsdale Insurance Company.

Almost two years later, two storms hit the insured premises. As a result, the insured premises suffered a power outage for several days. Without electricity, the insured premises’ sump pump failed and a foot of water poured into two fully furnished living spaces in the lower living area. Altogether, the cost of restoring the damaged areas to their former condition exceeded $100,000.

When Mr. Isken informed Galster Insurance of the damage, advised Mr. Galster Mr. The ability to immediately file a claim under the Compensation Policy. Mr. Isken did so. However, through his conversations with the internal claims adjuster for Scottsdale Insurance Company, Mr. Isken knowing that the indemnity policy only provided $5,000 in water damage coverage, instead of the $50,000 he instructed Galster Insurance to obtain.

ANALYSIS

Galster insurance’s duty towards Mr. Isken

Galster Insurance claimed that Mr. The plaintiff’s professional negligence claim must fail because Mr. Isken did not plead and prove that Mr. Galster owed him a fiduciary duty.

Typically, an insurance agent takes only the information normally found in an agency relationship. This includes the duty to exercise reasonable care, diligence and judgment in obtaining the insurance requested by the insured. The agent assumed no obligation to advise the insured on the specific insurance matters solely by virtue of the agency relationship.

A fiduciary relationship is not a requirement in every negligence case between an insured and an agent. Generally, an insurance agent does not have a duty to advise a client about appropriate insurance coverage. However, this general rule does not apply if the agent voluntarily assumes responsibility for selecting appropriate coverage or if the insured makes an ambiguous request for coverage that requires clarification.

To the extent that there is any doubt in Delaware jurisprudence, Delaware courts will not require a plaintiff to plead the existence of a fiduciary relationship if an agent allegedly failed to follow the insured’s specific instructions.

Mr. Iskin has well testified that he specifically instructed Mr. Galster to replace the Nationwide Policy with equivalent coverage. Because Mr. Galster owed Mr. Iskin a duty to follow these instructions (even in the absence of a fiduciary relationship between the two), the court refused to dismiss this part of the complaint.

Negligent misrepresentation claim

Galster Insurance also claimed that Mr. The ice had not invoked enough prima facie elements of fraud under Delaware law. The court disagreed. The three minimum pleading requirements that a fraud claim must satisfy under Superior Court Civil Rule 9(b) in order to survive dismissal, the alleged misrepresentations must:

  • enumerated;
  • identify the parties to the conversation; and
  • account for the content of the discussions in sufficient detail to alert the party to the precise offense of which it is charged.

Mr. Isken specifically instructed Mr. Galster to obtain a policy identical to the Nationwide Policy. The court found that the content of the discussion set out the elements of fraud in sufficient detail.

The four corners of the contract

Finally, Galster Insurance claims that Mr. The plaintiff’s fraudulent inducement claim must fail because the claim is based on representations made by Mr. Garters outside the four corners of the contract. Mr. The suit’s reliance on non-contractual representations, Galster Insurance argues, ran afoul of the court’s “bootstrap doctrine.”

However, a fraud claim may be based on representations contained in a contract, “where an action is based entirely on a breach of the terms of a contract between the parties, and not on a breach of an independent duty imposed by law, a plaintiff must sue in contract and not in tort.” A plaintiff “cannot bootstrap” a breach of contract claim into a fraud claim merely by alleging that a contracting party never intended to perform its obligations or “merely by adding the term fraudulently induced to a complaint.”

Essentially, a fraud claim asserted concurrently with a breach of contract claim can survive, so long as the claim is based on conduct that is separate and distinct from the conduct constituting the tort.

Mr. Isken did not allege that Galster Insurance had breached their contract; rather, his claim was rooted in Mr. Galster’s breach of duty to him in damages alone and independent of their contract. The court declined to dismiss the fraudulent inducement claim under this theory.

Sometimes a little knowledge can get an insurance agent in trouble with a court of law. When an insurance agent receives a simple and direct instruction to substitute a stud policy that provides identical coverage, failure to comply with the request is a breach of the duty imposed on the insurance agent and may result in liability for the failure. The negligent failure cost the insured at least $45,000, and by claiming he had replaced the national policy with an identical Scottsdale policy, it is both negligent and appears to be fraudulent. The trial, if not decided, would be interesting.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and zalma@zalma.com. Subscribe and receive videos limited to Excellence in Claims Handling subscribers at locals.com https://zalmaoninsurance.locals.com/subscribe.Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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