The Illinois Supreme Court recently overturned the Court of Appeals’ decision in American Family Mut. Ins. Co. v. Krop, 82 N.E. 3d 533, 2017 IL App (1st) 161071 (Ill. App. 2017). As discussed in my post on June 14, 2017, the Illinois Appellate Court had concluded that the insured’s claim against their agent for negligent procurement of insurance did not arise until the insured knew or reasonable should have known of the injury, i.e., at the moment when the insurer denied coverage.
In overturning the decision, the Illinois Supreme Court in American Family Mut. Ins. Co. v. Krop, 2018 IL 122556 (Ill. Oct. 18, 2018), concluded that when customers have an opportunity to read their insurance policy and can reasonably be expected to understand its terms, the cause of action for negligent failure to procure insurance accrues as soon as the customer receives the policy.
In reaching its decision, the Illinois Supreme Court reviewed and analyzed the Insurance Placement Liability Act, Section 2-2201. Noting that the statute prevents an insurance producer from being held to the fiduciary standard (except in the narrowest set of circumstances which were not applicable in the instant case), the court concluded that the insured’s claim for negligent failure to procure insurance was controlled by the insurance customers’ obligation to read their policy. American Family, at ¶ 29. In relevant part, the supreme court stated:
Customers generally know their own goals better than their insurance agent does, but determining if a policy achieves those goals will be difficult when customers do not read the policy. Expecting customers to read their policies and understand the terms incentivizes them to act in good faith to purchase the policy they actually want, rather than to delay raising an issue until after the insurer has already denied coverage. See Hermitage Corp., 166 Ill.2d at 77, 209 Ill.Dec. 684, 651 N.E.2d 1132 (noting that cause of action for contract actions accrues at moment of breach, not injury). Moreover, insurance customers frequently maintain the same insurance policy for years, perhaps decades, at a time. If the cause of action did not accrue until the insurance producer notified the customer of an uninsured liability, insurance customers would benefit from their policy throughout the intervening period, while evidence potentially relevant to the insurer’s defense would be at risk of deterioration. Therefore, because insurance customers can read their policies and learn of any defects, the discovery rule typically will not delay the start of the two-year limitations period for negligent failure to procure insurance.
Notwithstanding its position that customers should read their policy and discovery any defects, the Illinois Supreme Court did state that “there will be a narrow set of cases in which the policyholder reasonably could not be expected to learn the extent of coverage simply by reading the policy.” The court noted, specifically, that in some cases the insurance policies may contain contradictory provisions or fail to define key terms. American Family, at ¶ 36.
Ultimately the supreme court concluded the Krop’s case did not represent a case of such “exceptional circumstances.” In essence, the court concluded that the Krops could have (and should have) read their policy and determined that the legal liability coverage it provided was different than the coverage provided by a prior carrier. As such, the court concluded that the two-year limitations period began to run on the earliest date when they reasonably should have known that their agent had not provided them with a policy that covered all the same liabilities as their previous policy – the date they received their policy!
Time will tell what types of cases will fit within the court’s definition of “exceptional circumstances.”