When a suit is filed against an insured, the wording of every liability insurance policy requires the insured to report that suit to the insurer in writing. Most insurers find a notice made orally to the company or the agent sufficient because the agent or broker will convert the oral report from the client to a written ACORD Notice of Loss and immediately deliver the notice to the insurer. Most insureds do not know how to give notice to their insurers and will call their agents or brokers, describe the losses or deliver copies of the suits and expect the agents or brokers to pass the notice to the insurers.
Insurance agents and brokers take on the obligation to pass on a notice of claim or suit received from the agent or broker's client to the appropriate insurer.
States have begun to issue regulations that require the agent or broker, upon receiving communication from an insured client regarding a claim, furnish the client with a complete response based on the facts as known by the agent or broker. This includes advising the insurer of the claim's existence.
Recognizing this fact, a New York appellate court, in Romero v. Alezeb Deli Grocery Inc., granted the defendant 2024 Second Avenue LLC's motion to vacate the default judgment entered against the defendant because the defendant's insurance agent or broker delayed forwarding the summons and complaint to the insurer for so long that a responsive pleading was not timely filed and default was entered.
Moreover, the record before the appellate court showed that the insurance broker did not respond to telephone calls from the plaintiff's counsel regarding the status of the claim. The appellate court saw no indication that the defendant's failure in answering the complaint was willful, or that plaintiff was prejudiced by the delay.
The insurance broker was lucky. Had the court not set aside the default, the insured would have had a perfect E&O claim against the broker for the amount awarded in the default judgment and for the additional damages the insured suffered as a result of a judgment for which the insured had viable defenses.
Every insurance agent or broker—even if not obligated to do so by contract—must, when receiving an oral or written notice of a suit filed against the insured, immediately:
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Recognize that by reason of the license the agent or broker is obligated to convey notice of loss
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Obtain the summons and complaint from the insured
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Properly fill out an ACORD notice of loss, and attach a copy of the summons and complaint
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Obtain from the insured the name, address and telephone number—both office and cell—of the persons with knowledge of the claim and suit
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Obtain from the insured a brief summary of the facts that give rise to the summons and complaint
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Deliver the ACORD notice and summons and complaint to every insurer who may potentially provide coverage to the insured for the claims alleged in the suit.
It is axiomatic that insurance is a business of the utmost good faith. Agents and brokers are obligated to deal fairly and in good faith with the insureds and insurers they represent. Failure to do so is a not only a breach of the custom and practice of the business but is also a breach of the covenant of good faith and fair dealing implied in every insurance transaction. The insured should learn from this failure and obtain a new broker.
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