Four years ago, the New York Court of Appeals issued its decision in Voss v. Netherlands Ins. Co., 22 N.Y.3d 728 (2014), which some thought might lead to more and more insurance brokers being sued by policyholders alleging that brokers had not obtained sufficient insurance or appropriate policies for them.
Several recent cases—including by the U.S. District Court for the Northern District of New York in Tracey Road Equipment v. Ally Financial, No. 5:18-CV-0011 (LEK/ATB) (N.D.N.Y. March 29, 2018), a case involving credit card fraud insurance—illustrate that such claims are carefully scrutinized by the courts. These decisions also make it clear that the floodgates have not opened and that brokers remain relatively well insulated from policyholder claims.
The Broker Liability Test
The Voss case arose when Deborah Voss sued her insurance broker, alleging that it had negligently obtained inadequate levels of business interruption insurance. The trial court dismissed the complaint, the Appellate Division, Fourth Department, affirmed, and the dispute reached the Court of Appeals. In a 4-3 decision, the court reversed.
In the majority opinion, the court explained that, as a general matter, insurance brokers have a common law duty to obtain requested coverage for their clients within a reasonable time or inform them of their inability to do so, but have no continuing duty to advise, guide, or direct a client to obtain additional coverage. The court added, however, that where a “special relationship” exists between a broker and client, the broker can be liable, even in the absence of a specific request for coverage, for failing to advise or direct the client to obtain additional coverage. The court noted that Murphy v. Kuhn, 90 N.Y.2d 266 (1997), cited three “exceptional situations” that might give rise to such a special relationship:
(1) The agent received 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 was a course of dealing over an extended period of time that would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on.
The court decided that the evidence put forth by Voss suggested that there had been “some interaction regarding a question of [business interruption] coverage,” with Voss relying on the broker’s expertise, and it concluded that her complaint should not have been dismissed on the basis that there was no special relationship between the parties.
Although the majority indicated that special relationships in the insurance brokerage context were “the exception, not the norm,” the dissent was concerned that a consequence of the majority decision might result in brokers becoming “a kind of back-up insurer.” Indeed, considering Voss with American Building Supply v. Petrocelli Group, 19 N.Y.3d 730 (2012), where the court held that an insured’s failure to read an insurance policy did not bar its lawsuit against its broker, it appeared that the court might be cutting back on protections for brokers.
Recent decisions including Tracey Road should help to calm that concern.
Credit Card Fraud Insurance
The plaintiff in Tracey Road, Tracey Road Equipment, was a heavy-duty truck and construction equipment dealership selling and renting new and used trucks and equipment. Tracey Road asserted that it used Ally Financial as its “exclusive insurance broker” from 1997 to 2016 and that it entrusted Tracey Road to “identify, select, and procure a variety of insurance policies.”
According to Tracey Road, at annual meetings Ally Financial’s representatives reviewed the adequacy of Tracey Road’s insurance coverage and advised it regarding appropriate coverage for the forthcoming year, “including but not limited to any appropriate or necessary changes required in [its] insurance coverage.” Tracey Road asserted that, as their relationship progressed, Ally Financial became more familiar with Tracey Road’s “business and its business practices,” and that it knew or should have known that “a large percentage of the sales transactions” executed by Tracey Road’s customers were made via credit card.
Tracey Road said that it met with Ally Financial’s representatives in 2016 to evaluate Tracey Road’s existing coverage and to discuss coverage options for the 2016-17 policy period. Following this meeting, “and based upon the parties’ longstanding relationship” and Ally Financial’s “advice and expertise,” Tracey Road said that it authorized Ally Financial to purchase “an inventory coverage policy” and an “omnibus policy.” According to Tracey Road, Ally Financial assured Tracey Road that it “was adequately and appropriately insured,” and Tracey Road understood this to mean that one or both of the policies provided credit card fraud coverage.
Tracey Road alleged that, in March 2017, when both policies were in effect, one of Tracey Road’s customers purchased over $120,000 worth of parts using fraudulent credit card information and never paid Tracey Road. Tracey Road filed a claim under the omnibus policy for the credit card fraud damages, which was denied. Thereafter, Tracey Road said, one of Ally Financial’s representatives informed it that neither policy covered losses resulting from credit card fraud.
