September 2020 |  Volume 34, Number 9

Recently we were pleased to report to a broker client that we were able to get the case against them dismissed right after the lawsuit was filed. The facts involved in that case are a great example of how counsel for policyholders attempt to pervert the New York Court of Appeals holding in Murphy v Kuhn[1] and try to establish the existence of a special relationship in an attempt to hold brokers and agents liable as “guarantors."  In this issue of The E&O Report, we will review the facts of this case and also when a special relationship may, or may not, arise.   

 In the above-mentioned case, the client of the brokerage was doing a build-out of a retail leasehold space in New York City. Its contractor caused lead paint dust to get into the air and contaminate adjacent buildings. This required millions of dollars in remediation costs. The insurance carrier denied coverage based on the Absolute Lead Paint exclusion contained in the policy. The policyholder was a corporation that had just been created for this business. This was the corporation's first and only dealing with the broker. While the broker advised the policyholder about additional insured coverage and related issues for inclusion in the construction agreement, the policyholder never asked, suggested, hinted, or even winked, about wanting lead paint liability coverage. In fact, the construction contract specifically excluded lead paint work from the scope of work. Despite these facts, that did not stop counsel from arguing that the broker had an affirmative duty to suggest getting lead paint liability coverage. 

We argued that, (like many policyholders suing brokers and agents), what they really want is to avoid getting more expensive coverage from the start and then simply use the broker as a guarantor claiming that whatever loss is excluded is the exact coverage that should have been recommended by the broker. In support of this, we argued to the court that if the uninsured loss was caused by a meteor from the planet Krypton hitting the premises, the lawsuit would be about the broker failing to get Krypton Meteor coverage with the policyholder never mentioning lead paint coverage.

Our adversary, again like others, tried to argue that their position was supported by the New York Court of Appeals case Voss v. Netherlands Ins. Co.[2], in which the court found a question of fact as to the existence, or not, of a Special Relationship. It is not usually a good thing for an agent or broker when a court finds that a special relationship may exist. But the Voss decision was actually a good one for brokers, knee jerk reaction notwithstanding. The judge handling the case discussed above, properly rejected counsel's interpretation of the Voss decision and how a special relationship may be found to exist. Accordingly, we believe that it is important for agents and brokers to understand Voss and its implications in this context.

 The Voss case involved allegations that the broker did not obtain enough business interruption limits applicable to a water damage claim. It was undisputed that the broker and Ms. Voss discussed her insurance needs, including business interruption coverage. It was admitted that the broker asked about her sales figures to enable them to calculate an appropriate amount of business interruption coverage. The broker also agreed to reassess her coverage needs as her businesses grew, which they did every year. Of course, it appears that there was a special relationship based on these facts. But, the key in this case was that it was (1) based on a wealth of facts and, more importantly, (2) the special relationship was “limited" to the specific kind of insurance at issue! That limitation is the key to Voss as a great defensive case for brokers and agents.

 When a special relationship is being alleged regarding a particular kind of insurance that was not procured, but allegedly should have been, the special relationship MUST be about that exact type of insurance! Simply, if a client is suing their broker for not getting lead paint liability coverage the facts supporting their special relationship argument all have to be about lead paint liability coverage. That the client may have facts supporting a special relationship as to asbestos coverage would be irrelevant. Thus, the Voss decision is a significant limitation on the duty a broker has and how a special relationship may, or may not, arise.

 Several important decisions out of the New York Federal Court system support this view of the Voss case. In Spinnato v. Unity of Omaha Life Ins. Co.,[3];  Holborn Corporation v. Sawgrass Mutual Insurance Company,[4] and Tracey Road Equipment, Inc. v. Ally Financial, Inc.,[5] each court held that unless the special relationship was about the exact coverage at issue in the failure to procure suit, that relationship is legally irrelevant. Two quotes stand out in these cases. In Holborn Corporation the court, citing Voss, noted that “special relationships in the insurance brokerage context are the exception, not the norm....". And in Tracey Road Equipment, Inc., the court nailed it when it said, on a failure to procure credit card fraud insurance…“Plaintiff's reliance on Voss is unavailing because Plaintiff does not allege ever discussing credit card fraud coverage with Defendant."

 In conclusion, we unabashedly admit that when a broker assumes an obligation or acts 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" is a canard meant to move us ever further to a day when a broker must act as a fiduciary to its insured and with that status an exponentially greater chance of E&O exposure. For now, it is important to understand that if you agree to act, do so properly. If you do not want to assume certain duties and obligations, then either do not take them on or make it clear to the client that you are relying on them for the facts specific to the risk for which they want insurance.       

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).