| April 2014, Special Issue |
Volume 26, Number 5 |
The Meaning and Impact of the Recent Court of Appeals' Voss Decision For many years, we have written and spoke during the seminars Keidel, Weldon & Cunningham, LLP presents for IIABNY members about a doctrine called “special relationship.” It’s an amorphous concept created by case law and used to hold a broker to a higher standard of care than merely procuring the coverage that was specifically requested. Brokers can be sued for “negligence” (a duty arising out of the law of Torts, non-contract law) based on the failure to exercise the care that a reasonably prudent broker would exercise in similar circumstances. Brokers can also be sued for “breach of contract,” (the failure to perform that which one agreed). In this issue of The E&O Report, we look at the facts in the Voss case recently decided by the New York Court of Appeals. And, we’ll deal with the issue of a broker having a special relationship with a customer.
There is no separate claim or cause of action for breach of the “special relationship.” The cases that address this issue merely recite facts where a broker, by an action or course of conduct, assumed a higher duty that must be properly discharged. Thus, I would suggest that there is no such thing in a legal or practical sense as a “special relationship” that can exist outside of an existing tort duty. But, like it or not, when the highest court in the State of New York upholds the doctrine, it must be taken seriously and treated accordingly. We must further ask ourselves what is really going on with several recent New York court decisions relating to the duty of a broker to its client and their impact on both the special relationship and “duty to read” doctrines. That brings us to the Voss case.
On Feb. 25, the New York Court of Appeals issued its decision in Voss, a case alleging a failure to procure proper coverage limits. The action against the broker arose out of a property damage loss and the consequent business interruption sustained by plaintiff-insureds as a result of water damage to a commercial building that occurred following three separate roof breaches. The primary question before the court was whether a special relationship existed between the insureds and their insurance broker requiring that the broker suggest and advise the customer as to the availability of higher business interruption limits. The appeal was based on a motion for summary judgment by the broker to dismiss the case based on the lack of a special relationship as a matter of law: i.e., no duty to recommend higher coverage limits. The court held that: “Under the circumstances of this case, we conclude that the broker failed to meet its burden justifying summary judgment and dismissal of the complaint is not warranted.” Thus, the determination of the existence or not of a special relationship will be for the jury to ultimately decide. The court also negated the duty to read defense even though the insured had possession of the policy and was therefore aware of the limits of coverage.
As with any procurement, the broker and plaintiff Deborah Voss discussed her insurance needs: property, professional liability and business interruption. The broker asked Voss her sales figures, etc. to enable him to calculate an appropriate amount of business interruption coverage. (This alone, like when a broker uses a replacement cost estimator to determine replacement costs for homeowners insurance, could support the assumption of a tort duty to correctly calculate the amount of business interruption coverage.) According to Voss, the broker also agreed to reassess her coverage needs as her businesses grew, which they did. Voss alleged that the broker assured her the insurance in place would be sufficient but that each year he “would take it up as the business evolved.” Voss accepted the broker’s recommendations and the Netherlands Insurance Co. policy was issued. Two years after the initial placement, Voss purchased a new building, moved and opened a new business, a cafe. After she discussed the move and the new business with the broker, he renewed the Netherlands policy with the same business interruption limits. The first loss, which occurred in March 2007, resulted from leaks in the roof. The damage disrupted her business and required the roof to be replaced. The new roof failed in the following month, resulting in more extensive water damage. All her businesses were closed for various periods of time.
In 2007, a renewal quote was obtained reducing business interruption coverage. The proposal was accepted and a policy issued. As to the reduction, the broker stated that he “would take a look at it.” Voss did not follow up and when the Netherlands policy was renewed with the significantly lower business interruption coverage, she said nothing.
