The ordeal for one New York broker began in 1992 when Robert Felzenberg, president of Payroll Express Corporation, was arrested, along with others, on federal charges of defrauding customers of more than $33.66 million. Some of the customers included the Port Authority of New York and New Jersey, the New York Stock Exchange, Pepsi-Cola, and the City of New York--more than 100 customers in total.

According to court documents and press reports, Elizabeth, N.J.-based Payroll Express was contracted to cash the checks of employees at the companies, hospitals and government agencies.

After the arrest, Payroll Express filed for bankruptcy, placing the matter of recovery in the hands of a U.S. District Court for the Southern District of New York.

In 1993, Mr. Felzenberg pled guilty to the charges and was sentenced to seven years in prison, said Robert M. Horkovich, an attorney for Anderson Kill & Olick in New York, who represented the defrauded customers.

Mr. Horkovich explained that at the time, Payroll Express was the largest check-cashing service around. The appeal of the service was for employees who did not have checking accounts. Often, these employees wasted time going to a check-cashing service that would charge exorbitant rates to cash their payroll checks. Instead, Payroll rolled armored cars to the worksites and cashed the checks without a charge to the employees.

In return, the company received a small percentage of the payroll deposited in its account as payment from the entities it contracted with.

The problem for Payroll began when Mr. Felzenberg and others began taking the payroll money deposited in its account and using it to cover other business expenses and companies Mr. Felzenberg owned.

While the case made headlines then, a second case has been brewing of more interest to insurers and agents.

In court, the debtors looked to recover their losses and turned to Payroll's liability insurers. Policies were written with Aetna, Chubb and Lloyd's. There was a primary settlement of $1 million, but an additional $21 million underwritten by Lloyd's was not paid.

Lloyd's cited two reasons for not settling. One, the umbrella policy that Payroll's insurance broker, Marshall & Sterling, was to secure did not cover theft by the company's president, Mr. Felzenberg. Additionally, the Poughkeepsie, N.Y.-based insurance broker did not reveal 17 prior losses Payroll had suffered.

Lloyd's contended that if the information had been revealed it would not have written the policy, and failure to disclose voided the policy.

According to court documents, after a long court proceeding, in 1997, U.S. District Court Judge Shira A. Scheindlin granted Lloyd's request for summary judgment in favor of the insurer over the issue for misrepresentation. In 1998, the claim against Lloyd's was dismissed.

An appeal by Payroll's bankruptcy trustee was unsuccessful.

A suit was filed against Marshall & Sterling in 1998 in U.S. Bankruptcy Court Southern District of New York by the trustee and debtors, claiming the brokerage firm failed to secure the proper insurance and failed to disclose the prior losses in the application as it was expected to do.

On Mar. 30, 2005, Judge Cornelius Blackshear found the brokerage firm failed to live up to its promise of service as an insurance broker and was liable for $21 million--the amount, the judge said, due under the Lloyd's policy. The broker was also ordered to return premium and commission--adding another $800,000 to the total--and Mr. Horkovich said the plaintiff's are seeking interest. The $21.8 million judgment has the potential to run significantly higher.

Mr. Horkovich said the case is currently on appeal.

A call for comment from the law firm representing Marshall & Sterling was not returned.

In making his decision, said Mr. Horkovich, there were three points Judge Blackshear noted that serve as a cautionary tale for agents and brokers as they do business.

The board of directors at Payroll depended upon Marshall & Sterling for its professional advice, he said. In this case, that advice was that the coverage the board of directors sought over all of its employees was in place, when it was not.

"If the broker represents to the client that there is a covered liability, and the client and customers depend on that advice [and it is not there], the agent can be held responsible," noted Mr. Horkovich.

Secondly, Marshall & Sterling held itself out as an expert in this field--in this case insurance for the armored car industry. Under that circumstance, the condition of responsibility is heightened, increasing the producer's liability.

Third, there was an obvious breakdown in communication between claims and underwriting departments, demonstrated by the failure to list the 17 prior losses on the application.

"If a broker undertakes writing an application, the broker has to make sure all of the departments are talking to one another and make sure that application is submitted properly," Mr. Horkovich observed. "Or, as happened here, the policy will be voided, and the policyholder will look to the [agency or brokerage] firm for money."

David H. Paige, an attorney in the New York law firm Sullivan, Manarel & Paige and chief operating officer of DeWitt Stern Group Inc., in New York, an insurance brokerage firm, noted that while the Marshall & Sterling case involves a lot of money, it is otherwise typical of the circumstances for agents surrounding professional liability cases.

The case law on an agent's level of duty to a client may differ from state to state, he observed, and it is worth noting that the judge used the New Jersey law for that purpose. The state's law places a high threshold of duty on the part of agents.

"If an agent is going to represent himself or herself as an expert, he or she had better be prepared for what comes with it," he pointed out. "The consequences are greater when an agent holds [him or her]self out as an expert than if they don't."

Also presenting some suggestions, Dave Hulcher, director of E&O operations for Big I Program (a division of the Independent Insurance Agents & Brokers of America) and Sabrena Sally at GE Insurance Solutions, which offers the liability program through the Big I Program, said agents need to tend to documentation.

While different agencies may take different approaches to this, consistency is key, they noted. The consistency in documentation provides a solid defense in an errors & omissions claim, they said.

When an agent holds himself or herself out as an expert in any field, they pointed out that it would be wise for the agency to examine its limits on the agency's E&O policy. Those limits should cover any loss relative to their clients exposure.

Mr. Hulcher advised that an agent should review his or her marketing materials and make sure they are not promising more than they can deliver.

While Mr. Paige and Ms. Sally agreed the Marshall & Sterling decision may be an anomaly, large decisions do crop up once in a while--and agents should be aware it could happen to them when they don't follow best practices to protect their agencies.

Flag: Costly Lessons

"If a broker undertakes writing an application, the broker has to make sure all of the departments are talking to one another and make sure that application is submitted properly."

Robert Horkovich, Anderson, Kill & Olick

"If an agent is going to represent himself or herself as an expert, he or she had better be prepared for what comes with it."

David Paige, COO, DeWitt Stern Group

Consistency in documentation provides a solid defense in an errors & omissions claim.

Sabrena Sally, Underwriting leader/Agents E&O, GE Insurance Solutions

Agents should review their marketing materials to make sure they are not promising more than they can deliver.

Dave Hulcher, Director, E&O Operations/ Big I Program