Tighter Limits on Broker Liability - New York Perspective
by Peter C. Contino, Esq.
Insurance Brokers often find themselves in the unenviable position of being the "insurer of last resort," where their clients have purchased inadequate insurance to meet their potential liabilities in litigation. This frequently occurs where a customer makes only a general request that a broker obtain liability or property coverage, which once obtained somehow proves inadequate to cover a later loss or liability because of some limitation in the policy.
In an attempt to shift liability from themselves to their insurance broker, plaintiffs in broker E&O cases frequently claim either, or both, that they were assured by their broker that they had coverage for a specific type of loss (i.e., that a specific policy coverage had been requested and obtained), and/or that because of a long standing and close relationship between broker and client, (i.e., a "special relationship"), the broker had a duty not only to obtain the coverage requested by its customer, but to evaluate and advise the customer as to what coverage the customer should have under the circumstances.
Given the myriad of potential variables in any broker/customer relationship, and the vagaries in what constitutes a "request for specific coverage" or a "special relationship" these exceptions have largely swallowed up the rule that a customer's general request for coverage does not trigger a duty to obtain a specific type of policy or to evaluate and advise as to a customer's insurance needs.
1 Thus, brokers were often put in the position of potentially being "the insurer of last resort."
New York's highest court, in a decision issued in mid 2006, Hoffend & Sons, Inc., v. Rose & Kiernan, Inc.,
2 has now defined what constitutes a "request for specific coverage" and a "special relationship" between broker and customer, so as to limit the application of these principals and offer greater protection to brokers against liability.
The facts of the Hoffend case are typical of those in which a brokerage customer, facing an uninsured loss or liability, seeks to shift same to their broker. Hoffend & Sons, Inc., ("Hoffend") was in the business of doing design and construction work for theatre stages.
3 Rose & Kiernan, Inc., ("R&K") was its insurance broker and had reviewed Hoffend's operations and previously provided advice regarding insurance, bonding, banking, contracts and product development, and aided Hoffend in creating its business plan.
4 In 1998, R&K provided Hoffend with an insurance proposal, which included two policies, a Travelers "Builders Risk" policy and a Great Northern, "Foreign Liability Exporters' Package Policy," neither of which provided property damage or liability coverage for damage to property occurring abroad.
5 After the policy inception date, R&K delivered the policies to Hoffend with a cover letter which specifically stated that the Travelers policy did not cover foreign projects and that coverage for same would have to be negotiated on a project-by-project basis.
6 At the same time that coverage was being obtained, Hoffend was in the process of entering into a contract to do work in Argentina. Its principal claimed that in a conversation with an R&K representative, he advised R&K that the Argentina project should be "covered."
7 In December 1999, the Travelers and Great Northern policies were renewed on the same terms for 2000, with R&K again submitting an insurance proposal to Hoffend, but this time there was no specific reference to the fact that coverage for foreign projects under the Travelers policy had to be individually negotiated on a project-by-project basis.
8 At that time, there was no specific discussion of coverage for the Argentina project.
9 The loss occurred in October 2000 and involved the collapse of a light bridge with damage to Hoffend's work and consequential damage.
10 Travelers disclaimed out right based upon its policy's territorial limits and Great Northern agreed to pick up liability to third-parties only.
11 Hoffend sued R&K for its uninsured loss, asserting both that R&K failed to obtain coverage for foreign projects under the Travelers policy, as requested, and on the basis that Hoffend and R&K had a "special relationship" based on R&K's involvement in its insurance and business plans, etc., which implied a continuing duty on R&K to advise Hoffend to procure the additional coverage which would have covered the subject loss.
12 The case went to the appellate courts on a trial court decision on summary judgment, with the intermediate appellate court predictably holding that there was an issue of fact as to whether a "request for specific coverage" for the project had been made and whether a "special relationship" existed.
13 This case is particularly significant for the fact that New York's Court of Appeals went out of its way to hold that there were no issues of fact, contrary to the holding of the Appellate Division, and instead dismissed as a matter of law, signaling to all courts in the state that this type of claim need not necessarily be tried. That fact is particularly important to the defendant broker who wishes to avoid the risk of the tender mercy of a lay jury. The Court of Appeals makes it clear that a case such as this could, and should, be disposed of by the courts prior to trial.
In so doing, New York's highest Court specifically rejected both the "request for specific coverage" argument and the "special relationship" argument, signaling to all courts in the state that these theories of liability should be narrowly applied.
On the issue of whether there had been a request for specific coverage, the Court of Appeals held that the communications between Hoffend's principal and R&K's broker, showed no more than that there had been a general request for insurance coverage which was satisfied when the Travelers policy was obtained.
14 The Court characterized Hoffend's witness recollection of the events leading up to issuance of the Travelers policy as to vague to create an issue of fact, put great emphasis on the fact that R&K had notified Hoffend in writing when the Travelers policy incepted that coverage for foreign property was not included unless negotiated on a project-by-project basis, and found that the request that R&K make sure, "that we are covered," was merely a general request for coverage, which does not put the burden on the broker to obtain a specific type of coverage.
15 The Court's finding on the "special relationship" issue is even more remarkable. Notwithstanding the extensive review of Hoffend's business plan, operations and insurance by R&K's broker, the Court found that as a matter of law no special relationship existed. In so doing, the Court pointed to specific objective criteria, which are no doubt intended to serve as guide posts for future courts to determine when a special relationship exists. In particular, the Court stressed the fact that in Hoffend, "a sophisticated commercial entity, did not compensate R&K for its insurance advice apart from its payment of premiums, nor did it delegate its insurance decision-making responsibilities to R&K. In short, as any ordinary broker-client relationship, Hoffend told R&K in general what insurance Hoffend had decided to purchase. It did not ask R&K what that insurance should be."
16 This writer has already seen the benefits of the Hoffend decision by the Court of Appeals at the trial court level, having won summary judgment for an insurance broker against a claim that it failed to obtain specific coverage requested by its customer, with the trial court rejecting the customer's counsel's argument that there were issues of fact, citing Hoffend as specific authority to the contrary.
While it remains to be seen how extensively lower courts will rely on the Court of Appeals decision in Hoffend, in reversing the trend of uncovered customers seeking to make their insurance brokers the "insurer of last resort." It is my opinion that the pendulum of authority in New York is now in favor of the broker and that it will be increasingly difficult for insured's as to whom a carrier has disclaimed coverage, to put their broker in the shoes of the carrier.
Peter C. Contino is a Partner in the firm's Professional Liability Practice Group resident in the Uniondale office. As a trial attorney, Mr. Contino's practice includes the defense of professional liability, commercial liability, products liability, public entity liability and other insurance related litigation.
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