A recent court decision in New York State substantially eliminates the duty of an insured to read the policy as a positive defense. I have personally testified that the duty to read the policy is limited to a lay understanding of the insurance contract. This decision has the effect of protecting an insurance client from themselves.
In light of this decision, how do insurance producers and insurance agencies protect themselves?
What does this have to do with E&O? Unfortunately, a great deal. In AA&B’s March issue, Barry Zalma makes the point of what constitutes a special relationship: "Insurance agents have a general duty of care and a duty to advise their clients. The general duty of care includes a duty to exercise reasonable care, skill and good faith diligence in obtaining insurance." He goes on to say that "the law is settled that an insured must demonstrate some type of special relationship for a duty to advise to exist." As an insurance expert, I confirm what Barry wrote is accurate.
Zalma’s admonition did not go far enough. Consider the November 2012 New York State Court decision American Building Supply v. the Petrocelli Group regarding insurance broker liability. The decision subjects producers to additional liability exposure because the duty to read the policy has been reduced. The decision states that if there is a specific request for coverage and the insured receives a nonconforming policy without complaint and fails to read the policy, it is not an absolute defense for the insurance producer.
The issue of the insured’s duty to read the policy dates back at least 100 years, when the New York Court of Appeals held that once an insured receives an insurance contract, he or she has a duty to read and examine the contents. This stricture has been modified over the years and now considers other factors, such as whether an expert or ordinary reading is required to understand the policy and whether a special relationship existed between the insurance producer and the insurance client.
In an intermediate series of decisions in 2000 and 2001, the New York courts adopted the position that receipt and the presumed reading of the policy did not bar actual negligence litigation against the broker or agent. The circle finally closed with the decision reached in November 2012, when the Court of Appeals of New York held that although the better practice is for the insured to read the policy, an insured should nevertheless have a right to look to the expertise of its broker with respect to insurance matters.
I support the practice of ensuring that the client understands what he or she is buying, the extent of coverage and complete documentation of the explanation made to the producer’s insurance client.
Some experts have suggested that agents require a written commitment from their clients that they will read their insurance policies upon receipt to ensure that all of the coverages that were requested by the insured are reflected in the policy as issued. Failing receipt, the agency CSR should reach out to the client and ask them to sign it and review coverages to make sure they are in agreement with the coverage in the process of being procured or placed.
This is a great idea in concept, except most insureds never read their policies. The likelihood of getting that commitment is questionable and getting them to sign a letter indicating that they have read the policy is even more remote.
Take a slightly different approach. Because there are other issues to consider other than policy coverage that may result in future litigation, anticipate additional issues like misrepresentation, prior losses and general information issues contained in the application for insurance. Send a copy of the application if practicable to the insured, indicating not only the coverage’s being applied for, but also the basis on which the risk is being underwritten.
If sending a copy of the application is not acceptable or practical, prepare some variation of an insurance schedule that indicates the coverages that are being applied for or procured. Ask the client to initial or sign and return it. I must admit I would not like to hang by my thumbs waiting for signed confirmations to come back from clients.
One of the premier defenses to the allegation that the insurance producer did not properly provide and procure insurance coverage as requested was the insured’s failure to read the insurance policy. The defense of failing to read the policy is being whittled away and more than likely no longer a viable defense.
If it is true that the best defense is a good offense, insurance agencies need to train their staff and producers on steps to take to obtain client understanding of the coverage being provided and the exclusions and terms and conditions of the insurance policies being placed on the client’s behalf. Of course, because no one system is an absolute guarantee that will avoid litigation, that training should provide a system that will to the greatest possible extent avoid future problems. Finally, the last words are documentation, documentation and documentation.