In February 2008, the roof failed a third time, causing damage and business interruption. In May 2008, while the insurance claims stemming from the third loss were still pending, plaintiffs commenced action against the broker, Netherlands and the roofing contractor. The plaintiffs alleged that a special relationship existed with the broker who negligently secured inadequate levels of business interruption insurance for all three losses. The broker asserted that no special relationship was created and, in the absence of a specific request by the insureds for coverage that went unfulfilled, it could not be held liable for failing to recommend or obtain higher limits. Second, the broker argued that the negligence claim failed based on Voss's admission that she received the policies and was fully aware of the policy limit that applied to the first two losses and the lower policy limit in effect at the time of the third loss.
Rather than simply find that the broker assumed tort duty to calculate the correct amount of business interruption coverage, the court phrased the issue as the existence or not of a “Special Relationship.” The court stated that “…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.” Under these circumstances, we conclude that the complaint cannot be dismissed on the basis that no special relationship arose between the parties. In doing so, we reiterate that special relationships in the insurance brokerage context are the exception, not the norm, and we emphasize that it remains to be determined whether a special relationship existed here. To prevail on their claim, plaintiffs bear the ultimate burden of proving that a special relationship did in fact arise and that they relied on [the brokers’] expertise in calculating the proper level of business interruption coverage during the relevant time frames.” As to the duty to read defense asserted by the broker, the court held that the plaintiffs’ awareness of the business interruption limits “does not defeat her cause of action as a matter of law”. Worse still, the court said that “…it is wholly irrelevant whether plaintiffs were aware of the limits that were actually procured.”
If the court could rule as it did anyway, why should there be a concern as to how the theory of liability is labeled tort or special relationship? The answer is that each finding based on special relationship” moves us ever closer to the possibility that the court may find that the broker has a “fiduciary relationship” to its insured. It would be a big change in New York law, imposing on brokers’ duties and obligations which they did not intend by word or act to assume. When a term, any term, is elastic and devoid of any legitimate application, the danger is that it can be used to reach a desired result: to back into a decision so to speak. Voss is but another New York case adding to the expanding liability being imposed by case law on brokers. One can see that slippery slope by the court’s use of the term “expert” when applied to the broker in Voss and the advice he gave. The use of the term “expert” seems at odds with the 2001 decision by this same court in the Chase Scientific Research case, where the court went to great lengths in its discussion of the issue of how a broker is not a “professional” like a doctor, lawyer or accountant under New York law.
Consider another example of changes in New York law applicable to brokers and the duty to read defense. Prior to the Court of Appeals’ Decision in the American Building Supply case in 2012, New York courts held that it was an absolute bar to a failure to procure case where the insured had possession of the policy and was able to see that the coverage it thought it was getting had not been procured. In American Bldg. Supply, the Court of Appeals held that the duty to read defense was an absolute bar no more; that it was now an element of comparative negligence, a counterbalance to whatever damages may be found against the broker. Yet, a mere year or so later, the same court in Voss held that “…it is wholly irrelevant whether plaintiffs were aware of the limits that were actually procured.” This seems to be inconsistent as to what the court previously held.
When a broker assumes an obligation or acts in some manner, it must do so within the standard of what a reasonable broker would have done. No one would argue otherwise. But liability for failing to act in accordance with that standard lies in the simple concept of negligence. Applying the label of a special relationship between a broker and customer creates an exponentially greater chance of errors and omissions exposure for the broker. For now, understand that if you agree to act, do so properly. If you do not want to assume certain duties and obligation, then either do not take them on or make it clear to the insured that you are relying on them for the facts specific to the risk for which they want insurance. The prudent insurance agent or broker that acts in this manner will help itself avoid the possibility of creating a special relationship with its customer.
Voss v Netherlands Ins. Co., 2014 WL 696528 (2014) Chase Scientific Research, Inc,, 96 N.Y.2d 20 (2001). American Building Supply Corp, 19 N.Y.3d 730 (2012).
Submitted by 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; Fair Lawn, New Jersey; Warwick, Rhode Island and Philadelphia, Pennsylvania. |
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