No Fiduciary Relationship Between Broker and Client

The United States District Court for the Southern District of Texas approved and adopted a magistrate judge’s recommendation, applying Texas law, that an insurance broker’s motion to dismiss the insured’s claims of negligence, breach of fiduciary duty, fraud, breach of contract, and negligent or intentional misrepresentation be granted, holding that the insured did not have standing and that there was no fiduciary duty between the insurance broker and the insured.

The insured, Hitchcock Independent School District (“HISD”), is a public school district that owns several properties throughout Galveston County, Texas, that were damaged by Hurricane Harvey in August 2017. HISD’s insurers refused to pay HISD’s $3.5 million property damage claim, and during the subsequent litigation, HISD discovered that the underlying policies contained an arbitration clause and a New York choice of law provision. Upon this discovery, HISD settled its suit against the insurers, then sued its insurance broker, Arthur J. Gallagher & Co and Arthur J. Gallagher Service Company, LLC (collectively, “Gallagher”) for failing to obtain insurance without requiring arbitration or New York law.

HISD argued that as a result of this failure, it was unable to recover more than $14 million from the insurers, an award possible under Texas law, but the magistrate judge found this claim of injury to be too speculative to establish HISD’s standing to sue its broker. Nonetheless, the magistrate judge examined the substantive claims as well.

In addition to ruling against HISD’s negligence and negligent misrepresentation claims as barred by the statute of limitations, the magistrate judge found that the lack of a fiduciary relationship between Gallagher and HISD doomed HISD’s breach of fiduciary duty, fraud, and negligent representation claims as well. Citing Texas case law, the magistrate judge stated that the relationship between an insurance agent and an insured does not give rise to a formal fiduciary duty. Additionally, a “routine, arms-length business transaction” like the one conducted between HISD and Gallagher does not give rise to an informal, or “confidential,” fiduciary relationship. Gallagher had no affirmative duty to disclose the punitive dispute resolution process present in the HISD’s Policy.  As such, there could be no breach of such a duty. Conversely, HISD had a duty to read and be familiar with the terms of its own policy and is bound by the terms whether it read them or not.

Finally, the magistrate judge found that HISD’s failure to point to a specific provision that was breached by Gallagher, or even to identify or describe the alleged contract “in any meaningful way,” doomed the breach of contract claim. Thus, the magistrate judge recommended, and the District Court agreed and approved, that Gallagher’s motion to dismiss be granted. Hitchcock Indep. Sch. Dist. v. Arthur J. Gallagher & Co., 2021 WL 1095320 (S. D. Tex. Feb. 26, 2021); 2021 WL 1092538 (S. D. Tex. Mar. 22, 2021).