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M.G. Skinner and Associates Insurance Agency, Inc. v. Norman-Spencer Agency, Inc.

United States Court of Appeals, Seventh Circuit

January 4, 2017

M.G. Skinner and Associates Insurance Agency, Inc. and Western Consolidated Premium Properties, Inc., Plaintiffs-Appellants,
Norman-Spencer Agency, Inc., Defendant-Appellee.

          Argued January 14, 2016

         Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 12-cv-3481 - Robert W. Gettleman, Judge.

          Before Flaum and Ripple, Circuit Judges, and Peterson, District Judge.


         This case arises out of a complex insurance transaction that ended badly because the supposed insurance turned out to be a complete fraud. Despite the complexities of the broader transaction and the litigation that it spawned, this appeal presents, essentially, a single question: whether Norman-Spencer Agency, Inc., an Ohio insurance agency, owed a duty to M.G. Skinner and Associates Insurance Agency, Inc. and Western Consolidated Premium Properties, Inc., two entities that had engaged a chain of sub-brokers to procure insurance for a vast collection of real property.

         M.G. Skinner and Associates and Western Consolidated Premium Properties, plaintiffs-appellants here, contend that defendant-appellee Norman-Spencer Agency was one of the sub-brokers in the chain, and thus it owed them a duty of reasonable care in procuring the insurance, which Norman-Spencer Agency breached by failing to point out obvious signs that the ultimate provider of the insurance was dishonest. But according to Norman-Spencer Agency, it was never asked and it never agreed to procure insurance for plaintiffs-appellants, and thus it owed them no duty. The district court agreed with Norman-Spencer Agency, and in separate orders, granted summary judgment in its favor, against each plaintiff-appellant. We agree with the district court and affirm both orders.

         I. Background

         A. Factual background

         Appellee Norman-Spencer Agency, Inc., which we will call Norman-Spencer, is an Ohio-based insurance agency. We will leave Norman-Spencer to the side for the moment and begin the story with appellants.

         Appellant Western Consolidated Premium Properties, Inc. (WCPP), a California corporation, is a risk purchasing group through which the owners or managers of commercial property can purchase insurance. Appellant M.G. Skinner and Associates Insurance Agency, Inc. (MGSA), also a California corporation, is an insurance broker that acts as the program administrator for WCPP. Michael Skinner is the sole shareholder of both WCPP and MGSA. WCPP and its affiliated broker MGSA represent more than 600 commercial properties, including office buildings, shopping centers, and residential complexes. The total insured value of these properties is nearly $3.5 billion.

         In late 2011, MGSA sought renewal coverage for the WCPP properties. MGSA contracted with MC Risk Services, LLC (MC Risk), a Texas insurance broker specializing in hab-itational and commercial real estate, to procure the renewal insurance for WCPP. Jed Morash was co-owner of MC Risk. Insurance placements as large as this one commonly involve sub-brokers. In this case, MC Risk engaged National Condo & Apartment Insurance Group LLC (NCAIG), an Ohio insurance broker. NCAIG's sole member is Kenneth Littlejohn. NCAIG had previous insurance-placement experience with Michael A. Ward and his company JRSO, LLC. By November 1, 2011, Littlejohn and Morash intended to place the WCPP coverage with JRSO. The chain of brokers was thus complete: from MGSA, to MC Risk, to NCAIG, and ultimately to Ward and JRSO, who would provide the insurance.

         Except that Ward and JRSO did not provide insurance. As it turns out, Ward had created a fictitious insurance policy for WCPP that was not actually backed by a legitimate insurer. Ward was convicted of wire fraud, sentenced to 10 years in prison, and ordered to pay more than $9 million in restitution to various victims of his fraud, including WCPP.

         So that's the main arc of the story. To fit Norman-Spencer in, we must backtrack and add some details.

         One of the property groups in the WCPP program was Myan Management Group, representing dozens of commercial and multi-unit residential properties in the southwest. The Myan properties had a history of losses, and Morash (at MC Risk) thought that cheaper coverage could be obtained by splitting the Myan properties off from the main WCPP group. So, with Littlejohn's advice, MGSA and MC Risk agreed to place Myan Management directly with JRSO for insurance. The Myan Management coverage was bound effective October 1, 2011, the premium was invoiced on October 4, and paid on November 3. But this coverage was also fictitious.

         In previous deals in which NCAIG had worked with Ward and JRSO, they had used Mulberry Insurance Services as program administrator. But Mulberry's work had been unsatisfactory, so NCAIG's Littlejohn recommended to Ward that he replace Mulberry with Norman-Spencer as program administrator.

         Ward, Littlejohn, and Norman-Spencer's president, Brian Norman, met on November 11, 2011, to discuss Norman-Spencer's potential retention as the JRSO program administrator. Following that meeting, Norman drafted a document titled "Memorandum of Understanding" that purported to outline the agreement between Ward and Norman. Among the terms of this agreement was that Norman-Spencer would issue a backlog of approximately 64 already-bound policies in exchange for $25, 000, and that going forward, Norman-Spencer would underwrite and issue policies for the JRSO program. The memorandum of understanding was never signed, but Norman-Spencer was paid the $25, 000 and began issuing the backlogged policies. The 64 backlogged policies included Myan Management's coverage, but not WCPP's.

         Norman pushed to be involved in more business with Ward. But whatever the terms of Ward and Norman-Spencer's November 11, 2011, agreement, Ward did not allow Norman-Spencer to be involved in the WCPP placement. In December 2011, Norman and Littlejohn (for NCAIG) discussed Norman-Spencer accepting a reduced commission to convince Ward to allow Norman-Spencer into the WCPP placement. But Ward never let Norman-Spencer into the deal. Littlejohn said this was because Ward thought the margin would be "too thin" if Norman-Spencer earned a commission on the placement.

         Along the way, Norman became aware of facts that MGSA and WCPP contend should have been "red flags" showing Ward's lack of trustworthiness. In November 2011, Norman discovered an order of conservation issued against Ward and JRSO by the Circuit Court of Cook County that Norman thought could cause concern about Ward's ability to bind coverage. Norman knew that Ward worked out of his home following the order of conservation's provision confiscating JRSO's property. When Norman asked Ward for a copy of Ward's reinsurance agreement, Ward delayed for over a month before producing a signed agreement, and even then, that agreement had irregularities that might have made it suspicious. But Norman-Spencer did not inform WCPP or MGSA about these problems.

         In December 2011, MC Risk gave WCPP a quote for the renewal coverage on JRSO letterhead, stating that Ward and JRSO had obtained coverage for WCPP. WCPP accepted the quote and paid more than $1.3 million as an initial installment of the premium. In the process, at least four insurance proposals were prepared for the WCPP coverage under the JRSO program. The various proposals were prepared on the letterheads of MC Risk, NCAIG, North American Capacity Insurance Company, and JRSO. None of the proposals or any pricing information came through Norman-Spencer. MC Risk and NCAIG each received a commission from the premium; Norman-Spencer did not.

         After Ward's fraud was discovered, the Myan Management coverage was reincorporated into the WCPP placement. MGSA and WCPP ultimately procured new insurance that cost more than ...

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