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Insurance Law FLASHPOINTS February 2020

February 14, 2020Print This Post Print This Post

Michael H. Passman, BatesCarey LLP, Chicago
312-762-3227 | E-mail Michael H. Passman

Appellate Court Confirms as Constitutional the Two-Year Statute of Limitations for Claims Against Insurance Producers and Applies to Brokers

The Insurance Placement Liability Act, 735 ILCS 5/2-2201, imposes a statutory duty on insurance producers to exercise ordinary care and skill in renewing, procuring, binding, or placing the coverage requested by the insured or the proposed insured. Garrick v. Mesirow Financial Holdings, Inc., 2013 IL App (1st) 122228, ¶35, 994 N.E.2d 986, 374 Ill.Dec. 49. This statutory duty applies to both brokers (producers retained by a potential insured) and agents (producers retained by an insurance company). Skaperdas v. Country Casualty Insurance Co., 2015 IL 117021, ¶¶23 – 27, 28 N.E.3d 747, 390 Ill.Dec. 94. Claims alleging a breach of an insurance producers’ duty, such as a negligent procurement claim, must be brought within two years of the date the cause of action accrues. 735 ILCS 5/13-214.4.

In American Family Mutual Insurance Co. v. Krop, 2018 IL 122556, 120 N.E.3d 982, 427 Ill.Dec. 915, the Supreme Court of Illinois held that a negligence cause of action against an insurance producer accrues when the negligently procured policy is issued, and the discovery rule does not delay the start of the limitations period until after the insured learns that the negligently procured policy does not provide coverage. Therefore, if the insured does not detect a flaw in the policy until a claim is made more than two years after the policy is issued, then the insured is generally barred from pursuing recovery from the insurance producer (Krop listed a few possible exceptions to that general rule).

The Krop decision involved an insured’s claim against a captive agent, i.e., an insurance producer who has a fixed, permanent, and exclusive relationship to the insurance company he or she represents and who has certain duties and allegiances to that company. Last month, in Austin Highlands Development Co. v. Midwest Insurance Agency, Inc., 2020 IL App (1st) 191125, the appellate court of Illinois confirmed that (1) the statute of limitations rules expressed in Krop also apply to policies procured by a broker, i.e., an insurance producer who solicits insurance business from the public under no employment from any particular company, and (2) the statute of limitations rules expressed in Krop are constitutional.

In Austin Highlands, the insured hired a broker to procure insurance for apartment complexes managed by the insured. The broker procured an excess policy from a company affiliated with AIG. The policy was issued on November 16, 2015. 2020 IL App (1st) 191125 at ¶3. In March 2016, the insured was sued in a federal class action lawsuit for allegedly violating Illinois statutes related to tenant security deposits. 2020 IL App (1st) 191125 at ¶4. The insured tendered the complaint to the broker to forward it to AIG. However, on August 25, 2016, the broker informed the insured that the excess policy issued by AIG did not provide coverage. The insured then allegedly spent over $300,000 of its own money to settle the lawsuit. Id.

On October 4, 2018 (almost three years after the policy was issued), the insured sued the broker, alleging that the broker was liable under the Insurance Placement Liability Act for failing to procure a policy that provided protection for claims like the one brought in the class action lawsuit. 2020 IL App (1st) 191125 at ¶5. The broker moved to dismiss based on the two-year statute of limitations in 735 ILCS 5/13-214.4. The circuit court granted the motion to dismiss. 2020 IL App (1st) 191125 at ¶6.

On appeal, the insured made two arguments:

First, the insured argued that a broker (as distinguished from an agent) was not an “insurance producer” as that term is used in the Insurance Placement Liability Act, and therefore the two-year statute of limitations applicable to Insurance Placement Liability Act claims does not apply to claims against brokers. The appellate court conceded that the term “insurance producer” is not defined in the Insurance Placement Liability Act.

However, the appellate court noted that the Illinois Supreme Court in the Skaperdas decision held that the definition of “insurance producer” in the Illinois Insurance Code should be imported into the Insurance Placement Liability Act. Under the Illinois Insurance Code, an “insurance producer” is any individual or entity “required to be licensed under the laws of [Illinois] to sell, solicit, or negotiate insurance.” 2020 IL App (1st) 191125 at ¶14. According to the Illinois Supreme Court in Skaperdas, that includes both agents and brokers. Therefore, the appellate court in Austin Highlands held that the broker was an “insurance producer” for the purposes of the Insurance Placement Liability Act and the two-year statute of limitations applied. 2020 IL App (1st) 191125 at ¶¶9 – 22.

Second, the insured argued that the two-year statute of limitations was unconstitutional because “[n]o other class of potentially responsible parties is afforded such insulation and virtual immunity from claims.” 2020 IL App (1st) 191125 at ¶29. The Illinois Constitution prohibits the legislature from enacting a “special or local law when a general law is or can be made applicable.” 2020 IL App (1st) 191125 at ¶28, quoting ILL.CONST. art. IV, §13. In other words, the legislature cannot confer a special benefit or privilege on one person or group while excluding others that are similarly situated.

The appellate court in Austin Highlands held that the insured failed to meet its burden to show how a two-year statute of limitations for claims against insurance producers is a special benefit or privilege conferred on this group at the expense of others that are similarly situated. The appellate court noted that the insured did not identify a comparable group that does not receive the alleged special protection, and there is no constitutional violation merely because a law treats one group of people (in this case insurance producers) differently than it treats another. Accordingly, the appellate court held that the insured had failed to meet its burden to overcome the presumption that the statute of limitations is constitutional. 2020 IL App (1st) 191125 at ¶¶24 – 29.

Because the appellate court held that the two-year statute of limitations applies to brokers and is constitutional, the appellate court applied the statute of limitations. The policy was issued on November 16, 2015, and received by the insured shortly thereafter. 2020 IL App (1st) 191125 at ¶19. Under the rule announced in Krop, the negligent procurement cause of action accrued at that time. The statute of limitations period therefore ended around November 16, 2017. The insured sued the broker on October 4, 2018, nearly three years after the cause of action accrued. In the absence of any facts showing that the insured could not have been expected to learn the extent of coverage by reading the policy when it was issued, the insured sued the broker after the statute of limitations period ended. Id. Accordingly, the appellate court affirmed the judgment dismissing the insured’s lawsuit against the broker. 2020 IL App (1st) 191125 at ¶31.

Neither Krop nor Austin Highlands presents a unique fact pattern. It is common for insurance disputes to arise years after the policy in question is issued. It is also common that an insured will discovery that its policy covers less than the insured thought it did only after an insurance dispute arises. In these circumstances, the Krop and Austin Highland decisions potentially insulate agents and brokers from negligence liability.

For more information about insurance law, see ILLINOIS INSURANCE LAW — 2015 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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