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Legal Update for Insurance Agents & Brokers - March 2019

March 1, 2019
Presented by the Insurance Agents & Brokers Liability Practice Group

edited by Timothy Ventura, Esq.

New York Courts Continue to Require a High Standard of Proof to Support Claims Against Insurance Brokers

By Martin A. Schwartzberg, Esquire

A recent decision by the Appellate Division, Third Department again demonstrates the heavy burden of proof imposed upon a party seeking to assert a malpractice or breach of contract claim against an insurance broker. In Hefty v. Paul Seymour Insurance Agency, 163 A.D.3d 1376 (3rd Dept. 2018), the Appellate Division upheld the trial court’s dismissal of the plaintiffs’ claims against their insurance broker.

The facts of the case are fairly straight forward. In 2010, the plaintiffs purchased a property for $33,000 with the intention of renovating the home and retiring there. At that time, the plaintiffs purchased a homeowners insurance policy through its insurance broker with a replacement cost limit of $92,000. Following extensive renovations and investment of over $200,000 in the property, it was destroyed by a fire. Thereafter, the plaintiffs commenced a lawsuit against its insurance broker alleging that it was negligent in failing to secure higher coverage limits for the property.

As the court noted in its decision, as a general principal, insurance brokers have a common law duty to obtain requested coverage for their clients within a reasonable time or inform the client of its inability to do so. However, the broker has no continuing duty to advise, guide or direct a client to obtain additional coverage. Accordingly, in order to set forth a case of negligence or breach of contract against an insurance broker, a plaintiff must establish that a specific request was made to the broker for the coverage that was not provided in the policy obtained.

In support of their motion to dismiss the plaintiffs’ claims, the insurance broker submitted the deposition testimony of the plaintiffs, which included the fact that, after renovating the property, they had conversations with the broker during which they informed the broker of the improvements to the property and requested that someone be sent to the property to reassess its value. However, the plaintiffs acknowledged in their deposition testimony that at no point did they ever make a specific request for an increase in coverage. The court found that, at best, the evidence established that the plaintiffs expressed a general interest in increasing coverage on the property, which is insufficient as a matter of law to satisfy the requirement of a specific request for a certain type of coverage.

As its fallback argument, the plaintiffs contended that a special relationship existed between themselves and the broker giving rise to an additional duty of advisement. Courts have held that, even in the absence of a specific request, an insurance broker may be liable for failing to advise or direct the client to obtain additional coverage where a special relationship has developed between the broker and the client. Stressing that special relationships in the insurance brokerage context are the exception and not the norm, New York’s highest court has identified three exceptional situations that may give rise to a special relationship:

1.         The agent receives 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 is 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 upon.

In applying the special relationship test to the facts, the Appellate Court found that the plaintiffs failed to raise a triable issue of fact as to the existence of such a special relationship. In the first instance, it was uncontroverted that the broker did not receive compensation from the plaintiffs apart from the payment of premiums. Further, although the plaintiffs claim that they repeatedly requested a reassessment of the property, it is undisputed that the broker never undertook to perform one. The court further held that the plaintiffs’ own submissions confirmed that they did not rely upon the expertise of the broker in assessing their insurance needs. To the contrary, the court found that the evidence demonstrated that the plaintiffs were sophisticated consumers of insurance products who directly managed their insurance coverages. The level of the plaintiffs’ sophistication was demonstrated by the fact that they owned as many as ten properties and that they would secure appropriate insurance coverages for the properties as they deemed fit, which included rejecting their broker’s advice at times and intentionally procuring insurance in an amount less than was recommended by the broker.

With regard to the property at issue, the plaintiffs initial insured it for only 80 percent of the recommended coverage, based upon their belief that the broker’s recommendation was too high. They also disputed whether flood insurance was necessary for the property, eventually receiving a refund from the broker for such coverage.

Finally, the fact that the broker handled all of the plaintiffs’ insurance needs for over a decade alone was insufficient to raise an issue of fact as to whether a special relationship existed. The court again noted that the plaintiffs had a history of rejecting the broker’s professional recommendations and managing the specifics of their own insurance policies. As a result, the court found that the record established that nothing more than the standard consumer-insurance broker relationship existed between the parties and that the court below properly granted the broker summary judgment and dismissed the plaintiffs’ complaint.

Hefty is significant in that it demonstrates the high burden of proof a party has to meet when attempting to establish a viable claim against its insurance broker for malpractice, negligence or breach of contract in New York. Notably, even though the broker purportedly failed to visit the property to reassess it, despite multiple requests to do so, this alone was insufficient to establish a breach of duty by the broker.  

 

Ohio Courts Crack Down on Attempts to Expand Insurance Agent Liability 

By Ray C. Freudiger, Esquire & Jeremy M. Welland, Esquire

It’s a scenario that plays out all too often for insurance agents: A client comes to you seeking insurance coverage for, say, a parcel of real property. Coverages and options are discussed, a quote is prepared and the client agrees to buy the policy. So far, so good. But then the worst happens: A casualty event occurs, the client makes a claim to the insurer, and he or she is informed there is no coverage for the loss. With no payment forthcoming from the insurance company, guess who they decide to look to for payment?

When these situations arise, frustrated insureds and their attorneys will bring suit against the insurance agent, arguing the insured did not know that the type of loss at issue was excluded or not covered and that the lack of coverage is the agent’s fault. While this is not a new strategy for litigants, Ohio courts have recently been pushing back.

