“Insurance is a relationship business.” And if you don't believeme, try an online search for that exact phrase, including thequotation marks. I did, and got 32,700 hits, nearly twice as manyas for “law is a relationship business.”

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(I got no hits for “taxidermy is a relationship business,”though I am sure there are many caring taxidermists who would bedisappointed to rank below lawyers in the “relationship”business.)

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Most professionals offer a relationship, along with theirprofessional services. Whether it's the physician's “bedsidemanner,” the architect's “feel” for what the client has in mind, orthe investment professional's mantra of “know your customer,” eachprofession has its own way of saying that it is listening, andcares about what the patient/client/customer has to say.

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For insurance agents and brokers, the customer relationship isthe life's blood of the business—along with technical proficiency,it's the quality that keeps policyholders coming back year afterpolicy year. And it is usually at least an annual point of contact,not counting the holiday and birthday cards and the New Year'scalendar.

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The dividing line between “order taker” and “trusted advisor”can be a blurry one, and become even more so when viewed throughthe microscope of a lawsuit.

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A lot has been written about a decision by the New York Court ofAppeals (the State's highest court) earlier this year, Voss v.The Netherlands Insurance Company, 22 N.Y.3d 728 (2014), inwhich the Court squarely framed the issue as “[W]hether a specialrelationship existed between the insureds and their insurancebroker.” If, under New York law, such a “special relationship”existed, the broker might be liable for (allegedly) failing torecommend adequate business interruption insurance limitsto Debra Voss and three of her businesses.

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What was so “special” about Voss' relationship with thebroker?

  • Her business interruption losses were not unusual: water damageoccurred over two years at a building owned by Voss, disruptingoperations in the building, including two other businesses owned byher and housed in her building. The water intrusion damages beganin 2007, the year after Voss bought the building.
  • The relationship was not particularly long-term: Vossbecame a customer of an insurance brokerage firm in 2004, just twoyears before she bought the building, and three years before thefirst loss.
  • The policyholder was familiar with the insurance product: shehad purchased business interruption insurance before buying thebuilding, with a $75,000 per-incident limit, and maintained thesame limit in the policy year after the purchase.
  • The broker didn't recommend lower limits: after the first twolosses the carrier offered a renewal with a $30,000 per-incidentlimit, rather than $75,000. Voss accepted the limit, thoughshe alleged that the broker promised to “look into” obtaining ahigher limit. The third loss, occurring in 2008, took place whenthe $30,000 limit was in place.

Yet, the court in Voss departed from the rule that itrecognized to be the “general” one:

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[I]n the ordinary broker-clientsetting, the client may prevail in a negligence action only whereit can establish that it made a particular request to the brokerand the requested coverage was not procured. Plaintiffs in thiscase do not allege that they specifically requested higher businessinterruption policy limits and have not proceeded against [thebroker] under this common-law theory of liability. Rather, theirclaim hinges on the existence of a special relationship.

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The court reviewed earlier cases that had found exceptionsto the general rule, and summarized:

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We identified three exceptionalsituations that may give rise to a special relationship, therebycreating an additional duty of advisement:(1) the agent receivescompensation 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 whichwould have put objectively reasonable insurance agents on noticethat their advice was being sought and specially relied on.

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The court found that the second exception could applyto Voss' claim against the broker. Voss had testified that onebroker with the firm had promised to “review her coverage annuallyas the business grew,” but failed to do so.

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The Voss decision was four-to-three, but even thedissenters agreed that the alleged promise to annually reviewcoverage could create a “special relationship.” They disagreed withthe majority opinion because the evidence also showed that thebrokerage firm had not kept the supposed promise for several years,so there was no reason for Voss to rely on it. As thedissenting opinion reasoned, “there is no authority for finding aspecial relationship based on a gratuitous promise to consult,where no consultation takes place.”

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The dissent concludes:

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Agents are not insurance companies anddo not earn premium income. They earn, ordinarily, relativelymodest commissions for bringing insurers and insureds together. Itis natural for a client that has suffered a loss not covered by itsinsurance to blame its insurance agent; and if lawsuits by clientsagainst their agents are welcomed by the courts, the consequencemay be to make the agent into a kind of back-up insurer, a resultneither sensible nor fair.

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(The dissent dryly commented, “It is true that, if Voss hasdescribed the facts accurately, [the brokerage firm] should not geta high mark for client service.”)

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The result in Voss may be explained by its proceduralsetting. The trial court judge had granted summary judgment to thebroker. In New York, as elsewhere, courts should not decide thecase on the merits if there is a disputed, material fact on whichthe outcome depends. The majority of the New York high court foundMs. Voss' testimony to create such a disputed fact; the dissenttreated the “fact” as irrelevant. In their view, the bare “promise”to annually review the insurance program, without either theinsured hiring the broker to do so, or the broker actuallyperforming the task and giving erroneous advice, could not giverise to a special duty of care.

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How easy it is, after an under-insured loss, to allege such“promises.” Coming as it did within sixteen months after SuperstormSandy devastated parts of the Mid-Atlantic and Northeast states,the Voss decision could encourage insureds withunder-insured (with benefit of hindsight) business interruption andother losses to have enhanced memories of similar promises, withouta written promise, a course of conduct, or any independent evidenceto support them.

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Brokers sometimes make matters worse by over-promising theirlevels of service in marketing materials and on their Web sites.Promising added no-cost services may be create a competitiveadvance in marketing; doing so without following through can createa competitive disadvantage in court.

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The Voss decision does not address a related issue: Howlong does such a “promise” to procure adequate coverage last? (Thedissent would cut the promise short because the broker repeatedlyfailed to perform as promised.) Another 2014 decision by a state'shighest court sheds light on the subject.

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On April 3, 2014, the Indiana Supreme held that the two-yearstatute of limitations on negligence actions against brokers beganto run when the policyholders could have discovered—by readingtheir homeowners insurance policy—that it did not afford fullreplacement cost coverage for their home in the event of a fire.(Groce v. American Family Mutual Ins. Co., No.48S02-1307-CT-472 (2014).) The limit for fire losses had beenraised several times over the years as the home had appreciated,but when the house was destroyed by fire in 2007, the carrier'spayout was capped near $186,000; the actual cost of reconstructionwas over $225,000.

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The agent in the Groce case had asked in 2003, when thecustomers purchased the home, “I'm assuming you want replacementcost coverage . . . if anything ever 9 happens—fire, tornado,wind—[the residence] will be replaced 100%?” The couple repliedthat they did want that level of protection. But the policy, asissued and as annually renewed, capped the insurer's obligation topay for reconstruction.

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Not all states strictly enforce policyholders' duty to readtheir policies. The Groce decision thus does not provide asafe harbor outside the Hoosier State. That said, there seems to besome judicial recognition that policyholders should not be allowedto sit on their rights for years, paying less in premiums for lowerlimits, then “recalling” promises by agents or brokers to procure“adequate” limits, with benefit of post-loss hindsight.

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Engagement letters by agencies and brokerage firms to their newclients can provide strong evidence of the scope of services thatwill be provided, though many insurance professionals do not usesuch letters, particularly with personal lines customers and smallbusinesses.

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We can't all be taxidermists.

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