An insurance broker transacts insurance with, but not on behalf of, an insurer. In doing so, the broker generally promises only to obtain the insurance requested by the insured. However, when there is a special relationship between the insureds and their insurance broker, the duty owed to the insured can be expanded. New York and most states recognize that there are policy reasons for the narrow view of an insurance broker's duty to its client. Brokers are not insurance companies and do not earn premium income. They earn, ordinarily, relatively modest commissions for bringing insurers and insureds together. It is natural for a client that has suffered a loss not covered by its insurance to blame its insurance agent; and if lawsuits by clients against their agents are welcomed by the courts, the consequence may be to make the agent into a kind of back-up insurer.

In Voss v. Netherlands Ins. Co., 2014-01259 (N.Y. 02/25/2014), the highest court in New York was asked to resolve an insurance dispute that arose out of property damage and the consequent business interruption sustained by plaintiff-insureds as a result of water damage that occurred following three separate roof breaches. The water damage occurred in a commercial building owned by plaintiffs.

Plaintiffs began the relationship with CH Insurance Brokerage Services Co., Inc. (CHI) in 2004. At that time plaintiffs operated two modeling agencies in Liverpool. Voss met with a representative of CHI, Joe Convertino, Jr., to discuss insurance coverage for the premises and her two companies. At the initial meeting, they discussed property insurance, professional liability coverage and business interruption insurance. Convertino asked Voss to disclose sales figures and other pertinent information so he could calculate an appropriate level of business interruption coverage for her companies. According to Voss, Convertino also represented that CHI would reassess and revisit the coverage needs as her businesses grew.

At a follow-up meeting, Convertino recommended a comprehensive policy with defendant The Netherlands Insurance Co. that afforded, as relevant here, $75,000 per incident in coverage for business interruption losses. When Voss questioned whether the $75,000 limit was adequate, Convertino allegedly assured her that it would suffice based on the condition of the building and the size of her businesses. According to Voss, Convertino also averred that he calculated the level of coverage at a threshold level and reemphasized that, each year, CHI “would take it up as the business evolved.” As a result, Voss accepted Convertino's recommendations and paid the premium for the Netherlands policy.

Plaintiffs later purchased a new building that had two stories and contained more than twice the square footage of the previous location. After Voss discussed the move and the new business arrangements with Convertino, CHI renewed the Netherlands policy with the same $75,000 business interruption limit for the new location and entities.

In 2007, Voss arrived at work and discovered multiple leaks in the roof with dripping water. The damage disrupted her business operations and a roofing contractor, defendant D.R. Casey Construction Corp., was retained to replace the roof. The following month the new roof failed, resulting in far more extensive water damage to both floors of the premises. All three businesses were required to close for various periods of time.

Netherlands treated these two roof breaches as separate occurrences under the business interruption policy (for a maximum potential of $150,000 in coverage) but, according to Voss, delayed making any payments. Plaintiffs ultimately recouped only $3,197 for the first loss and $30,000 for the second loss.

In the midst of dealing with the roofing issues, Voss met with another CHI representative, Carrie Allen, to discuss the renewal of the Netherlands policy. When Voss received a proposal indicating that the business interruption coverage would be reduced from $75,000 to $30,000, she questioned Allen about the reduction and Allen's response was that she “would take a look at it.” Voss did not follow up, however, because she was preoccupied with the building's extensive property damage. When the Netherlands policy was renewed in April 2007, it reflected a per-occurrence limit of $30,000 in business interruption coverage.

In February 2008, the roof failed a third time, causing significant damage to the premises and further disrupting plaintiff's businesses. Plaintiffs alleged that a special relationship existed with CHI and that CHI had negligently secured inadequate levels of business interruption insurance for all three losses. CHI responded with a motion for summary judgment.

The trial court granted CHI's motion and dismissed the complaint. The Appellate Division, with one justice dissenting, affirmed. The majority disagreed with the trial court on the special relationship issue, finding that CHI had failed to meet its burden of demonstrating the absence of a special relationship.

As a general principle, insurance brokers have a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage. Hence, in the ordinary broker-client setting, the client may prevail in a negligence action only where it can establish that it made a particular request to the broker and the requested coverage was not procured. Plaintiff's claim hinges on the existence of a special relationship.

Where a special relationship develops between the broker and client, New York holds that the broker may be liable, even in the absence of a specific request, for failing to advise or direct the client to obtain additional coverage. New York considers three exceptional situations that may give rise to a special relationship, thereby creating an additional duty of advisement: (1) the agent receives compensation for consultation apart from payment of the premiums; (2) there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent; or (3) there is a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on by the insured.

Viewed in the light most favorable to plaintiffs, the evidence suggests that there was some interaction regarding a question of business interruption coverage, with the insured relying on the expertise of the agent. Under these circumstances, the highest court in New York concluded that the complaint cannot be dismissed on the basis that no special relationship arose between the parties. In doing so the court noted that special relationships in the insurance brokerage context are the exception, not the norm, and emphasized that it remains to be determined whether a special relationship existed here. Under the circumstances of this case, the broker failed to meet its burden, justifying summary judgment and dismissal of the complaint. The order of the appellate division was reversed, with costs, and the motion of defendant CH Insurance Brokerage Services Co., Inc. for summary judgment was denied.

The issues raised have not been resolved. The parties must now try the case before a judge or jury and if the judge or jury finds that a special relationship existed and the failure to fulfill the promises made as part of that special relationship – making sure that the plaintiffs had adequate business interruption insurance – a judgment will be rendered in favor of the plaintiffs. If not, the case will be dismissed.

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Leaky Logic: Roof Damage Case Hinges on Broker&rsquo;s 'Special Relationship'

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