On Nov. 19, 2012, the New York Court of Appeals in American Building Supply Corp. v. PetrocelliGroup Inc. et al. ruled for the first time on the issue ofwhether an insured’s receipt of the insurance policy withoutcomplaint barred an E&O claim against an insurance agent orbroker. The Court of Appeals concluded that “The [insured’s]failure to read the policy, at most, may give rise to a defense ofcomparative negligence but should not bar, altogether, an actionagainst a broker.”

The ruling is a significant decision that is likely to influenceother jurisdictions. It is a call to insurance agents and brokersto revisit and fortify their loss control procedures. Considerationshould be given to working with their E&O insurers and/orE&O attorneys to tailor procedures to the particular businessof the insurance agency or brokerage.

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In so ruling on American Building Supply, the Court ofAppeals considered whether the 100-year-old legal presumption setforth in its decision of Metzger v. Aetna Ins. Co., 227 NY411, 416 (1920), that an insured who is in receipt of the insurancepolicy has a duty to read it and is presumed to know the contentsthereof, applies to bar an E&O action against an agent orbroker who has allegedly failed to obtained the insurance coveragespecifically requested by the insured. The Court concludedthat the presumption did not apply:

The Facts as alleged here, thatplaintiff requested specific coverage and upon receipt of thepolicy did not read it and lodged no complaint, should not barplaintiff from pursuing this action.

Although the Court of Appeals noted that it is a good idea forthe insured to read its insurance policy, it opined that theinsured could rely in this regard upon the expertise of theinsurance agent or broker:

While it is certainly thebetter practice for an insured to read its policy, an insuredshould have a right to “look to the expertise of its broker withrespect to insurance matters” (Baseball Off. of Commr. v. Marsh& McLennan, 295 A.D.2d 73, 82 [1st Dept 2002]; see alsoBell v. O’Leary, 744 F2d 1370, 1373 [8th Cir 1984]). Thefailure to read the policy, at most, may give rise to a defense ofcomparative negligence but should not bar, altogether, an actionagainst a broker (see Baseball Off. of Commr. 295 A.D.2dat 82).

The Court of Appeals found that there were issues of fact as towhether plaintiff requested specific coverage for its employees andwhether defendant failed to secure a policy as requested, and thusconcluded that it was inappropriate to award summary judgment tothe insurance broker because “plaintiff’s failure to read andunderstand the policy should not be an absolute bar to recoveryunder the circumstances of this case.”

The Court of Appeals reiterated thatordinarily, absent a special relationship, an insurance agent orbroker has the duty to obtain only the insurance that wasspecifically requested by the insured:

[I]nsurance agents have a common-lawduty to obtain requested coverage for their clients within areasonable time or inform the client of the inability to do so;however, they have no continuing duty to advise, guide or direct aclient to obtain additional coverage” (Murphy v. Kuhn, 90N.Y.2d 266, 270 [1997]). To set forth a case for negligence orbreach of contract against an insurance broker, a plaintiff mustestablish that a specific request was made to the broker for thecoverage that was not provided in the policy (see Hoffend &Sons Inc. v. Rose & Kiernan, Inc., 7 N.Y.3d 152, 155[2006]). “A general request for coverage will not satisfy therequirement of a specific request for a certain type of coverage”(Id. at 158).

The facts of the case were as follows:

American Building Supply (ABS) provided building materials togeneral contractors. DRK LLC sublet a building to ABS. Underthe primary lease, DRK was responsible for procuring a generalliability insurance policy with a minimum of $5 million in coveragecovering bodily injury and property damage from a New York licensedcarrier.

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As part of its sublease agreement, ABS was required to complywith all the terms of the of the original lease agreement,including the provision to procure insurance. ABS hired theinsurance broker, Pollack Assocs., which procured a policy fromBurlington Insurance Co. The Burlington policy included across-liability exclusion that excluded claims between thepolicyholders (ABS and DRK) as well as all claims asserted by an“employee of any insured.” ABS and DRK then transferred coverage toa new insurance broker, Petrocelli Group Inc. , which renewed theBurlington policy for a second policy year.