Tracey Road sued Ally Financial, asserting that they had a special relationship and alleging negligence and breach of fiduciary duty claims in connection with Ally Financial’s alleged failure to advise Tracey Road to purchase credit card fraud insurance coverage or to obtain the coverage on its behalf.
Ally Financial moved to dismiss, arguing that Tracey Road’s negligence and breach of fiduciary duty claims both failed because Ally Financial did not have a duty to advise Tracey Road to purchase credit card fraud insurance or to procure credit card fraud insurance on its behalf.
The District Court’s Decision
The court granted Ally Financial’s motion.
In its decision, the court examined the three “exceptional situations” cited in Murphy that could create a special relationship and found that none of them existed in this case.
The court began by pointing out that the first situation did not apply because Tracey Road did not allege that it paid Ally Financial for consulting work.
The court also ruled that the parties did not have a special relationship under the second situation, finding Tracey Road’s attempt to rely on Voss to be “unavailing.” The court reasoned that Tracey Road did not allege that it ever discussed credit card fraud insurance coverage with Ally Financial. In the court’s view, any “general conversation” about “adequate” insurance that Tracey Road may have had with Ally Financial—regardless of what Tracey Road may have believed—was “not a request for credit card fraud insurance” and did not impose a duty on Ally Financial to advise Tracey Road about that insurance.
Finally, the court decided that the “course of dealing” exception was not sufficient to withstand Ally Financial’s motion to dismiss. The court explained that Tracey Road had not alleged that it knew little about insurance or that it had delegated the entirety of its insurance decision-making to Ally Financial. Indeed, the court noted, Ally Financial did not obtain policies without receiving Tracey Road’s permission.
The court added that Tracey Road’s description of the parties’ annual meetings provided no basis to infer that they “enjoyed anything other than an ordinary consumer-agent insurance relationship,” given that Tracey Road alleged only that, at the annual meetings, Ally Financial reviewed Tracey Road’s existing coverage and made recommendations for future coverage. This described the role “of most, if not all, insurance brokers,” the court said.
The court concluded that Tracey Road’s contention that it relied on Ally Financial “as its exclusive insurance broker” from 1997 to 2016 and that Ally Financial had a “heightened level of familiarity” with its business practices was insufficient, without more, to establish the course of dealing exception. Tracey Road’s assertion failed to distinguish its relationship with Ally Financial “from an ordinary broker-client relationship,” the court declared.
Two other decisions from earlier this year reflect the narrow interpretation courts are giving to the three “exceptional situations” that might lead to broker liability.
In Holborn v. Sawgrass Mutual Ins. Co., No. 16-cv-09147 (AJN) (S.D.N.Y. Jan. 17, 2018), the U.S. District Court for the Southern District of New York rejected an insured’s contention that it had a “special relationship” with its broker under the second Murphy exception: an interaction regarding a question of coverage with the insured relying on the broker’s expertise. The court ruled that “[a]n alleged conversation in which the parties discussed ‘the most advantageous’ policy—without either party specifically mentioning [the relevant insurance coverage]—is insufficient to create a special relationship.”
A few days later, in Hudson Heritage Federal Credit Union v. Cumis Ins. Society, No. 17 CV 2930 (VB) (S.D.N.Y. Jan. 22, 2018), the Southern District decided that the plaintiff had alleged the existence of a special relationship with its insurance company under the third Murphy exception for course of dealing. Here, the plaintiff contended that it had a 75-year relationship with its insurer, which provided “insurance guidance, risk analysis, and coverage recommendations.” The plaintiff also asserted that the parties “engaged in periodic risk assessment meetings” and that it used the insurer’s “exclusive risk management services to avoid … emerging and ever-changing risks.” The specificity of these allegations led the Southern District to conclude that it would not dismiss the plaintiff’s negligence claim at an early stage of the case.
The Tracey Road decision rejecting a special relationship claim in the context of a credit card fraud insurance case reinforces the view expressed by the Court of Appeals in Voss that a special relationship is “the exception” and in Murphy that insureds “are in a better position to know their personal assets and abilities to protect themselves more so than general insurance agents or brokers, unless the latter are informed and asked to advise and act.”
Tracey Road, Holborn, and Hudson all demonstrate that insurance brokers still are well insulated from liability for claims of professional negligence.
Evan H. Krinick, managing partner of Rivkin Radler, can be reached at email@example.com.