Agent or broker?

Rough Notes, Mar 1999

At issue: Howard Esser was the insurance broker for Joseph Lazzara. Esser had handled the plaintiff's personal and business insurance needs for 20 years. Esser had agency agreements with several insurance companies, including Aetna and Reliance. These contracts authorized Esser to bind insurance coverage and entitled him to receive commissions on the business placed with these companies.

In 1973 Esser recommended that Lazzara increase his automobile limits from $500,000 to $1 million. Lazzara agreed and had Esser obtain the additional coverage. Esser was to renew coverage unless otherwise instructed. Lazzara did not give any instructions to Esser as to how the coverage was to be structured, or with whom it was to be placed. In order to provide coverage for $1 million, Esser wrote primary coverage of $300,000 with Reliance and coverage of $1 million in excess of $250,000 with Aetna. Both policies were renewed several times.

In July 1977, Reliance issued the Lazzara policy with split limits of $100,000 per person and $300,000 per occurrence. The split-limit policy created a $150,000 gap because it would cover only $100,000 per person, and the Aetna policy required limits of $250,000. Esser renewed the splitlimit policy several times.

On August 13, 1979, Lazzara's daughter, Diana, was involved in an automobile accident that killed Anthony Bond. A lawsuit was filed by the estate of Anthony Bond and Donna Bond, the wife of the deceased, against Lazzara, Diana Lazzara and Reliance. The trial court issued a judgment against the defendants for $510,000. Reliance paid only $100,000 of the judgment due to the split-limit policy. Aetna paid the excess amount.

In January 1983, Lazzara filed suit against Esser for the unpaid $150,000.

In the trial court and subsequent appeals, Esser's primary argument was that he was an agent of the insurer, not a broker for Lazzara. The district court held, as a matter of law, that Esser acted as an insurance broker for the purposes of acquiring and maintaining auto insurance for Lazzara, rather than as an agent for the insurer. Thus he "had a duty to act in good faith and with reasonable care, skill and diligence in compliance with Lazzara's instructions."

The Illinois courts have defined an insurance broker as: "One who procures insurance and acts as middleman between the insured and the insurer, and solicits insurance business from the public under no employment from any special company, but, having secured an order, places the insurance with the company selected by the insured, or, in the absence of any selection by him, with the company selected by such broker.

"An insurance agent, on the other hand, has a fixed and permanent relationship to an insurance company that the agent represents and has certain duties and allegiances to that company." The court went on to say "whether a person is an agent or a broker is determined by his or her acts."

The Illinois appellate courts have applied four criteria in determining whether a person is an agent or a broker: 1. who called the intermediary into action; 2. who controls its actions; 3. who pays it; and 4. whose interests does it represent. Since Illinois law permits insurers to pay brokers, point 3 is not given much weight in actual practice.

In answering Esser's arguments, the appeals court ruled that Esser had served Lazzara for many years. Lazzara had called Esser into action by requesting that Esser obtain additional limits. Furthermore, Lazzara did not ask for a specific insurance company, but relied on Esser's judgment. A significant argument raised by Esser was that, once he procured the insurance, he ceased being Lazzara's agent. The court held that, since his instructions were to maintain the agreed-upon coverage, his authority extended beyond the mere procurement of the policy.

The court ruled that an agencycompany agreement does not establish a fixed and permanent relationship. Esser was not required to place a specific amount of written premium with a company, was not paid a salary, had no allegiance to any insurance company, and was permitted to enter agency agreements with other companies.

Esser made several other arguments:

1. Even though it was Lazzara's agent, there was no evidence that it breached its fiduciary obligations. The court said that Esser breached its fiduciary duties because it failed to maintain the coverage requested by Lazzara, and failed to inform Lazzara of the gap in coverage.

2. That Lazzara failed to prove the essential elements of a contract to obtain and maintain insurance. The court said it was not necessary to address this issue because it had already granted a summary judgment for Lazzara. "It makes little difference whether we uphold the grant of summary judgment on the basis of breach of fiduciary duty or breach of contract."

3. That the district court erred by not allowing Esser to raise the exclusions of the Reliance policy. However, the court said that when Reliance paid $100,000 on the judgment, it conceded its liability under the terms of the policy