New York’s highest court issued an interesting decision last week on the professional duties of insurance brokers.  This is a topic of renewed interest following Sandy, as I’m sure that more than a few policyholders will claim that their brokers provided them with insufficient coverage to weather the storm (pun intended).  I know, for example, that carriers are denying claims out on the Barrier Islands without even bothering to send out adjusters, so there are going to be a lot of unhappy policyholders around.

The policyholder in the New York case, American Building Supply, sells building materials to general contractors, and is the sole tenant in a subleased building which is used only by ABS employees and not open to the general public.  ABS claimed that, in discussions with its broker, it specifically requested general liability coverage for its employees in the event of injury.  Unfortunately, the policy involved in the case contained a cross-liability exclusion clause that provided in part:  “This insurance does not apply to any actual or alleged ‘bodily injury’…to…a present, former, future, or prospective partner, officer, director, stockholder, or employee of any insured.”  Neither the broker nor ABS actually read the policy when it was sold.  And you can guess what happened next:  an injured employee and a denial of liability coverage.

The broker (Petrocelli) attempted to defend the resulting malpractice suit by arguing that ABS was itself negligent, by failing to read and understand the policy it purchased.   The Court disagreed with that position, writing:  “The failure to read the policy, at most, may give rise to a defense of comparative negligence but should not bar, altogether, an action against a broker.” The Court also wrote:  “To set forth a case for negligence or breach of contract against a broker, a plaintiff must establish that a specific request was made to the broker for the coverage that was not provided.”  Here, issues of fact existed as to whether ABS had specifically requested coverage for its employees in the case of accidental injury, so the appeals court sent the case back to the trial court for resolution of that issue. 

In rendering its decision, the Court noted that Petrocelli’s position was illogical:  “Since no one but employees ever entered the premises, the coverage [Petrocelli] obtained, which excluded coverage for injuries to employees, hardly made sense.” 

You can read the full ABS case by clicking here.

The rule in New Jersey is slightly different.  The key New Jersey case is Aden v. Fortsh, 169 N.J. 64 (2001).   In Aden, the husband-and-wife policyholders bought a $48,000 condo and contended that they asked Fortsh, an insurance broker, to cover both the condo and $16,000 in contents.  Fortsh contended that he advised the Adens to consult the condo association policy to make sure that anything not covered by the policy he sold would be covered by the association’s policy.  As an aside, the first policy that Fortsh offered had a $120 annual premium, which the Adens rejected as too expensive.  Fortsh then got the Adens a policy with a $98 annual premium.  (Note to professionals:  when clients nickel-and-dime, there’s trouble just over the horizon.)  Fortsh completed the application for the policy and signed it with the Adens’ permission (a mistake in retrospect, since had the Adens signed it, the subsequent malpractice case would have been harder to sustain). Unfortunately, the policy had only $1000 in total coverage.

The Adens never read the policy.  A fire happened, and they had to pay $20,000 for repairs out of their own pocket.  Result:  malpractice suit.

The Court said that the Adens’ failure to read the policy didn’t matter:  “To hold that an insured must read the policy, and therefore is not entitled to rely on the broker’s expertise… would make the insured responsible for ‘self-inflicted harm,’ despite the broker’s express obligation to protect the insured from that harm…A broker is not an ‘order taker’ who is responsible only for completing forms and accepting commissions.”

The Court noted that its ruling would not preclude brokers from arguing that the policyholder’s failure to read the policy was the true cause of the harm.  But, the Court said, the broker’s lawyer had tried to do just that at trial, and the jury had rejected his efforts.  The Court wrote:  “Even had he read the policy, [Aden] would have been entitled to assume that the $1000 in dwelling coverage was sufficient coverage in light of Fortsh’s professional obligation to ensure that the condominium association’s policy and the policy he was procuring for Aden, in the aggregate, provided adequate coverage.”

You can read the full Aden decision by clicking here.

Here’s my take on all this.  Insurance policies are often a bewildering forest of arcane and discordant trees and weeds.  (From my perspective as a coverage lawyer, thank heaven for that!) Expecting policyholders to understand them when judges can’t agree on what they mean is usually downright nutty.  The best practice is for a broker to take the time at least to review the declarations page carefully, go over it with the client, and make sure everyone’s on the same page.