Actions by Insureds Against Brokers: 'Special Relationships'

Under New York law, insurance brokers have a common-law duty to obtain coverage that their clients request within a reasonable time, or inform their clients that they are unable to do so. However, brokers do not have a continuing duty to advise, guide or direct their clients to obtain additional coverage. This means that in the typical case, an insured may have a claim against its broker for negligence if the insured specifically instructs the broker to obtain, for example, $1 million in coverage for fire, and the broker fails to do so.

But it is highly questionable whether an insured would have a claim in the absence of a specific request ' even if the insured had been working with the same broker for decades and even if the broker (according to the insured) should have known that $100,000 in fire coverage was clearly inadequate.

In the 1997 case, Murphy v. Kuhn, 90 N.Y.2d 266 (N.Y. 1997, the idea that in limited circumstances, brokers could assume certain legal duties beyond those existing at common law was first enunciated by the New York Court of Appeals. The case arose out of an automobile accident for which there was insufficient coverage. Bringing suit against his insurance agent, the plaintiff argued that although he had never specifically requested the defendants to increase liability limits on the policy at issue, the agent had entered into a special relationship of trust and confidence with the client following a long and continued course of business, which generated a special reliance by the insured and a general duty to advise on the part of the agent.

The court held that even assuming a special relationship was a cognizable concept, the relationship between the agent and client at issue was insufficient to warrant survival of the agent's motion for summary judgment. However, the court went on to note that “[e]xceptional and particularized situations may arise in which insurance agents, through their conduct or by express or implied contract with customers and clients, may assume or acquire duties in addition to those fixed at common law.”

It held that “whether such additional responsibilities should be recognized and given legal effect is governed by the particular relationship on a case-by-case basis.” Hence, a special relationship may exist in exceptional circumstances, but the agent-client relationship in Murphy was not exceptional such that agent duties would extend beyond the common law.

'Voss'

The Court of Appeals returned to “special relationships” approximately 17 years later in Voss. Like Murphy, the case involved a lawsuit by an insured against an agent after it was revealed that there was insufficient coverage following submission of a claim; summary judgment had been granted to the agent by the lower court. In Voss, the defendant broker had obtained insurance for the plaintiff insured in 2004 that provided for $75,000 in business interruption coverage. The plaintiff questioned whether this amount was sufficient, and allegedly was told by the broker that it was, and that the broker would review the coverage annually.

In 2006, the plaintiff obtained a larger property, discussed this with the broker, and the broker renewed the policy with the same $75,000 limit. In 2007, the new building sustained a roof leak, followed by a partial collapse of the roof, for which the plaintiff received approximately $33,000 in insurance proceeds. After the partial collapse, a proposed renewal of the insurance reduced the coverage limit to $30,000; the plaintiff questioned this once ' with her broker promising to look into it ' but never followed up. In 2008, there was another partial roof collapse for which there was inadequate coverage.

The Voss court referenced its own prior holding in Murphy, in which it had referred to three situations where a special relationship was found to exist in other jurisdictions. In Voss , the court now made it clear that these three situations were potentially applicable in New York: 1) Where the agent receives compensation for consultation apart from payment of the premiums; 2) Where there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent; or 3) Where there is a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied upon.

The court held that the defendant failed to satisfy its burden of showing the absence of a material issue of fact as to the existence of a special relationship. Instead, the court concluded that the evidence revealed “some interaction regarding a question of [business interruption] coverage, with the insured relying on the expertise of the agent.” In other words, the Voss court was describing the second of the situations first described in Murphy . The court noted the fact that the plaintiff had discussed business interruption coverage from the inception of their relationship, that the broker's initial proposal of $75,000 in coverage was initially questioned but the broker assured the plaintiff it was adequate, and that the broker had repeatedly pledged to review plaintiff's coverage needs annually.

Cases Since Voss

In the two years since the Voss decision, a number of reported cases have considered the “special relationship” issue in the context of an insured's suit against its broker. While there has not been a dramatic embrace of the “special relationship” between a broker and client, there is a sense that the possibility of a special relationship is something a New York court will consider.

