Court Declines to Hold Broker Accountable for Insured’s Failure to Report Known Claims in Application

A Massachusetts federal court has held that, absent special circumstances, an insurance broker does not owe a fiduciary duty of care to its client and therefore is entitled to accept its clients’ representation that all known claims had been reported in its application and has no duty to investigate whether potential claims were not reported.  Biochemics, Inc. v. Axis Reins. Co., 2017 WL 4317384 (D. Mass. Sept. 28, 2017).

The insured pharmaceutical company and its founder were the targets of an SEC formal investigative order and subsequent enforcement action.  During the course of the matter, the pharmaceutical company, in consultation with its broker and insurance producer, switched its D&O insurance carriers.  The pharmaceutical company did not report the matter as either a claim or potential claim to the first carrier, nor did it disclose the matter on its application for insurance with the second carrier.  The second carrier denied coverage for the matter, and the insured pharmaceutical company filed suit against the carrier as well as the broker and insurance producer.  The court granted the second carrier’s motion for summary judgment, concluding that the SEC investigation and enforcement action were not covered because the SEC formal investigative order was issued prior to its policy’s inception.

The pharmaceutical company then moved for summary judgment on their claims for negligence, breach of fiduciary duty, and violations of Massachusetts consumer protection laws against the broker and insurance producer, arguing that their handling of the company’s account resulted in the denial of coverage.  In denying the pharmaceutical company’s motion for summary judgment, the court held there were no special circumstances imposing a fiduciary duty of care on the broker or insurance producer.  Therefore, because the company was required to report all known claims to the second insurer in signing the policy proposal, the broker and insurance producer were entitled to rely on that representation and had no obligation to ferret out unreported claims or potential claims.

Wiley Executive Summary

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