Broker 'Experts' May Face E&O Suits From Nonspecific Coverage Requests

The apartment owner's broker procured a policy specifically providing that coverage for such items would be limited to 10 percent of their value, absent the purchase of an additions-and-alterations policy rider.

At deposition, the insured testified that he told the broker what the apartment consisted of, how it was furnished, what had been done to it, and that he wanted to make sure it was properly insured.

Since he had not testified, however, that he had specifically requested purchase of the additions-and-alterations rider, the broker moved for summary judgment dismissing, among other things, the insured's negligence and breach of contract claims.

In general, the basic duty of an insurance agent or broker is to provide requested coverage for customers within a reasonable time period. Historically, courts have found that agents can only be liable for failing to provide a particular type or level of coverage when it has been shown that such coverage was specifically requested or promised. (See accompanying information box, "Agents' Duties.")

In this case, however, despite the fact that the customer's coverage request was general rather than specific, the trial court denied the broker's motion to dismiss.

The broker appealed.

Although one justice on the appellate court panel cited traditional arguments favoring the broker's position, the majority ruled otherwise.

The minority justice said "the duty owed by an insurance broker to his or her customer is ordinarily defined by the nature of the request the customer makes to the broker."

Therefore, "in order to recover damages for negligence or breach of contract…based on the broker's failure to procure a particular type of coverage, the plaintiff must demonstrate that he or she made a specific request to the broker for that coverage."

Citing a 2001 ruling from the New York Appellate Division, Third Department in Catalanotto vs. Commercial Mut. Ins. Co., he pointed out that a "general request for coverage will not satisfy the requirement of a specific request for a certain type of coverage."

Accordingly, because no evidence had been presented on the motion of a specific request by the insured for the additional coverage available for the flooring, carpeting, curtains, painted walls and bookcases in the unit, he concluded that summary judgment dismissing these claims should have been granted.

"At bottom," this justice concluded, "the evidence submitted by [the broker] established that the plaintiff made a generalized request that defendant procure a policy that fully or completely insured the contents of the unit," adding that such a request "is insufficient to impose liability on defendant for procuring an additions-and-alterations rider."

Rejecting this reasoning, however, the majority affirmed the trial court's decision to deny the broker's motion to dismiss.

Without substantial discussion devoted to the issue, the majority–apparently relying upon the plaintiff's testimony that he requested coverage that would adequately insure the apartment and its contents–noted that although the plaintiff "admittedly received and read the policy procured by the defendant brokerage, he was allegedly assured that the requested coverage had been obtained and he had a 'right to look to the expertise of [his broker] with respect to insurance matters'" (quoting Baseball Office of Commr. vs. Marsh & McLennan, a 2002 holding by the same court).

This decision is significant in that it is evidence of a continued cementing of the perception in the courts that, in fact, insurance agents and brokers are more than just "order takers." They are, instead, being viewed more and more as "experts."

As such, they can expect more and more to at least be compelled to go to trial on issues regarding whether generalized–as opposed to specific–coverage requests should have prompted brokers to seek or procure certain coverages, or to provide advice to insureds regarding coverage.

SPECIAL RELATIONSHIPS

Recent cases also suggest that it is becoming less and less difficult for courts to find that "special relationships" exist between insureds and their brokers–relationships which in turn expand the duty of care that brokers owe to their customers.

In September 2007, in GE HFS Holdings Inc. vs. National Union Fire Ins. Co. of Pittsburgh, Pa., the United States District Court for the District of Massachusetts decided that sufficient facts had been alleged to require a jury to decide whether or not a special relationship existed between a broker and the chairman of the board of a home health care agency, who was denied coverage for a claim under a directors and officers liability policy.

The chairman of the home health agency in bankruptcy was sued for allegedly providing false financial information to a company that had loaned money to the home health care agency and was now unable to collect the amounts due under the loan.

When the chairman submitted a claim for coverage under his company's D&O policy, the insurer denied coverage on the grounds that the policy contained an exclusion for claims "arising out of [or] attributable to any actual or alleged contractual liability of the company or an insured under any express (written or oral) contract or agreement."

The chairman of the health care agency turned around and sued the insurer and the broker seeking a declaration that the D&O insurer was required to cover the claim or, in the alternative, that the broker who had procured the coverage should indemnify and defend him to the extent the policy failed to provide coverage for the claim.

The broker moved for summary judgment to dismiss.

In denying the motion, the court noted that while there may be no general duty on the part of an agent or broker to explain the type of insurance involved, additional duties may be found to exist where it can be shown that "special circumstances" or a "special relationship" existed.

In this case, the insured offered evidence that the broker had been the company's insurance broker in connection with procuring various types of policies for more than 10 years. Over that time, the company had often obtained advice from the broker regarding coverage issues and the appropriateness of insurance, particularly during the course of its bankruptcy.

Further, the broker had taken it upon itself to send a letter to the company discussing various provisions of the relevant endorsement, without making mention of the meaning or effect of the exclusion at issue.

Relying upon this, and in particular the fact that when "an insurance agent makes frequent recommendations," these activities may constitute a special circumstance that "imposes additional duties on the agent," the court concluded that sufficient facts were alleged to require a jury to decide whether or not a special relationship existed.

PROCEED WITH CAUTION

An extensive review of additional 2007 insurance agent and broker cases reveals that while some old, reliable defense arguments are still hanging tough, the landscape remains packed with potential potholes.

Courts still generally expect and impose a duty upon insureds to read their policies, and breach-of-duty claims must still pass proximate cause tests before they can move forward.

However, the argument that an insured only made a generalized request and not a specific request for coverage is finding less support in terms of obtaining summary relief, given the courts' increasing view of agents and brokers as "insurance experts."

Also, the existence of "special" circumstances or relationships, which create expanded duties of care for agents and brokers, seem to be less difficult to establish (at least insofar as necessary to avoid summary dismissal, and require the claims to be tried to a jury).

The catchphrase for insurance agents and brokers remains "proceed with caution."

Peter J. Biging, Esq. is a partner in the New York office of Lewis Brisbois Bisgaard & Smith LLP. He can be reached at BIGING@lbbslaw.com

See related article, "What Can Insurance Customers Expect?" for a discussion of agents' duties.