ABS asserted that it specifically requested “general liabilityfor the employees ... if anyone was to trip and fall and getinjured in any way.” ABS also alleged that Petrocelli was awarethat ABS was a wholesale operation and that only employees were onthe premises. Neither ABS nor Petrocelli read the policy and,therefore, were unaware that the policy contained the exclusion.The exclusion came to light in October 2005, when an ABS employeewas injured after a forklift fell on his leg and Burlington deniedthe claim pursuant to the cross-liability exclusion. Although theSupreme Court ordered Burlington to provide coverage to ABS, theAppellate Division, First Department (First Department) reversedciting the above-mentioned exclusion.

ABS then sued Petrocelli for breach of contract and negligencefor failing to procure the correct policy. Petrocelli moved forsummary judgment, but the Supreme Court denied the motion, claimingthere were issues of fact for a jury to decide regarding theplaintiff’s request for specific insurance coverage. The FirstDepartment reversed, stating that any recovery was precludedbecause ABS had failed to read and understand the policy. As such,there were no material issues of fact and summary judgment shouldhave been granted.

In the wake of this decision, given that the receipt of thepolicy defense will no longer act to bar E&O lawsuits, itis important for insurance agents and brokers to review theprocedures in place at their agencies for offering coverages,documenting the insured’s specific request for insurance coverageand delivering the insured’s insurance policy.

1. Offer a full range ofcoverage

Although under the Court of Appeals decision of Murphy v.Kuhn, supra., ordinarily a New York insurance agent or brokerhas no duty to advise, guide or direct an insured to obtain aparticular type or amount of coverage absent a specific request,the prudent insurance agent or broker will offer a wide range ofcoverage and document the insured’s file with respect to thecoverage the insured selected, as well as the coverage that theinsured declined. Use checklists to prompt the agent to offer awide range of coverage. Proposals can reflect the coverage that wasoffered. Emails and correspondence to the insured can document thecoverage that was offered to the insured and detail the coveragesthat the insured accepted or declined. If warranted, theinsured can sign off on major declinations or reductions ofcoverage.

2. Document insured’s specific requestfor insurance

With the loss of the receipt of the policy defense, there islittle to prevent an insured, after a denial of a claim or apartial claim denial, from alleging that he or she requestedwhatever coverage is lacking, essentially making agent’s E&Opolicy substitute coverage. Such an allegation will often be enoughto survive the agent’s motion for summary judgment, allowing theinsured to get to the jury in an E&O trial.

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E&O trials can be expensive and time-consuming and somethingthat most agents or brokers would like to avoid. To strengthen andbolster the agent’s recollection as to what insurance the insuredspecifically requested, the agent should establish a regularlyfollowed procedure for documenting the insured’s specific insurancerequest in the insured’s file. This documentation also couldinclude notes as to the insured’s description of the risk. An emailor correspondence to the insured documenting the insurance that wasspecifically requested could prove very useful in defending anensuing E&O lawsuit. Equally important is careful preparationof the insurance application, which the insured should sign onlyafter the agent instructs him to review for accuracy. A copy of thesigned application should be kept in the insured’s file.

3. Deliver insurance policy with an offer toreview

Even though the receipt of the insurance policy defense as acomplete bar has been eliminated, agents should implement regularlyfollowed procedures surrounding the delivery of the policy to theinsured. When the policy comes in to the agency, a knowledgeableand fully trained policy checker should promptly check it againstthe application for accuracy. The agent also should be familiarwith the forms and endorsements of the various polices offered,which can differ from insurer to insurer.

The policy should then be delivered to the insured with a coverletter advising the insured to review the insurance policy andcontact the agent with any questions. The cover letter should offerthe insured the opportunity to review the insurance policy with theagent. A copy of the correspondence should be kept in the insured’sfile.