Mark J. Bunim ()
In a narrow 4-3 decision, the New York Court of Appeals has opened up the pathway to insurance brokers’ liability to their customers for failure to procure proper [or sufficient] insurance coverage. This article will examine the case decided and its potential ramifications, especially with hundreds of unpaid Storm Sandy claims hovering in the background.
On Feb. 25, 2014, in Voss v. Netherlands Insurance and CH Insurance Brokerage Services (2014-01259 (N.Y. Feb. 25, 2014), the New York Court of Appeals reversed two lower court decisions, which had granted summary judgment to defendant broker dismissing the negligence complaint against it. The Court of Appeals ruled that a “question of fact” exists as to the broker’s liability. In this case, plaintiff, a business owner, had obtained property coverage and business interruption coverage beginning in 2004. At the inception of the relationship, according to plaintiff’s deposition testimony, the broker had asked for sales figures and other information to calculate the needed amount of business interruption coverage. The broker recommended $75,000 in coverage and told plaintiff it was adequate. According to plaintiff, the broker told her “that it would review the coverage annually.”
Plaintiff’s business expanded. Two years after she bought the original coverage, she moved the business premises to larger space. The broker renewed the business interruption policy with the same limits, at the new location. A year after the move, the first loss occurred. After this first loss, in which the business experienced multiple leaks in the roof from dripping water, the insurance company lowered the plaintiff’s business interruption limits to $30,000 (from $75,000). The insured questioned the broker on the scope of coverage. The broker replied, “we will take a look at it,” but no changes occurred. Four months after the first loss a second water leakage occurred and six months later a third water leakage happened; which resulted in the claim before the court.
Deborah Voss, who operated a modeling agency, sued the broker for negligence (she also sued the insurer, but the issue before the Court of Appeals was only the broker’s possible liability) due to the broker’s alleged failure to procure sufficient business interruption coverage. The issue addressed by the court was whether a “special relationship” existed between the broker and the insured. It has long been the law in New York that a broker has no duty to advise its insured/customer regarding the scope and nature of coverage absent a “special relationship.” A broker’s duty in New York has always been limited to the obligation to procure the coverage requested by the insured, or to advise the insured that it is unable to get such coverage; but not to offer coverage advice or analysis (See, American Building Supply Corp. v. Petrocelli, 10 NY 3d 730 [ 2012]) absent a “special relationship.”
In Voss , the court reiterated this fact and the definition of “special relationship” but liberalized the proof necessary for an insured to overcome a summary judgment motion. The court here remanded the issue of the existence of a special relationship back to the trial court [ i.e. a jury].
A “special relationship” exists if: (a) the broker receives compensation from the insured, aside from commission (i.e. a service fee); or (b) there was a discussion between the broker and the insured regarding coverage with the insured relying upon the advice and expertise of the broker; or (c) there is a course of dealing between the broker and the insured over a long period of time “which would put an objectively reasonable insurance [broker] on notice that their advice was being sought and specifically relied upon.” See, Murphy v. Kuhn, 90 NY 2d 266 (1977).
In Voss the court majority found that the insured at deposition had said that it relied on the broker’s commitment in 2004 (three years before the first loss) to annually review the adequacy of the business interruption coverage (“give her advice in the future as the business evolved”). The court found this to be sufficient to deny summary judgment to the broker in that the insured may be able to demonstrate that a “special relationship” existed under criteria (b).
Since the broker was the party moving for summary judgement, the court held that the burden was on the broker to prove that “no special relationship” existed, which it could not do. Furthermore, the court held that even though the insured/customers admitted that they were aware of the business interruption limits and of the reduction in coverage after the first loss, this fact alone does not defeat their claim “as a matter of law” since the claim is based upon the concept of “special relationship” for failing to recommend higher limits. The court held, “it is wholly irrelevant whether plaintiffs were aware of the limits that were actually procured.”
The three dissenting judges in Voss said that the broker had no continuing duty to advise the client, that the 2004 statement (to continue to review the scope of coverage) was “gratuitous,” and the broker had no obligation to follow through. The dissent worried that “if lawsuits by clients against their agents are welcome by the courts, the consequence may be to make the agent into a back-up insurer….”
In sum, the court’s majority ruled that the question of a “special relationship” between an insurance broker and customer can no longer be decided as a matter of law and that the insured’s knowledge of their policy’s limits does not preclude the claim.
This ruling certainly brings New York a step closer to the position of other states with regard to broker’s exposure to their clients. For example, in New Jersey the courts have followed the rule set forth by the New Jersey Supreme Court in Ryder v. Lynch, 42 N.J. 465, 201 A.2d 561 (1964):
One who holds himself out to the public as an insurance broker is required to have the degree of skill and knowledge requisite to the calling. When engaged by a member of the public to obtain insurance, the law holds him to the exercise of good faith and reasonable skill, care and diligence in the execution of the commission. He is expected to possess reasonable knowledge of the types of policies, the different terms and the coverage available in the area in which his principal seeks to be protected. If he neglects to procure the insurance or if the policy is void or materially deficient or does not provide the coverage he undertook to supply, because of his failure to exercise the requisite skill or diligence, he becomes liable to his principal for the loss sustained thereby.
From a practical perspective, it now will be extremely difficult or virtually impossible for a New York broker to obtain summary judgment dismissing an errors and omission complaint once an insured customer alleges “special relationship.” Under the broadened standard it will be a fact question for a jury to determine whether a “special relationship” exists. Given this new reality, are property/ casualty insurance brokers going to be willing to take their chances with a jury against an insured who was under-covered or denied coverage? Clearly the broker errors and omission cases will now cry out for early settlement in view of this changed pro-insured standard.
What are the implications for Super Storm Sandy victims, especially for businesses that were denied coverage for business interruption losses in Manhattan due to power outages? Will the relationship between those insureds and their brokers now be part of the litigation picture, in addition to lawsuits that have already been filed and will be filed against insurance companies?
Since it will no longer be that difficult for businesses and homeowners to make claims against their brokers under the umbrella of “special relationship” and get those cases to a jury, one would expect to see a proliferation of new Sandy-related broker “E&O” cases. Certainly insureds can look to their prior discussions with their brokers on the scope of coverage or look to the length of their relationships with brokers as factors to be weighed for a finder of fact to determine if an insured relied upon the broker’s advice, thus forming a “special relationship.”
Having mediated many Sandy cases, myself, as part of the New York state program, I can well foresee a torrent of broker error and omission lawsuits cropping up over the next year by victims who were unable to reach a resolution with their property carriers. Insureds were repeatedly telling me during these mediations that they “relied on the broker’s assurances” for the [inadequate] coverage they had. The Voss ruling could well inundate the courts with a new phase of litigation, now that the floodgates are open.
Mark J. Bunim is a mediator and arbitrator with NAM (National Arbitration and Mediation). He can be reached at email@example.com.