The 1st District Appellate Court recently held that a two-year statute of limitations applies to insurance producers for negligence in procuring insurance, measured from the insured’s receipt of the policy.

The case is Austin Highlands Development Co. v. Midwest Insurance Agency Inc., 020 IL App (1st) 191125 (Jan. 30). The insured, Austin Highlands Development Co., was represented by Richard Jones & Associates Ltd. of Mt. Prospect. Traub Lieberman Straus & Shrewsberry of Chicago represented the insurance broker-producer, Midwest Insurance Agency Inc.

Austin, a management agent for various apartment complexes, purchased a liability insurance policy from Midwest, its broker, in 2015. In 2016, Austin was sued in a federal class action for violation of Illinois statutes related to tenant security deposits. Austin tendered to its insurer, an affiliate of AIG, which denied coverage.

After settling the underlying lawsuit, Austin in 2018 sued Midwest for failing to procure adequate coverage. Midwest moved to dismiss based on the two-year statute of limitations under 735 ILCS 5/13-214.4, which requires that lawsuits against insurance producers for failure to procure be brought “within 2 years of the date the cause of action accrues.” The trial court held that the cause of action accrued upon Austin’s receipt of the policy in 2015, and granted the motion. Austin then took this appeal.

Limitations background analysis

In an opinion by Justice Eileen M. O’Neill Burke, the 1st District affirmed. She began by observing that the two general types of intermediaries between insureds and insurers are brokers and agents. Historically, the former were considered to be agents and fiduciaries of the insureds, while the latter were considered to be agents and fiduciaries of insurers.

In 1997, however, the Illinois legislature added section 2-2201 to the Code of Civil Procedure (735 ILS 5/2-2201). That section requires that "insurance producers" exercise ordinary care in procuring insurance, and barred the producers from being held to heightened standards of conduct applicable to fiduciaries, except in narrow circumstances.

Although the statute did not define a "producer,” the Supreme Court in American Family Mutual Insurance Co. v. Krop, 2018 IL 122556, did so by holding that both agents and brokers are producers. The fact that producers are no longer generally regarded as fiduciaries, moreover, Burke said, is important because their non-fiduciary status affects the statute of limitations.

In Krop, for example, the court addressed the two-year limitations period and found that an action for negligent procurement is a tort arising out of a contractual relationship. Because it does, the cause of action accrues upon breach rather than when the damages occur, such as is the case for most torts. The breach, moreover, according to the court, occurs the moment the producer delivers the allegedly deficient policy to the insured.

Although the Krop court recognized that the discovery rule can delay the start of the limitations period until discovery of the of the injury, the court found that insureds should discover their injury upon their receipt of the policy because the producer does not owe its customer a fiduciary duty. Thus, the insureds themselves have a duty to read and understand their policies, rather than wait to learn of a deficiency when the insurer denies coverage.

Burke explained that Krop nonetheless recognized an exception where the policy contains contradictory or confusing provisions such that the typical customer could not be expected to anticipate how the policy applies.

Austin’s arguments

With that background, Burke turned to Austin’s arguments in the present case. One was that an entity other than Midwest was listed on its policy as the "producer,” so Midwest could not be so considered. Burke rejected the point on the grounds that Austin itself alleged in its complaint that Midwest was the producer, and in any event, it was licensed as a broker and a producer by law.

She then addressed whether Austin had filed the lawsuit within two years of receipt of its policy. Although the record was silent on the exact date of receipt, Burke said the court could "presume" receipt by Austin shortly after the policy was issued, particularly given that Austin did not claim otherwise. Based on that determination, Austin waited nearly three years to file its suit.

Austin also relied on Perelman v. Fisher, 298 Ill.App.3d 1007 (1998), which held that an insured filing suit for a deficient policy beyond the stated statutory period did not necessarily time-bar the lawsuit. Burke pointed out, however, that the court in Perelman relied upon the fiduciary relationship between the insured and broker, which no longer exists.

Finally, Austin raised a constitutional challenge to section 13-214.4, arguing that it constitutes special legislation under the Illinois Constitution. Burke likened the challenge to one for violation of the U.S. Constitution equal protection clause. She rejected it because Austin failed to show how the statute conferred a special privilege on one group at the expense of another similarly situated.

In sum, the court affirmed the dismissal for failure to comply with the two-year limitations period.

Key point

With few exceptions, actions for negligent procurement of coverage against insurance producers must be brought within two years of the insured’s receipt of the policy that allegedly was negligently procured.