Court of Appeals Holds Insurance Broker Liable Due to “Special Relationship” with Insured

A New York Perspective

By: Alyson L. Knipe, Esq.

A recent decision by the New York Court of Appeals is likely to pave the way for increased litigation against insurance brokers.  Generally, insurance brokers and agents do not have a duty to give advice to clients regarding how much insurance coverage is appropriate.  However, when there is a “special relationship” between insurance brokers and clients, New York holds that brokers may be liable for failing to advise on additional coverage.

In Deborah Voss v. The Netherlands Insurance Company, (2014 NY Slip Op 01259), an insured sued her insurance broker for negligently failing to procure sufficient business interruption coverage when her business grew. The plaintiff operated a number of businesses, and in 2004 she sought insurance coverage relating to her businesses from CH Insurance Brokerage Services Company (“CH”).  The CH representative requested sales figures and other pertinent information in order to calculate the appropriate level of business interruption coverage.  Further, the broker represented that he would continue to reassess and revisit the coverage needs as the plaintiff’s business expanded.  CH recommended a policy with Netherlands Insurance Company that included a $75,000 per incident business interruption coverage.

Two years later, the plaintiff purchased a new premises and opened two additional business entities in the same building.  After discussing the new move and businesses with CH, Plaintiff renewed her policy with the same business interruption limit for the new location and additional entities.

In March 2007, plaintiff discovered a roof leak that disrupted operations. A roofing company was retained to replace the roof and a month later the new roof failed, requiring the business entities to again close for various periods of time.  In the meantime, plaintiff met with another representative from CH to discuss coverage. The CH broker proposed reducing the business interruption coverage to $30,000, and the plaintiff renewed the policy with the $30,000 coverage limit.

Almost a year later, the roof failed for a third time, resulting in substantial damage to the building and further disruption of her businesses.  Along with suing Netherlands and the her roofing contractor, plaintiff sued CH alleging that she had a special relationship with CH and that it negligently secured inadequate business interruption coverage.  CH moved for summary judgment arguing that no such special relationship existed and therefore, it was not liable for failing to obtain higher coverage limits.  The trial and Appellate Courts agreed and granted the summary judgment motion.

However, the New York Court of Appeals reversed, holding that there was a question of fact regarding whether a “special relationship” between the parties existed, as the evidence suggested the insured relied on the expertise of the broker.

The Court of Appeals identified three exceptional situations that give rise to a special relationship triggering an additional duty of advisement: (1) the agent receives compensation for consultation apart from payment of the premiums; (2) there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent; or (3) 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 specifically relied on by the insured.

Therefore, under the ordinary broker-client relationship, brokers have a common law duty to obtain the coverage their clients request within a reasonable time or to inform them of their inability to do so.  There is no continuing duty to advise, guide or direct a client to obtain additional coverage.  However, a client may prevail in a negligence action for failing to procure the requested coverage where a “special relationship” exists between itself and the broker.