IL App 1st Dist./Broker Liability

“Discovery Rule” Does Not Toll Statute of Limitations in Negligent Procurement Action

The Illinois Appellate Court for the First District, in an opinion written by Justice Burke with Justices Lampkin and Reyes concurring, applying Illinois law, held that a two-year statute of limitations applies to a claim for negligent procurement against an agent.  Per Illinois Supreme Court precedent, the two-year statute of limitations begins to run when the insured receives the policy, not after some later date when injury is discovered.

Austin Highlands Development Company (“Austin”) acted as the agent for entities that own various apartment complexes in the Chicagoland area.  Midwest Insurance Agency, Inc. (“Midwest”) was Austin’s exclusive agent for the purposes of procuring insurance for apartment complexes and for Austin’s business conduct.  Midwest procured an insurance policy for Austin for a one-year period beginning on November 25, 2015, issued by Commerce and Industry Insurance Company, a company affiliated with American International Group, Inc. (“AIG”).  The policy was issued on November 16, 2015.

In March 2016, Austin was sued in a federal class action lawsuit for allegedly violating an Illinois statute related to tenant security deposits.  Austin tendered the complaint to Midwest to forward to AIG.  AIG denied coverage.

On October 4, 2018, Austin sued Midwest as its insurance producer for negligent procurement because it failed to procure an insurance policy that covered claims like those brought in the federal lawsuit against the company.  Under Illinois law, an “insurance producer … shall exercise ordinary care and skill in renewing, procuring, binding, or placing the coverage requested by the insured or proposed insured.”  Midwest moved to dismiss by arguing that the statute of limitations had lapsed because a cause of action against an insurance producer must be filed within two years of when the insured received the insurance policy at issue.  The Circuit Court agreed, holding that Midwest was an “insurance producer” under the law and that Austin failed to file its lawsuit within the two-year statute of limitations.

On appeal, Austin argued that, because Midwest acted as its broker and worked for it, Midwest was not an insurance producer under the law; therefore, the two-year statute of limitations did not apply.  The Appellate Court disagreed.  There are two general types of individuals who act as the conduits between the insured and the insurer: insurance brokers and insurance agents.  An insurance broker provides insurance policies for their customers from multiple companies, and an insurance agent is an individual or business entity “who has a fixed and permanent relation to the companies he represents and who has certain duties and allegiances to such companies.”  Illinois courts have determined that “insurance producer” should be defined as any individual or business entity “required to be licensed under the laws of [Illinois] to sell, solicit, or negotiate insurance.”

Moreover, under Illinois law, negligent procurement claims are torts arising out of contractual relationships, and, therefore, the cause of action accrues when the breach occurs, not when the damages occur.  According to Illinois precedent, the breach occurs the moment the insurance producer delivers the allegedly deficient policy.  Thus, because Austin’s claim was against an insurance producer, a two-year statute of limitations, which began when the insurance was delivered, applied.  The Appellate Court noted that while the record does not state when Austin received the policy, it was likely around November 2015 due to the issuance date and policy period.  Therefore, “[b]ecause Austin waited nearly three years to file the instant lawsuit and it has not pled any facts showing it reasonable could not have been expected to learn the extent of coverage simply by reading the policy, Austin filed its lawsuit after the time period mandated by law.”

Though not addressed by the Circuit Court, the Appellate Court addressed Austin’s argument that the two-year statute of limitations is unconstitutional because the statute of limitations shows that the Illinois legislature had a clear intention to provide special insulation to insurance producers from claims and causes of action by insureds.  The Illinois Constitution prohibits the legislature from enacting a “special or local law when a general law is or can be made applicable.”  The Appellate Court held that Austin failed to satisfy its burden to overcome the presumption of constitutionality; Austin had not even identified a comparable group that does not receive the alleged special protection.  Austin Highlands Development Co. v. Midwest Insurance Agency, Inc., 2020 IL App (1st) 191125 (Jan. 30, 2020).