Why an Insurance Carrier’s Denial of Coverage Should Be a Warning to the Insurance Producer
An insurance producer often finds itself dragged into litigation, not for any particular act or omission that it allegedly engaged in, but as the fall-back position for a client who has had a claim rejected by its insurance carrier. This was clearly highlighted in the recent case of Law Office of Drew Bauman v. The Hanover Insurance Company, et al., (D.N.J. Feb. 27, 2023).
In Bauman, the law firm had filed a suit against Hanover, seeking a declaration that Hanover’s policy provided coverage to the firm stemming from its representation of a client in a real estate transaction and/or that Hanover’s denial of coverage represented a breach of the insurance contract. Alternatively, the law firm also sued its insurance producer, USI Insurance Services, LLC, premised upon the claim that, if Hanover’s policy was deemed to not provide coverage for the legal malpractice claim, then USI, as the insurance producer, had been negligent in not procuring appropriate coverage for the firm. The law firm also alleged that the failure to procure adequate coverage represented a breach of contract between the law firm and USI.
District Court Judge Cecchi dismissed all of Bauman’s claims, without prejudice, against both Hanover and USI. As to the claims against Hanover, the court found that the claim for declaratory relief was redundant of the breach of contract claim and, therefore, such a claim could not stand independently. Further, the court found that the breach of contract claim was defectively plead since it failed to specify the particular language or provision of the insurance policy that had been allegedly breached.
As to the claims against USI, Judge Cecchi dismissed the negligence claim, noting that the plaintiff simply alleged that USI had been negligent to the extent that it was determined there was either none or insufficient coverage for the law firm for the real estate claim, but that no specific act or omission by USI was alleged. The court, likewise, dismissed the breach of contract claim against USI since a contract-based claim for the failure to provide adequate coverage is not recognized in New Jersey.
As a general matter, the insurance producer has no control over the insurance carrier’s coverage determination for a particular claim. However, a decision that coverage does not exist significantly increases the likelihood of an insurance agency’s client looking to shift the blame or to find an alternate source of compensation. While the insurance producer is supporting its client in challenging an adverse insurance coverage determination, the producer should be mindful that the risk of the client asserting a claim against the producer increases markedly during this process, and that particular care should be taken to ensure the retention of all documentation relating to the origination of the policy and the communications that take place with the client.
Legal Update for Insurance Agents & Brokers, August 2023 has been prepared for our readers by Marshall Dennehey. It is solely intended to provide information on recent legal developments and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. We welcome the opportunity to provide such legal assistance as you require on this and other subjects. If you receive the alerts in error, please send a note tgventura@mdwcg.com. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2023 Marshall Dennehey. All Rights Reserved.