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 moved to dismiss the complaint because: (1) Mr. Isken did not allege Galster Insurance owed him a fiduciary duty; (2) Mr. Isken did not plead fraud with particularity; 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 (November 3, 2022) the court explained the relationship between insured and insurance agent.

FACTUAL BACKGROUND

Galster Insurance is a third-party broker 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 via a homeowner insurance policy (“the Nationwide Policy”) until September 2018, when Nationwide elected 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 equivalent terms as the Nationwide Policy. Galster Insurance secured a replacement policy (“the Replacement Policy”) through Scottsdale Insurance Company.

Nearly two years later two storms hit the Insured Premises. Consequently, the Insured Premises sustained loss of electricity for several days. Without electricity, the Insured Premise’s sump pump failed and one foot of water flooded into two fully furnished living spaces in the lower-level living area. All told, the cost of restoring the damaged areas to their previous condition exceeded $100,000.

When Mr. Isken informed Galster Insurance of the damage, Mr. Galster advised Mr. Isken to immediately file a claim under the Replacement Policy. Mr. Isken did so. However, through his conversations with the in-house claims adjuster for Scottsdale Insurance Company, Mr. Isken learned the Replacement Policy only provided $5,000 worth of coverage for water damage, instead of the $50,000 he instructed Galster Insurance to obtain.

ANALYSIS

Galster Insurance’s Duty to Mr. Isken

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

Ordinarily, an insurance agent assumes only those duties normally found in an agency relationship. This includes the obligation to use reasonable care, diligence, and judgment in procuring the insurance requested by the insured. The agent assumed no duty to advise the insured on the specific insurance matters merely because of the agency relationship.

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

To the extent there is any doubt in Delaware jurisprudence the Delaware Court will not require a plaintiff to plead the existence of a fiduciary relationship if an agent allegedly fails to follow the specific instructions of the insured.

Mr. Iskin has well-pled that he explicitly instructed Mr. Galster to replace the Nationwide Policy with equivalent coverage. Because Mr. Galster owed Mr. Iskin a duty to follow these instructions (even absent a fiduciary relationship between the two), the Court refused to dismiss this count of the complaint.

The Negligent Misrepresentation Pleading Requirements

Galster Insurance also argued Mr. Isken had not adequately pled the prima facie elements of fraud under Delaware law. The Court disagreed. The three minimum pleading requirements a fraud claim must meet under Superior Court Civil Rule 9(b) to survive dismissal the alleged misrepresentations must:

be enumerated;
identify the parties to the conversation; and
set out the content of the discussions with sufficient particularity to place the party on notice of the precise misconduct with which it is charged.

Mr. Isken specifically instructed Mr. Galster to acquire a policy identical to the Nationwide Policy. The Court found the substance of the discussion laid out the elements of fraud with sufficient particularity.

The Four Corners of the Contract

Finally, Galster Insurance contends Mr. Isken’s fraudulent inducement claim must fail because the claim relies on representations made by Mr. Galster outside the four corners of their contract. Mr. Isken’s reliance on extra-contractual representations, so claims Galster Insurance, ran afoul of this Court’s “bootstrap doctrine”.

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

Essentially, a fraud claim alleged contemporaneously with a breach of contract claim may survive, so long as the claim is based on conduct that is separate and distinct from the conduct constituting breach.

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

Sometimes a little knowledge can get an insurance agent in trouble with a court. When an insurance agent is given a simple and direct instruction to replace one policy with anther that provides identical coverage, failure to fulfill the request is a breach of the duty imposed on insurance agents and can result in tort liability for the failure. The negligent failure cost the insured, at least, $45,000, and by claiming he had replaced the Nationwide policy with an identical Scottsdale policy is both negligent and appears to be fraudulent. The trial, if not settled, would appear to be interesting.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

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 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.Subscribe and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://zalmaoninsurance.locals.com/subscribe.Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

Write to Mr. Zalma at zalma@zalma.com; http://www.zalma.com; http://zalma.com/blog; daily articles are published at https://zalma.substack.com. Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library

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