In a very close (4-3) decision, New York’s highest court recently reversed summary judgment in a property damage and business interruption case, finding that a broker could be liable because of a potential “special relationship” with the insured. Critically, the ruling attempts to chip away at the traditional liability shield provided to insurance brokers from negligence claims by the insured.
In reviving the insured’s lawsuit against the broker, the majority in Voss v. Netherlands Ins. Co. et al., 22 N.Y.3d 728 (2014) ruled that the lower court erred when it dismissed a business owner’s lawsuit against a brokerage services firm for negligently securing inadequate levels of business interruption insurance for losses sustained by the insured from repeated roof leakages in a commercial building.
Normally, the insured can only sue its insurance broker for negligence where the insured can demonstrate that the broker did not procure coverage that the insured specifically requested. However, an exception to the general rule exists where there exists a “special relationship” between broker and insured. A “special relationship” occurs when a broker is paid separately for consultation, when an insured relies on the broker’s expertise regarding the level of coverage, or a course of dealing over an extended period of time sufficient to put the broker on notice that the insured was seeking and relying on the broker’s advice. Under the special relationship exception, the broker can be held liable for not advising the insured to obtain additional coverage, even if the insured did not specifically request it.
In Voss, the insured claimed that she had a special relationship with the broker because she questioned the level of business interruption insurance the broker originally proposed, but ultimately purchased that level of coverage by relying on the broker’s expertise. According to the complaint, the broker informed Voss that it would re-evaluate her coverage needs as her businesses expanded, which the broker failed to do. The broker denied a special relationship existed and also argued that, even if there was such a relationship, the broker’s alleged breach of its duty was not the proximate cause of Voss’ damages. According to the broker, the damages occurred because the insurer did not promptly pay the policy limits.
At summary judgment, the broker had the burden to show the absence of a special relationship with the insured. In finding that the broker did not satisfy its burden, the majority explained, “The evidence suggests that ‘there was some interaction regarding a question of (business interruption coverage), with the insured relying on the expertise of the agent.” The court, however, softened its finding by acknowledging that “special relationships in the insurance brokerage context are the exception, not the norm…” In remitting the case for further proceedings, the majority concluded that “it remains to be determined whether a special relationship existed here.”
Criticizing the majority for taking an “unjustifiable step” in transforming a broker into a “backup insurer,” the dissent focused on the “sound policy reasons” for the ordinary rule that an insurance broker is under no duty to give its client advice regarding what insurance is appropriate. The dissent emphasized:
“Agents are not insurance companies and do not earn premium income… if lawsuits by clients against their agents are welcomed by the courts, the consequence may be to make the agent into a kind of backup insurer, a result neither sensible nor fair.”
We recommend that policyholders seek clarity in their contracts with brokers and obtain specific advice on coverage when appropriate. To avoid any dispute, the contract should direct the policyholder to look to the broker for advice. Brokers, on the other hand, must clarify their understanding of the relationship too and ensure the contract accurately spells out their responsibilities.