Can an Insured Recover from Their Insurance Broker If the Broker Fails to Obtain the Coverage Requested, or Misrepresents Coverage?

Kevin Pollack | Property Insurance Coverage Law Blog | August 18, 2017

If an insurance broker fails to obtain the insurance coverage requested or misrepresents the scope or extent of coverage, does an insured have a claim against the broker when the insurance they expected to cover their loss does not as a result of the broker’s negligence?

A recent ruling by a trial court in New York once again reemphasizes that the answer to the question is yes.

In 386 3rd Ave. Partners Ltd. Partnership v. Alliance Brokerage Corp.,1 the trial court found that an insurance broker could be subjected to liability for failing to obtain the requested flood insurance, and then misrepresenting to its client the coverage obtained.

In 386 3rd Ave. Partners, owners of multiple commercial properties went to their insurance broker (Alliance Brokerage Corp) to procure flood policies for their commercial properties. However, the Travelers policy procured by Alliance only covered the insured’s properties located outside of flood zones; the insured’s properties inside the flood zones were excluded and not covered by the Travelers insurance policy.

Roughly one year before Superstorm Sandy, the insured specifically asked that Alliance advise in writing “if any of the[ir] Brooklyn commercial properties have the flood coverage.” The insureds claimed that Alliance responded that “[a]ll of the commercial properties have … a $1 million limit for flood….”

When Superstorm Sandy hit in 2012 and damaged each of the insured properties, Travelers denied flood coverage for the properties inside the flood zones, citing a flood zone exclusion in the policy.

Following the denial of coverage, the insured sued their broker. When the broker moved for summary judgment, the trial court denied the motion, explaining that insurance brokers owe a common law duty to obtain the insurance coverage requested, or to inform their clients of the inability to do so. The court further explained that a broker may be found liable where the broker “failed to discharge the duties imposed by the agreement to obtain insurance, either by proof that it breached the agreement or because it failed to exercise due care in the transaction.” Here, the broker apparently not only failed to procure the coverage requested (flood coverage for all of the insured’s properties), but also misrepresented to the insured that the properties all had 1 million in flood coverage. Each of these acts, if true, independently trigger broker liability.

But what about the fact that the insurance policies contained the flood zone exclusion? Did the insured’s failure to read the policy, and address this issue with the broker before Superstorm Sandy impact the viability of their claim?

On this issue, the trial court noted that the insured’s failure to read the policy was “not a superseding cause” precluding the broker’s liability, explaining that, absent any showing that an insured knew of the discrepancy between the coverage it claimed to have requested and that obtained by the insurance broker, the insured had “a right to rely upon the [broker’s] presumed obedience to his or her instructions.”
1 386 3rd Ave. Partners Ltd. Partnership v. Alliance Brokerage Corp., No. 500074/14, 2017 NY Slip Op 31484 (N.Y. Sup.Ct. Kings Co. July 11, 2017).

What Counsel Must Do To Maximize Insurance Coverage

Finley T. Harckham | Anderson Kill | December 18, 2015

Insurance policies are complex contracts, often riddled with pitfalls for the policyholder. The pursuit of a claim in the wake of a loss is equally fraught. Yet all too many companies entrust their assets and their very survival to insurance policies that are vetted by neither in-house counsel nor a broker with the mandate or the know-how to ensure the coverage grant and policy terms are well-matched to the company’s risks. Similarly, companies too often fail to avail themselves of the expertise required to expedite and maximize a claim.

For an attorney unfamiliar with the nuances of insurance policies and the claims process, a broker can provide invaluable support – if the broker is explicitly tasked with helping the company assess its coverage needs and analyze policies purporting to provide it. Not all brokers are equipped to perform these tasks, and not all policyholders want them to. Counsel’s first task, then, is to determine what kind of broker support is needed and to make sure that the appropriate broker is bound by contract to provide it. A written agreement that addresses the scope of services provided is essential.

To determine that scope, counsel needs a full grasp of the core tasks in which the broker may (or may not) be called upon to assist (for an outline of those tasks, see Insurance Due Diligence below).

Spell Out the Broker’s Role

Misunderstanding about what exactly is expected of a broker is far more likely in the absence of a written contract. The contract should not only identify the lines of coverage the broker is authorized to procure, but also clearly indicate whether the broker is expected to provide advice and expertise to assist the client in their selection of insurance or handling of claims, and to provide other services, as opposed to simply serving in the role of an order taker who shops for what the client has asked for.

