Last week, the Illinois Supreme Court began hearing arguments from its civil docket with Skaperdas v. Country Casualty Insurance Company.  Skaperdas poses a major question for the insurance industry: does a “captive” insurance agent who only represents a single insurer owe customers a tort duty of care in obtaining insurance?  Our detailed summary of the facts and lower court opinions in Skaperdas is here.

In early 2008, shortly after the plaintiff’s girlfriend had had an accident driving one of his vehicles, the plaintiff allegedly had a conversation with his insurance agent and told the agent to add both his girlfriend and her son to his policy.  For whatever reason, something went wrong; the declarations page identified the driver as a “female, 30-64,” but the policy listed only the plaintiff as a named insured.

Not long after, the girlfriend’s son was seriously injured in a bicycle accident.  When the negligent driver turned out to be underinsured, the plaintiff and his girlfriend sought benefits from the plaintiff’s policy. The claim was denied on the grounds that neither the girlfriend nor her son was named insureds.

The plaintiff sued the insurance agent for negligence, and sought a declaration of insurance coverage with respect to the defendant insurer.  Both defendants moved to dismiss, arguing that since the defendant was an “agent,” not a “broker,” he owed the plaintiffs no duty of care under the Insurance Placement Liability Act.  (735 ILCS 5/2-2201(a).)  The Fourth District reversed, holding that there was no difference between agents and brokers under the statute for purposes of assigning tort duties.

Counsel for the insurance agent began the argument, arguing that a captive agent owed no duty to his or her customer.  Counsel argued that the Appellate Court had misapplied Section 2-2201, expanding liability and contradicting agency law, the common law and legislative intent.  Counsel argued that no case other than Country Mutual Insurance Co. v. Carr, an earlier decision of the Fourth District (vacated by settlement) which the Fourth District followed in Skaperdas, had ever held that Section 2-2201 imposes any tort duty on a captive agent.  The Appellate Court disregarded the rule that the legislature is presumed to act in view of the common law, which at the time Section 2-2201 was enacted, had long drawn a distinction between captive agents and independent brokers.  The principal of a captive agent is the insurer, not the insured.  Section 2-2201 can and should have been interpreted consistently with the common law to keep in place the long-standing distinction between captive agents and brokers. Justice Theis asked when the legislature first used the term “insurance producer.”  Counsel responded that the legislature had used the term in the Act, but had not defined it until 2001 – therefore, one must assume the legislature was informed by the common law in using the term. Justice Theis asked when the term was placed in the statute, and counsel answered 1997.  Justice Theis asked whether one could argue that the legislature knew exactly what it was doing when it amended the Insurance Code.  Counsel responded that there was nothing in the Insurance Code that showed an intent to change the common law.  The question was what was the legislative intent in 1997, when it inserted the relevant language.  Justice Thomas asked whether plaintiff had any cause of action available as a result of the agent’s apparent mistake.  Counsel responded that plaintiffs were pursuing claims for breach of contract and declaratory judgment.  Justice Thomas asked whether there was a breach of fiduciary duty claim, and counsel answered no.  Nevertheless, plaintiffs were not left without a remedy.  Counsel argued that clear and convincing evidence of intent was necessary to support a finding that the common law had been changed to expand liability.  The intent of the statute was remedy breaches of fiduciary duty – but captive agents don’t have fiduciary duties.  Counsel also pointed out that Section 2-2201 had been proposed by the independent agents association, which would have no reason to seek expanded liability.  Justice Karmeier asked whether the Court would have to conclude that the statute was ambiguous to reach any of these points, and counsel said yes.  Justice Karmeier asked whether the Court could look at the Insurance Code together with the relevant provisions of the CCP and conclude that the statute is clear.  Counsel answered that that would amount to going outside the plain language of the statute, and the Court would have to first find ambiguity.  Counsel argued that the Fourth District’s holding would encourage insureds not to confirm their own coverage, and when something went wrong, to pursue their agents.  Counsel argued that under the Appellate Court’s holding, it might even be possible for a captive agent to be sued for failing to offer coverage from other companies.  Justice Theis noted that that wasn’t the plaintiffs’ theory.  Counsel agreed, but argued that it was the inevitable outcome of the Fourth District’s holding.

Counsel for the insurer followed, adopting the arguments made by counsel for the agent.  Counsel argued that nothing in the statute suggested liability for the insurer, but because of respondeat superior, that was the result of finding liability for the agent.  Counsel argued that the Fourth District’s construction of the statute disadvantages captive agents, since a broker could not render the insurer liable under respondeat superior.

Counsel for the plaintiffs followed.  Counsel argued that the “absurd results” discussed by appellants weren’t what the plaintiffs were alleging.  Without a negligence cause of action, counsel argued that the plaintiffs would have no recourse against the agent for his error. Chief Justice Garman asked whether the case was a statutory interpretation matter.  Counsel agreed that it was based on the question of who was an “insurance producer” under the Insurance Code.  The Chief Justice asked whether the statute was ambiguous, and counsel said it was not.  Counsel said plaintiffs were merely arguing for a standard of ordinary care – simply give the plaintiff what he asked for.  Justice Thomas asked whether counsel was suggesting that the parade of horribles urged by defendants was impossible, and counsel said yes.  The first step in statutory construction is the plain language of the statute, and Section 2-2201 merely refers to insurance producers, making no distinction between agents and brokers.  Practically speaking, counsel argued, the public interacts with both types of insurance representatives in similar ways. The Chief Justice asked whether the legislature intended in 1997 to abrogate the common law distinction between agents and brokers, and counsel answered yes.

Counsel for the agent concluded in rebuttal, arguing that the parade of horribles is inevitable if Section 2-2201 is interpreted to create an ordinary duty of care in placing coverage.  Counsel argued that the insured is obliged under the law to seek an explanation if he doesn’t understand the scope of his coverage.  The legislature’s action in 1997 could not be interpreted using a definition the legislature didn’t adopt until 2001, according to counsel.  Justice Theis asked whether there was a statute before 1997, and counsel said there was no statute specific to insurance placement liability.  Justice Thomas asked whether any negligent conduct by a captive agent is absolved, and counsel answered that the agent is responsible only if he or she fails to submit the application.  Justice Thomas asked whether a breach of contract action would cover the agent’s alleged failure to include the additional insureds, and counsel said no.  Nevertheless, the plaintiffs’ claim for breach of contract against the insurer continues.  Thus, plaintiffs are not left without a remedy.  Counsel pointed out that interpreting Section 2-2201 to create a tort duty would create an inherent conflict of interest between a captive agent and his insurer, if the agent is to have a tort duty to the insured or prospective insured.  Thus, the Appellate Court’s decision will require a comprehensive overhaul of the industry.  Justice Thomas asked whether such conflicts exist between insurers and brokers, and counsel said yes.  Justice Thomas pointed out that the only difference was that an agent could only deal with a single insurer.  Counsel responded that the difference was that customers went to brokers because they’re independent, and can source insurance from any number of insurers. If the insured goes to a captive agent, the insured knows the agent is only going to offer what his or her company has.

We expect Skaperdas to be decided in four to six months.

Image courtesy of Flickr by Alan Cleaver (no changes).