We had a broker liability case not long ago involving a manufacturing facility on the banks of the Hudson River that got wiped out by Sandy. The client had no flood coverage. We argued that, under the particular circumstances of the case, the broker had an obligation to price the market for flood coverage, and to advise the client of available limits. The case eventually settled for a significant amount. (It helps to have a good testifying expert on your side. An “expert” is someone who wasn’t there, but for a price, will gladly tell you what happened. Kidding, kidding.)
Our adversary in that case (a friend) has been lamenting to us the fact that we settled before the recent unreported New Jersey Appellate Division decision in C.S. Osborne v. Charter Oak Fire Ins. Co., which you can read here. As described by our friends at the insurance defense firm White and Williams here, the C.S. Osborne Court held that “absent a special relationship, a carrier or its agents has no common law duty to advise an insured concerning the possible need for higher policy limits upon renewal of a policy.” Under the facts of C.S. Osborne, no such “special relationship” existed. (Chris Leise, a top-notch defense lawyer with whom I’ve spoken at insurance law seminars in the past, was lead counsel for the broker in C.S. Osborne. You can read Chris’s bio here.)
Of course, no one knows what in the hell a “special relationship” means, including the judges who say or write it. Candlelight dinners? Long walks along the beach while holding hands? Taking Zumba classes together?
Let’s briefly consider the facts in C.S. Osborne and try to figure out why no “special relationship” existed. C.S. Osborne is a company that makes hand tools. The company has its headquarters and a manufacturing facility in Harrison, New Jersey, on the banks of the mighty Passaic River. They also have a facility in St. Louis.
C.S. Osborne’s insurance broker, Bollinger, placed the company’s commercial insurance program. The policy generally excluded water loss, but included $1 million of flood coverage. Bollinger’s March 2012 renewal proposal specifically stated: “Higher limits or sub-limits may be available so please advise us if you are interested in higher limits options so that we may secure quotations for your consideration.” (I think the Court probably could have decided the case in the broker’s favor based on this statement alone, without an extended discussion of the law.)
Nobody called the broker to ask for an increase in limits, and, in October 2012, Sandy hit. There wasn’t enough flood insurance to cover the loss, and, this being America, C.S. Osborne sued the broker.
C.S. Osborne argued that the broker had a “special relationship” with C.S. Osborne, and therefore a higher level of duty, because it been handling C.S. Osborne’s account for 11 years. A broker representative had toured the Harrison facility at least twice, and there was correspondence indicating that the broker, after assessing C.S. Osborne’s risk profile, had recommended terrorism coverage and products recall coverage, as well as other types of coverage, for the company.
Also, Bollinger’s account manager often socialized with C.S. Osborne’s President at monthly board meetings of the local cemetery. (I want to party with these guys!)
Not enough, said the Court. But, in so doing, the Court completely dodged the issue of what would constitute the requisite “special relationship” that would heighten the broker’s duty, stating only: “Bollinger never told plaintiff anything that would reasonably cause plaintiff to rely on his quotes as recommendations for the proper amount of insurance coverage,” and “[a]n insurance broker is not an insurance consultant; if plaintiff wanted an insurance consultant, it could have retained one.”
That last statement, for which the Court cited no authority, is particularly puzzling. Most major brokerages tell clients that they’re in the risk management business, and help clients identify risks and place necessary coverage. Bollinger has recently been purchased by Arthur J. Gallagher Insurance Services, for example, and the AJG website reads in part: “Gallagher’s Casualty Practice team is focused on developing and delivering the unique professional and general liability solutions you need, including primary and excess insurance coverage, to help you grow your business. It is a comprehensive evaluation of your risk exposure and a snapshot of your total cost of risk. Most brokers consider liability coverage to be part of a standard package. Gallagher’s team of professionals understands that your situation demands a tailored solution to handle any unique needs.” (Emphasis added.)
Where does this leave us in terms of figuring out the standard of conduct that brokers must meet? Nowhere, really. If you’re on the brokerage side, though, you’d probably be better off having the client check a box stating that the client has reviewed the limits, and considers them adequate. (If you’re a broker, you should also be doing this for high-exposure risks, like flood and cyber-liability.) If you’re on the policyholder side, it’s very important to understand what your broker will and will not do, and to review your contractual relationship with the broker to make sure that you’re entirely comfortable with it. If you’re relying on the broker to be your outside risk manager (as many small and middle market companies do), the agreement should spell that out, so that if limits are inadequate or other problems occur, you may have recourse.
But really, the law aside, you know your business best, and should always take a proactive role in reviewing the basics of your insurance coverage program to make sure whether the coverage makes sense for you.