SUMMARY: In Cleveland Indians Baseball Co., L.P. v. New Hampshire Insurance Company, 727 F.3d 633 (6th Cir. 2013), the Sixth Circuit Court of Appeals found that a holder of an insurance certificate could assert a viable negligence claim against the insurance broker that issued the certificate where the broker failed to obtain the correct coverage requested by the named insured. The case expansively interpreted Michigan law to find potential tort liability by the broker, opening up avenues of recovery for additional insureds and insurance certificate holders where the insurance policy at issue does not provide expected coverage due to a mistake by the broker.
National Pastime Sports agreed to produce a “Kids Fun Day” event in conjunction with a Cleveland Indians home game. As part of this undertaking, National Pastime procured a commercial general liability (“CGL”) policy through its insurance broker, CSI Insurance Group, under which the Cleveland Indians were named as additional insureds. On the insurance application submitted to the broker, National Pastime checked a box that stated inflatables would be used at the event. The broker then provided the Cleveland Indians with an insurance certificate for the policy.
Once the CGL policy was purchased and the insurance certificate was issued, but before the policy was provided to either National Pastime or the Cleveland Indians, the Fun Day event took place. During the event, two attendees, Douglas Johnson and David Brown, were injured when an inflatable slide collapsed on them. Johnson died nine days later.
National Pastime notified CSI of the accident shortly after it occurred. At that time, National Pastime learned that the CGL policy it had purchased included an “amusement device” exclusion which, among other things, excluded coverage for inflatable slides like the slide involved in the accident. When National Pastime informed the broker that it had checked a box on the policy application noting that inflatables would be used during the event, a CSI employee responded, “Oh, ok. Sorry, I guessed I missed it. I’m so used to quoting up your events I think I hardly look at anything but the dates and the details of the event.”
Brown’s and Johnson’s representatives subsequently sued National Pastime and the Cleveland Indians. The CGL insurer denied coverage of the lawsuit based upon the amusement device exclusion. Coverage lawsuits subsequently ensued between the various parties, stake by the broker. including claims brought by the Cleveland Indians against CSI alleging that CSI was negligent in failing to procure the requested insurance coverage for the Fun Day event. The federal district court dismissed the Cleveland Indians’ claims on CSI’s motion for summary judgment, finding there was no duty owed to the Cleveland Indians by CSI which could give rise to tort liability.
On appeal, the Sixth Circuit reversed the trial court. While the court acknowledged that there “is no Michigan case law directly on the issue of an insurance broker’s duty to an additional insured,” the court found that there was case law supporting a claim of negligence against CSI in this instance. Specifically, the court noted that in various contexts, Michigan courts have imposed “an independent duty of care” on those who provide professional services “towards third parties where the harm was foreseeable and where the defendant had specific knowledge that its actions might harm a specific third party.” Relying on this general proposition, the court found:
Here, it is reasonably foreseeable that an additional insured such as the Indians will be harmed if an insurance agency or other intermediary fails to procure the intended coverage, just as the primary insured would be. While it is understandable that the law should not allow the insurance broker to be held liable to a virtually limitless class of claimants who are total strangers to the relationship between the insurance agency and the insured, or parties who were unknown to the insurance broker before the filing of a suit, this is not that case.
The court further found that to the extent Michigan law required a “special relationship” between CSI and the Cleveland Indians in order for a tort claim to exist, such a relationship “certainly exists here” since CSI knew the specific purpose of the CGL policy, and CSI sent the Cleveland Indians an insurance certificate naming the team as an additional insured.
Accordingly, the court held that the Cleveland Indians had a viable negligence claim against CSI as “CSI was well aware that the Indians could be harmed if the proper insurance was not procured.” The court also found that the Cleveland Indians could assert a claim of negligent misrepresentation against CSI since the Cleveland Indians reasonably relied upon the insurance certificate provided by CSI and believed adequate insurance coverage had been procured for the Fun Day event. The court held this reliance was reasonable in light of the fact that the insurance policy itself (which contained the “amusement device” exclusion) had not yet been provided to the Cleveland Indians at the time of the accident.
One judge dissented, asserting that the majority opinion was contrary to established Michigan law. The dissent said there was no independent duty owed by CSI to the Cleveland Indians separate and distinct from CSI’s contractual duty to procure insurance for National Pastime. Absent such a distinct duty, the dissent said, CSI should not be held liable in tort to the Cleveland Indians. The dissent also found fault with the majority opinion because it could potentially result in a windfall recovery to the Cleveland Indians. “The rule proposed by the majority would permit double recovery, because under the majority’s approach CSI could be liable to [National Pastime] for breach of its contract to obtain insurance, and to the Indians for negligence, even though the damages due to each would be the same.”
IMPORT OF DECISION: The Cleveland Indians case expansively interpreted Michigan tort law to find that an insurance broker can be held liable to third parties with which it did not contract if the harm to such parties was foreseeable by the broker. The holding of the case seems to conflict somewhat with a Michigan Court of Appeals case, West American Ins. Co. v. Meridian Mutual Ins. Co., 230 Mich. App. 305, 583 N.W.2d 548 (1998), in which the court held that insurance certificates only show that an insurance policy has been issued, but cannot be used to prove the specific terms of the policy referenced in the certificate. Because the Cleveland Indians case was decided by a federal court, it is not binding on Michigan state courts. It is unclear whether Michigan courts will reject its holding or follow its lead in future broker liability cases. As issuing insurance certificates is a common function of insurance brokers, it remains to be seen if this activity will be the basis for an increase in claims by certificate holders who find out that the policy referenced in the certificate does not provide the coverage the certificate holder expected.