Part of being a businessowner is understanding and accepting the fact that all businesses come with inherent risks and liability. According to a study by the U.S. Small Business Administration, 36% to 53% of small businesses are sued in a given year.[1] Whether it’s a contract dispute, an injured customer, an auto accident, an injured employee, or a property damage claim, lawsuits are generally unpredictable and often carry significant financial and emotional burdens.
Simply put, the quickest and most cost-effective way to mitigate a business’ liability is by obtaining insurance.
Different businesses require different types of insurance coverage and failing to obtain the correct insurance policy can be devastating to a company, especially in the face of a lawsuit. As a result, selecting the right type and amount of coverage is crucial.
Finding the proper insurance is also easier said than done, as many variables must be considered, including the type of corporation, its operations, its customers, its employees, the contracts relied on, the products sold, the assets owned, whether transportation is involved, if any property is owned or leased – and the list goes on and on. As a result, purchasing commercial insurance can be complicated and should be done with the assistance of an expert.
Who Do I Ask?
Traditionally, businessowners rely on insurance brokers to identify, select, and procure the insurance policies that best protect their company. In fact, many insurance customers conduct very little to no research when buying insurance and, instead, rely entirely on an insurance salesperson to “make sure” they are protected. However, should businessowners trust their brokers with such an important responsibility?
The short answer is, “No.” While most insurance producers are extremely knowledgeable about the different policies available, in Illinois insurance brokers cannot be held responsible for failing to identify or fulfill a business’ insurance needs.
Under the Illinois’ Insurance Placement Liability Act, insurance providers do not owe fiduciary duties to their customers, except in narrow circumstances involving the wrongful retention or misappropriation of money.[2] In other words, if a businessowner asks their broker to, “make sure” they are protected, but later finds out that she or he does not have the necessary insurance to cover a lawsuit, there is no remedy, no do-over, and the businessowner must pay the resulting legal fees and costs out-of-pocket.[3]
At Arnett Law Group, we encounter underinsured businesses all the time. The most common examples occur when (1) an insurance policy does not apply to the occurrence at issue, (2) an insurance policy excludes the occurrence at issue, or (3) the insurance policy limit is too small for the claim at hand. When this happens, many entrepreneurs first instinct is to blame their insurance broker.
However, if there is a dispute as to what is covered verses what should have been covered under a policy, Illinois Courts tend to hold the customer responsible, not the insurance producer. This is because insurance customers have a legal obligation to read and understand the policies they purchase.[4] Moreover, insurance producers only have a duty to procure policies that the customer specifically requests.[5]
Insurance producers have no fiduciary duty to research and suggest additional insurance policies that may be vital to a business’ protection.
Yes, it is safe to assume that most insurance brokers would prefer to sell more insurance rather than less, but many brokers also want long-term business. They want to get their foot in the door by offering cost-effective options. In addition, many insurance brokers are not familiar with unique, yet potential, liability facing niche companies.
At Arnett Law Group, we use our experience as litigation attorneys to supplement the knowledge of our clients’ insurance brokers, by advising of the potential risks that small businesses face. The resulting partnership – between the company, broker, and legal counsel – provides a comprehensive risk analysis for the small business client in order to ascertain the best way to protect it via insurance.
Takeaways:
- Insurance producers do not have a fiduciary duty to make sure your company is fully protected from risks and liability.
- Requests for select insurance policies should be made to an insurance producer in writing.
- Partnering legal counsel who are aware of the risks associated with the small business client, along with the knowledge and expertise of an insurance broker, is a smart way to protect that business via insurance.
For more information, feel free to contact Daniel Arnett ([email protected]) or Mark Bennett ([email protected]) at Arnett Law Group, LLC.
[1] Klemm Analysis Group for U.S. Small Business Administration, Impact of Litigation on Small Business, 2005, https://www.sba.gov/sites/default/files/files/rs265tot.pdf.
[2] 735 ILCS 5/2-2201; See Am Family Mut. Ins. Co. v. Krop, 2018 IL 122556.
[3] Skaperdas v. County Casualty Insurance Co., 2015 IL 117021, ¶¶ 39-40.
[4] Garrick v. Mesirow Financial Holdings, Inc., 2013 IL App (1st) 122228, ¶ 49; See also Hoover v. Country Mut. Ins. Co., 2012 IL App (1st) 110939.
[5] See Melrose Park Sundries, Inc. v. Carlini, 399 Ill. App. 3d 915 (1st Dist. 2010); See also Office Furnishings, Ltd. V. A.F. Crissie & Co., 2015 IL App (1st) 141724 (finding an insurer’s duty to exercise ordinary care arises only after coverage is requested by the insured).
