When an insurance claim is denied, policyholders sometimes look to their broker as a potential source of recovery.  Generally speaking, a broker owes its client the duty to procure the scope of coverage requested.  When a broker fails to do so, it may be liable for any gap in its client’s coverage.  The Mississippi Supreme Court addressed this issue recently in Mitchell Scruggs, et al. v. Greg Bost, et al.

In Scruggs, a jury found the policyholder, a cotton gin and cotton ginning business (“Scruggs”), liable for willingly and knowingly infringing patents on certain agricultural products Scruggs used.  Scruggs sought coverage under its general liability policy, the insurer denied coverage, coverage was litigated, and the court ultimately held that the policy did not cover the illegal conduct.  Scruggs then sued its broker for failing to procure a policy that would have insured against the type of patent claim brought against it.  Scruggs alleged that one of the principals told its insurance broker when purchasing the policy that he wanted to be protected “in the event that anybody sues us over almost anything.”  According to Scruggs, the broker failed to procure coverage that would have protected against a patent infringement claim and so the broker should be held liable for the losses Scruggs suffered as a result of the patent suit.

The court denied Scruggs’ claim, reasoning that an insurance broker cannot be liable for failing to purchase the necessary coverage when the conduct at issue, the intentional and illegal patent infringement, was uninsurable as a matter of law.  According to the court, even if the broker was negligent in procuring coverage, there was no basis for liability since no coverage existed as a matter of law.

It may seem all too obvious that trying to hold a broker liable for coming up short in procuring insurance that would cover intentional patent infringement is a non-starter.  But uninsurable risks come in more subtle varieties.  Targets of suits alleging violation of federal securities law know this.  As we previously reported, directors and officers (“D&O”) insurance carriers frequently argue that disgorgement of profits, or restitution, defined as the return of money or property to its rightful owner, is uninsurable as a matter of law and thus not covered under their policies.

Understanding the contours of broker liability may be helpful to know after suffering a loss.  But it might not be as important as understanding, before purchasing coverage, what risks are endemic to an industry or line of business, and which of these might not be insurable in the first place.  Scruggs serves as a reminder of this.