In Kritzer v. Ventura Ins. Brokerage,'2015 WL 8073858 (Sup. Ct. N.Y. Cty. March 4, 2015), the Supreme Court, New York County, denied a broker's motion to dismiss a negligence claim brought by an insured after the broker allegedly failed to obtain sufficient coverage for the insured's six-carat diamond ring. There, plaintiffs alleged that their broker had assured them that their policy included “blanket coverage” of up to $150,000 for jewelry. However, after the ring was lost, it was revealed that the plaintiffs' policy provided coverage of only $50,000 for any item not scheduled.

In denying the motion to dismiss, the court noted that the complaint alleged that: 1) the defendant knew of the plaintiffs' particular concern regarding coverage for the ring; 2) the defendant assured them of coverage up to $150,000 even if an item was not specifically scheduled; and 3) the defendant knew that the diamond ring was valued at over $50,000. Accordingly, the court determined that even absent a specific request, the allegations suggest a reliance on the defendant's expertise, which “may create a special relationship between plaintiffs and defendant, imposing on it an enhanced duty to advise plaintiffs adequately regarding coverage to meet their needs.”

In another case addressing a motion to dismiss, a New York federal court came out the other way, granting a motion to dismiss by a broker, holding that the plaintiff insured failed to make any allegations warranting a finding of a special relationship. In Long Beach Road Holdings v. Foremost Ins., 75 F.Supp.3d 575, 588-591 (E.D.N.Y. 2015), the insurer issued a standard flood insurance policy, along with declarations, to the plaintiff in the amount of $450,000 immediately before Hurricane Sandy, but because the plaintiff's mortgage transaction on the property was delayed until shortly after the hurricane, the policy declarations were amended such that coverage began following the hurricane.

After the hurricane damaged the plaintiff's property, the plaintiff brought suit, claiming that its broker was negligent because, among other things, it did not advise the insured that the start-date of the policy in the certificate of insurance was incorrect. In granting the broker's motion to dismiss, the court contrasted the case with Voss , holding that there were no allegations in the complaint warranting a finding of anything other than a standard consumer-agent insurance relationship.

In Kaufman v. BWD Group, 127 A.D.3d 433 (1st Dept. 2015), the Appellate Division, First Department, upheld summary judgment in favor of a broker following a fire and the insured's discovery of inadequate coverage for her personal property. The court reasoned that ' despite the fact that the broker had purchased insurance for the insured for 20 years ' there was no material issue of fact as to the existence of a “special relationship,” because the evidence showed that the insured herself chose the coverage and did not rely on the broker for advice as to the appropriate amount.

Just a few months ago, the Appellate Division, Third Department, in Finch v. Steve Cardell Agency, 2016 WL 634597 (3d Dept. Feb. 18, 2016), determined that the defendant broker was not entitled to summary judgment where an error led it to place a policy for a rodeo that excluded from coverage injuries or damage caused by animals.

The broker had been placing insurance for the plaintiff for approximately six years when it placed a policy for a rodeo event during which bulls escaped from a holding pen and injured bystanders. The court relied upon the third situation described in Voss ' 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 ' to hold that there were triable issues of fact as to whether the parties had a special relationship. In support of its holding, the court pointed to: 1) the parties' six-year relationship; 2) the plaintiff's testimony that he knew little about insurance, relied upon defendant to obtain appropriate coverage, and had never seen any of the rodeo policies that defendant procured for him; and 3) the defendant's testimony that the animal exclusion in the policy was overlooked in error.

Conclusion

Following the court of appeals' decision in Voss , a “special relationship” between an insured and a broker can provide a basis for an insured to pursue a tort claim against a broker outside of the situation where an insured specifically requests coverage that the broker fails to procure. But this remains the exception rather than the rule.

Lisa Bentley is a founding partner at Aguilar Bentley. This article originally appeared in print as Actions by Insureds Against Brokers: 'Special Relationships' Since ' Voss,' and also appeared in The New York Law Journal, an ALM sibling publication of this newsletter.