Such clarity is important not only so the parties to the contract have a clear understanding of their roles but also to indicate where responsibility lies if the insurance that is obtained or the broker services provided turn out to not meet the client’s needs. In many jurisdictions, there is a legal presumption that a broker is merely an order taker who owes no duty to the client beyond procuring the insurance coverage that was requested or reporting an inability to do so. Further, a burden is often placed upon the client to read and understand the policies that have been obtained for them, even if the client has no expertise in insurance. These presumptions have resulted in many clients, who believed they were entitled to rely upon the expertise and advice of the broker, finding that they have no legal recourse when their coverage turns out to not be what they expected.

That predicament can often be avoided by entering into a written contract with the broker that establishes the type of special relationship some courts find necessary in order to impose liability upon a broker for obtaining inadequate or unsuitable insurance. The agreement should specify that the client is relying upon the advice and expertise of the broker and that the broker’s agreement to assume that role is a material consideration in being retained. The broker may require a fee in order to assume the role of advisor, and if so, the client must decide whether it is worth the cost.

Insurance Due Diligence

While a broker can provide vital assistance in the purchase of insurance and pursuit of claims, it’s ultimately up to in-house counsel to vet insurance contracts and to hold insurance companies to their responsibilities at claim time. That entails executing the tasks outlined below, with or without close assistance from a broker.

Before coverage is bound: Counsel should analyze the contracts being offered with the company’s major liability and loss exposures in mind. Insurance policies for businesses are typically complex, lengthy contracts written in arcane language, with many exclusions that take away with the left hand much of the coverage seemingly proffered with the right. Many of the key provisions found in standard form policies have been interpreted by the courts and are best understood in light of that case law.

Most policies consist largely of standard forms, many of which remain unchanged from year to year. The broker can be asked to identify all changes in coverage. Moreover, excess policies often “follow form” to primary policies. So reviewing higher-layer policies in a tower of insurance is typically far less involved than gaining an understanding of primary policies. Care must be taken, however, to ensure that excess policies do not have less advantageous terms, if possible, and that if they do, any policies at higher levels do not follow form to them.

Choice of law and arbitration: Many commercial insurance policies contain problematic choice-of-law provisions. The insurance companies favourite choice is New York law, which is worse for policyholders than the laws of most other states in certain respects. For example, under New York law, in most instances there is no cause of action available to corporations for an insurance company’s bad faith.

Many insurance policies contain mandatory arbitration clauses. Counsel should carefully weigh the advantages and disadvantages of litigation versus arbitration and review the specifics of any arbitration provision in policies under consideration.

Policyholders receive at least two potential benefits from resolving their coverage disputes through the litigation instead of arbitration. First, all courts in the U.S. apply rules of insurance policy interpretation that are favourable in some respects to policyholders as the party that did not draft the contract. Most notably, insurance policy coverage granting provisions are to be construed broadly while exclusions are to be viewed narrowly, and ambiguities are to be resolved in favor of coverage. These rules are applied in some arbitrations, but their use is specifically prohibited under certain arbitration clauses, and in general, arbitrators are granted broad latitude under the law to depart from a strict application of legal precedent.

Manuscript provisions: Many insurance policies contain both standard forms and “manuscript provisions” drafted for a particular policyholder. Counsel should be involved in the negotiation of manuscript provisions for two reasons. First, such provisions must clearly reflect the agreement of the parties, since if a dispute arises over the meaning, the policyholder may not be entitled to application of the reasonable expectations doctrine, which holds that the insurance company provides the contract wording and must be held accountable for any ambiguity. Second, the participation of counsel in the company’s evaluation and drafting of such provisions might provide attorney-client privilege or attorney work product protection against disclosure of internal communications in a coverage action over the meaning of a manuscript provision.

Review applications: Counsel’s role is also vital in the insurance application process. It is important to ensure complete disclosure in insurance applications because material omissions can result in rescission of the insurance policy. Applications for insurance policies typically require disclosure of known claims, losses and risk exposures. Often, in-house counsel are particularly knowledgeable about those items and may be able to identify omissions in the disclosure prepared by risk management.

Evaluate coverage: Large and complex insurance claims almost inevitably involve issues of contract interpretation and other matters for which the policyholder requires legal expertise.

A coverage opinion from counsel should be obtained whenever an insurance company asserts, or it appears from the policy, that coverage may not be provided for an important claim. The application of insurance policy provisions to a particular claim is often unclear, and the meanings of numerous standard form clauses have been interpreted differently by the courts of different states. Therefore, determining which state’s law applies and researching applicable case law can be important to a coverage analysis. Moreover, whether an exclusion applies to a claim may depend upon a determination of the proximate cause of a loss, injury or damage  – legal issues best addressed by counsel.

While brokers often have a productive role to play in the handling of the claim, they generally are not trained in insurance policy interpretation. They may be able to tell counsel how the insurance company typically handles the type of claim in question – but not how it should be handled.

The assistance of counsel…

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