An insurance broker or agent can be liable to his insured client for failing to obtain the proper coverages and causing the insured client not to have insurance for his or her loss. A broker can liable for either negligence or breach of contract.
We have handled cases against insurance brokers. Mr. Seitelman started his legal career defending insurance brokers under their professional errors & omissions (“E & O”) insurance policies.
When building a case against an insurance broker, four issues must be considered.
Issue 1 – Was the Insured Covered?
As a first step, we must determine whether the client had a loss which is either not covered or which is inadequately covered.
Of course, if proper insurance were obtained, then there would be no claim against the broker. This is true even where the insurance company has wrongly denied the claim. The broker’s sole responsibility is to obtain proper insurance for the client.
The following are two classic examples of an insurance broker failing to obtain proper insurance coverage:
- The client tells the broker to get full coverage for the client’s home including flood coverage. The broker obtains a property policy, but he fails to obtain a separate flood policy through the National Flood Program. The broker mistakenly assumed that the regular fire policy covered flood. The client is two blocks from a river, and he has a flood loss when the river overflows. There is no insurance to cover the damage. Therefore, the client would have a claim against the broker.
- The client owns two homes, one in Brooklyn and one in New Jersey. Previously, he lived full-time in Brooklyn, but he now lives full-time in New Jersey and rents out the Brooklyn building. The broker fails to change the policy to reflect that the client is not residing at the Brooklyn home. When the client’s Brooklyn home has a serious fire and sustains substantial damage, the insurance company refuses to cover the loss because the policy requires residency within the Brooklyn home. The client has a valid claim to sue the broker.
When a broker fails to obtain adequate insurance, he stands in the shoes of the insurance company. The broker will have to make good the loss.
Issue 2 – What Insurance Did the Client Request and What Should Broker Have Recommended?
The law says that the broker is not the client’s risk manager. The broker is not a mind reader. Essentially, he has to act upon the information and orders given by the client.
- If the insured specifically requested flood insurance, but the broker failed to get it, then this is a clear act of negligence on the part of the broker.
- If the insured told the broker that the insured has an inventory of $1,000,000 to insure, but in reality the inventory is $2,000,000, the broker has no obligation to make his own independent physical inventory and audit. If the insured were to lose his entire inventory in a fire and if he were to claim that the broker was negligent in failing to get $2,000,000 coverage, this claim would fail.
- If the client ordered property and liability insurance for his business, there is no automatic assumption that he also might need business interruption. Of course, it is a good practice for the broker to raise the issue. However, if the insured does not communicate his need for business interruption insurance, there may be no grounds to claim for a loss.
Issue 3 – Is There a Special Relationship with the Broker?
Generally, the insurance broker will claim as his defense that he was a mere order taker. For example, the broker will claim that the insured simply requested $500,000 of fire insurance and that there was no discussion about acquiring flood insurance – even though the client’s home is in a well-known flood zone, such as Long Beach.
To overcome this defense, the client must show that a special relationship existed, such that the broker was more than a mere order taker. In this case, the broker’s expertise goes beyond a mere layperson’s knowledge, and the broker is really acting as the client’s “outsourced risk manager.” We need to demonstrate that the broker should have recommended to the insured what coverages were needed rather than simply acting as a passive order taker.
Here are some ways of demonstrating that a special relationship existed:
- The broker actively solicits a client’s business and is familiar with the client’s geographic area. For example, the broker’s office is in Brighton Beach, and he is actively soliciting homeowners’ policies from people in Brighton Beach, a flood zone. The broker knows that the client lives in a flood zone, and he should advise his clients to get flood insurance.
- The broker meets with the client extensively to get an idea of the client’s business operations and risks. If the client were a general contractor, the broker should be aware of the special risks and hazards involved in construction work as well as the contractual indemnification provisions in construction contracts.
Issue 4 – Possible Defenses
A client should be aware that the insurance broker has various defenses that he may attempt to use.
One defense is that the insured should have read the policy and have seen that the coverage was inadequate. Although this defense is not guaranteed to be successful, the jury may consider it reasonable. The insured will argue that he relied on the broker’s special expertise in obtaining the proper insurance and that the client did not need to read the policy. See American Building Supply v. Petrocelli Group, 19 NY3d 730 (2012).
Another common defense is that the broker did not have a special relationship with the insured, especially if the insured is an educated customer.
The insurance broker can be held liable for failing to obtain the proper insurance for his client. The insurance broker can be held responsible under either negligence or breach of contract.
The success of a case against an insurance broker depends upon the unique facts of the case which must be carefully reviewed with an attorney.
If you have a potential case against an insurance broker, please feel free to call us for a free consultation at 800-581-1434 or write to [email protected].
Prior results do not guarantee a similar outcome.