The New York Court of Appeals Holds that a Policyholder’s Receipt of Its Policy Gives Rise to a Comparative Negligence Defense
On November 19, 2012, the New York Court of Appeals issued a decision in the case of American Building Supply, Inc., which held that the policyholder’s receipt of its policy does not preclude a claim of fault against an insurance agent or broker. In this issue of The E & O Report, we will discuss the court’s decision and also how this case will arise in connection with the defense of New York E & O matters.
The Issue in the Case
Since 1920, New York Courts have held that in lawsuits involving insurance carriers, the policyholder is conclusively presumed to know the contents of its policy whether he or she reviews it or not. In claims involving insurance agents and brokers, New York Courts have been inconsistent in their application of this “receipt of policy defense.” For the most part, New York Courts have declined to apply the receipt of policy defense in agent/broker cases in the absence of other defenses available to the insurance agent or broker. For example, when a policyholder has made a general, non-specific request for coverage, such as a request for the “best” or “top of the line” coverage, along with the policyholder’s receipt of the policy, the Courts have dismissed the suit against the agent or broker. New York Courts, however, have not dismissed cases based upon the receipt of policy defense standing alone, such as when a policyholder makes a specific request but the agent or broker failed to procure the requested coverage.
In the American Building Supply case, the lower court judge from New York County denied the agency’s motion for summary judgment and found that there was an issue of fact as to whether a specific request was made for coverage that would include contractual liability coverage between a landlord and a tenant insured under the same general liability policy. The trial court relied upon a 2002 Appellate Division First Department case (Baseball Office v Marsh & McLennan) which holds that a policyholder’s receipt of the policy gives rise to the defense of comparative negligence but does not bar such a lawsuit. Under the comparative negligence theory, it is up to the trier of fact to determine the percentage of fault that should be allocated to both the policyholder and the broker.
The American Building Supply decision was appealed from the lower court to the Appellate Division First Department. In a decision issued in March 2011, the Appellate Division, First Department overturned the trial court and dismissed the lawsuit. The First Department held that while there may have been an issue of fact as to whether there was a specific request for the coverage “the presumption that a policyholder read and understood a policy of insurance duly issued to him or her precludes recovery.”
Earlier this year, the Court of Appeals, upon application by American Building Supply, elected to take this case and address the receipt of the policy defense. American Building Supply was the sole tenant in a building subleased from DRK, LLC who had leased the property from the New York City Industrial Development Agency. A policy had been procured with Burlington Insurance Company by a prior insurance broker covering both American Building Supply (ABS) and DRK. ABS and DRK then transferred coverage to a new insurance broker pursuant to a broker of record letter. The Burlington policy was then renewed for a second policy year. The Burlington policy included a cross-liability exclusion that excluded claims between the policyholders (ABS and DRK) and also excluded coverage for all claims asserted by an “employee of any insured.” In October 2005, one of the employees of ABS was injured when a ramp within the building collapsed causing a forklift to fall onto the employee’s leg. The employee then brought a lawsuit against DRK and ABS to recover for his injuries. The claim was submitted to Burlington who denied coverage for the claim based upon the cross-liability exclusion. ABS maintains that it specifically requested “general liability for the employees ... if anyone was to trip and fall and get injured in any way.” ABS further claims that the broker was aware that ABS was a wholesale operation and the only people present on the premises were the employees. ABS conceded that it received its policy but never read it.
The Court of Appeals, in conclusion, found that there were issues of fact as to whether or not ABS had made a specific coverage request and whether the broker failed to provide the coverage that had allegedly been requested. Further, the Court concluded that a policyholder’s receipt of its policy may give rise to the defense of comparative negligence but is not an absolute bar to recovery.
The Effect of the Decision on Murphy v. Kuhn
In addition to addressing the receipt of the policy defense, the Court of Appeals also once again reaffirmed the landmark decision in Murphy v Kuhn which held that while an insurance agent or broker has a duty to obtain requested coverage, the agent or broker has no continuing duty to advise, guide or direct a client, absent a specific relationship of trust and confidence.
The American Building Supply decision was issued with a four-to-two majority by the Court of Appeals. The dissent stated that “it seems to me elementary that before you can complain about the contents of any contract, you should at least have read it.” The dissent further argued that the limitations on the receipt of a policy defense had already been addressed by the Courts in situations where the broker had failed to comply with a specific request. The dissent indicated that they would have affirmed the Appellate Division, First Department’s dismissal of the action against the broker.
The Practical Impact of the Decision
Although the Court has now clarified that the receipt of the policy defense is subject to comparative negligence, trial courts in New York rarely, dismissed lawsuits against insurance brokers solely based upon receipt of the policy. Nonetheless, the Court’s decision makes it more important than ever for insurance brokers to keep clear and succinct documentation of their communications with their clients.
The best practice for agencies and brokerages to regularly follow is to confirm requests for coverage in writing, particularly when a customer has specifically stated that there is a type or level of coverage that he or she does not wish to purchase. Further, agencies and brokerages should also follow the best practice of obtaining and maintaining signed applications from all customers even when an application is not required or if the application was submitted electronically to the insurance company.
Finally, agencies and brokerages should also be sure that whenever insurance policies are delivered to insureds, a cover letter is included which specifically states that the customer should review their policy and then contact the agency or brokerage with any questions or changes concerning the coverages. If your agency or brokerage does receive an inquiry from a customer following the delivery of a policy, be sure to document the inquiry and the response by the agency or brokerage.
Although the ABS decision may not give rise to additional claims against agents and brokers, it may make it harder to defend the claims if the agent or broker does not maintain good documentation concerning their communication with their customers and the delivery of their policies. If an E & O claim or lawsuit is unfortunately made by a customer, the prudent insurance agency or brokerage that follows the several best practices that we have discussed above will have the documentation that is necessary to defend itself.
Submitted by:
Stephen C. Cunningham, Esq.
James C. Keidel, Esq.
Keidel, Weldon & Cunningham, LLP
Keidel, Weldon & Cunningham, LLP concentrates its practice in the defense of insurance agents and broker’s errors and omissions claims and litigation, errors and omissions loss control counsel and education, insurance coverage analysis and litigation and insurance regulatory matters. Please direct any comments or questions to James C. Keidel, Esq. by mail to the main office of Keidel, Weldon & Cunningham, LLP, at 925 Westchester Avenue, Suite 400, White Plains, NY 10604, telephone at (914) 948-7000 or e-mail at jkeidel@kwcllp.com. The law firm also maintains offices in Syracuse, New York; New York City, New York; Wilton, Connecticut; Bayonne, New Jersey; Warwick, Rhode Island and Philadelphia, Pennsylvania.