December 2020 |  Volume 37, Number 112

In The E&O Report over the years, we have written about positive trends in courts limiting the “Special Relationship" doctrine. Recall that the Special Relationship doctrine is the notion that an insurance agent or broker can be found to have taken on additional duties and responsibilities to its insured beyond the basic duty to procure the coverage requested or advise the insured that such coverage cannot be placed, as the Court of Appeals held in Murphy^[1]. Our critique of this ruling was that all the Court of Appeals ruled was that an insurance agent or broker is liable for what it agrees to do, by word, deed or contract and that there is nothing “Special" about it. Further, that these additional duties are properly categorized in the existing legal doctrines of contract and tort law. (Tort is the law of negligence.) We foresaw, and we have been proven right time and time again, that the amorphous “Special Relationship" notion would be used by Insureds and activist courts to hold insurance brokers and agents liable for things that they never agreed to be responsible for. In a word, to make agents or broker “guarantors" of coverage in violation of that very admonition by the court in Murphy. While an outright rejection of the doctrine is still a goal, there have been a number of court decisions that have correctly limited its application to a narrow and specific fact pattern. We write to advise you of a recent court decision on this issue that was issued by the New York Appellate Division First Department, whose jurisdiction covers Manhattan.

Just to recap, it has always been our position that accepting, for the sake of argument, that a Special Relationship is proper, it does not impose a duty on an insurance agent or broker that is all-encompassing but narrow, specific, and limited to prior dealings as to the exact type of coverage at issue. Thus, if you have a Special Relationship as to forwarding notice of an occurrence time after time for your insured over the years, that does not allow the insured to sue you for failing to suggest higher limits based on the special relationship doctrine.

In 2014 we saw the first recognition of this limitation. The Court of Appeals in Voss[2] found a “Special Relationship" in a case that was about the failure to procure business interruption coverage because there was a course of dealing/discussion about business interruption coverage!

Four years later, the Federal Court in Spinnato[3] confirmed that limitation, noting that the Voss court declined to grant summary judgment because the parties “discussed business interruption insurance from the inception of their business" and the broker obtained relevant business data to analyze and ease the plaintiff's concerns regarding the adequacy of the coverage.

Also, in 2018 another Federal Court[4], citing Voss first noted that “[S]pecial relationships in the insurance brokerage context are the exception, not the norm..." and then held in accordance with Voss that the complaint there was fatally defective for not alleging that there was a course of dealing as to the exact thing at issue in the litigation, which there was reinsurance.

Finally in 2018, another New York Federal Court[5] rejected finding a “Special Relationship" based on the limitation in Voss, and citing the Holborn case, because the insured did not have a prior course of dealing with discussions about the exact coverage at issue, which was Credit Card Fraud coverage.

On November 18, 2020, the Appellate Division First Department issued a decision in the Martin case[6] in which, among other issues and claims, a Special Relationship argument was made against the broker in the context of a Motion to Dismiss. The broker was sued for not timely forwarding notice of a claim to all, primary and excess, liability insurers which resulted in a late notice denial of coverage. The causes of action were (1) breach of contract, (2) breach of fiduciary duty, and (3) negligence. The lower court dismissed all the claims.

On appeal, the First Department found (1) that the lower court properly dismissed the breach of contract claim due to plaintiff's failure to allege the presence of an express or implied contract. The insured admitted that there was no written contract between itself and the broker and did not specifically allege that the parties were operating under an oral or implied arrangement. While plaintiff alleged that the broker had served as its insurance broker for approximately 12 years, and that it had exclusively undertaken to provide notice to plaintiff's insurers of all claims, the allegations failed to set forth the specific terms of any such agreement or how it was breached. The presence of a contract will only be found where the material terms are reasonably certain, which is not the case here.

As to (2), the breach of fiduciary duty claim, the First Department also found that it was properly dismissed. While the insured did not oppose dismissal of the breach of fiduciary duty claim in opposition to the broker's motion to dismiss, (and thus had abandoned this claim), it did not matter as plaintiff failed to allege the presence of a fiduciary relationship between itself and the broker.

However, as to (3) the negligence claim the First Department reversed the decision of the lower court because the “Special Relationship" was about the exact thing at issue in the lawsuit. The court said, “Thus, we have held that a duty was imposed on a broker to notify the appropriate primary and excess carriers of a potential claim where there was evidence that as a matter of routine [the insured] referred all questions regarding its insurance claims to [the broker] and [the broker] handled all [the insured]'s insurance needs, including referring its claims to insurers." So, because in the Martin case the broker had notified all of the customer's insurance carriers in the past when a liability claim occurred, it created a “Special Relationship" this time.

In conclusion, the prudent insurance agent or broker should always be aware of its conduct and course of dealing with customers, since that is where potential E&O claims based on a special relationship will arise.

Submitted by:

Howard S. Kronberg, Esq
Keidel, Weldon & Cunningham, LLP

[1]              Murphy v. Kuhn 90 N.Y.2d 266 (1997)

[2]              Voss v. Netherlands Ins. Co., 22 N.Y.3d 728 (2014)

[3]              Spinnato v. Unity of Omaha Life Ins. Co., 322 F.Supp.3d 377 (E.D.N.Y., 2018)

[4]              Holborn Corporation v. Sawgrass Mutual Insurance Company, 304 F.Supp.3d 392 (S.D.N.Y 2018)

[5]              Tracey Road Equipment, Inc. v. Ally Financial, Inc., 2018 WL 1578160 (N.D.N.Y. 2018)

[6]              Martin Assoc., Inc. v Illinois Natl. Ins. Co., 2020 N.Y. App. Div. LEXIS 7049 (1^st Dept., 2020)