In LGR Realty, Inc. v. Frank & London Ins. Agency, 2018-Ohio-334, discussed in a prior Update, the Ohio Supreme Court decided that the statute of limitations for a claim for negligence in procuring insurance begins to run on the date the policy goes into effect, not on the date of a later casualty loss, at least where the policy contains a specific exclusion for the coverage later claimed by the plaintiff. This provides closure to insurance agents, so a plaintiff cannot claim 10 or 20 years later they wanted a certain coverage that was not provided and that they did not know there was a problem with coverage until a casualty event occurred.

In Johnson v. Grossi Ins. Agency, 2018 Ohio Misc. LEXIS 593, the Summit County Court of Common Please went even further, holding:

While an insurance agent has a duty to exercise ordinary care and reasonable diligence in his or her good faith effort to provide for an insured the policy terms the insured has requested, an insured has a corollary duty to read the policy that has been given to him or her to verify that it provides the coverage requested. The failure to do so bars the insured from presenting a professional negligence claim against the agent.

(Emphasis added.)

Imposing a duty to actually read the policy would, on its own, seriously limit the efficacy of bringing suit against an insurance agent. While Johnson has no precedential effect outside of Summit County, it at least shows a potential roadmap for an agent to argue against liability.

In a case handled in our Cincinnati office, which was affirmed by the Court of Appeals, an insured obtained insurance for one parcel of real property but failed to take all necessary steps to obtain insurance for a second parcel of property. The trial court held that the insurance agent discharged the duty he owed to the plaintiffs by obtaining a quote for them, advising them what they would need to do to finalize coverage and advising them that further communication would be with the insurer itself. The court noted, among other things, the plaintiffs should have realized that something was amiss when they obtained policy documents for one parcel of real property and not the other. This should have clued them in to the fact that they had no coverage on the second parcel.

Taken together, these cases show a trend toward requiring insureds who acquire policies through agents to actually read the documents provided and to pay attention to what they receive. They cannot simply claim they relied on their insurance agent, did not read the documents themselves and place all of the blame on the insurance agent. Of course, it is always advisable for insurance agents to keep careful records of discussions about coverage to protect against potential lawsuits. Still, if the worst happens and a lawsuit arises, Ohio courts are giving insureds less leeway to claim they did not know what was in their insurance policies, increasing the chance of a successful defense.

Keeping Sympathy Out of Trial and the Importance of Jury Charges To Set the Standard of Care 

By Lawrence B. Berg, Esquire

In Stephens v. 48 Branford Place Associates, LLC, et al., the New Jersey Appellate Division affirmed a jury verdict of no cause for action with regard to the claims asserted against the insurance broker and the agency. In reaching this decision, the court addressed the scope of information to be provided to the jury concerning the plaintiff’s loss and the terms of the jury charge that should be used to establish the agency’s duty.

The plaintiff’s husband was shot and killed while attending a concert held at the property. The Stephens’ estate brought suit against the corporate property owner, its principle and its insurance broker. This claim had been tendered to the property owner’s GL insurance carrier, which declined coverage based upon the terms of an assault and battery exclusion. The plaintiff alleged that the broker had been professionally negligent with regard to the nature of insurance procured on behalf of the property owner. The claims against the broker required resolution of the information that was conveyed to the broker as part of the insurance application process. The property owner’s principle eventually agreed to the entry of a judgment in favor of the plaintiff and against the corporate entity in exchange for an agreement to dismiss the claims against the principle, individually, and for his agreement to cooperate in the plaintiff’s claims against the broker. Following a bench trial in which the property owner offered no defense to the plaintiff’s claim, a damage verdict of $1.0 million was entered. The claims against the broker had previously been severed from the claims against the property owner.

At the trial of the professional malpractice claims, the plaintiff sought to advise the jury that she was suing in her administrative capacity, so the jury would understand the claim involved a death. Instead, since the quantum of damages had already been established at the prior trial, the court refused to disclose the nature of the underlying claims to the jury or that the plaintiff was suing as a legal representative. The jury was simply told that the plaintiff had sustained “a loss.” In affirming this evidential ruling, the Appellate Division held that the trial court’s decision was proper since the issue of damages was not to be decided by the jury, and, therefore, disclosure of the plaintiff’s status as the administrator of the estate was not probative of any issue and could have a prejudicial effect on the jury’s resolution of the liability question.

As part of the instructions to be given to the jury to guide their deliberations, the plaintiff sought to have the court instruct the jury that the insurance broker’s actions needed to be considered in the crucible of being a fiduciary who must give appropriate advice as to the coverage needed in a given business. The trial court refused to provide such an instruction. The Appellate Division affirmed this decision and reiterated that the law only imposed a duty on an insurance broker to use the degree of skill and knowledge generally exercised in the representation of a client seeking insurance coverage.

The material in this law alert has been prepared for our readers by Marshall Dennehey Warner Coleman & Goggin. 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. To be removed from our list of subscribers who receive this complimentary Legal Update for Insurance Agents & Brokers, please contact tgventura@mdwcg.com. If however you continue to receive the alerts in error, please send a note tgventura@mdwcg.com.

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Ray C. Freudiger
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Jeremy M. Welland
Associate
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