According to people on the internet with way too much time on their hands, some of the most frequently used categories in the history of the Jeopardy game show are "Before and After" "Science," and "Potpourri." The latter being my favorite, as you never knew what great piece of information will be the subject.
With that in mind, this edition of The E&O Report is a Potpourri regarding a few important points that we have seen in some E&O matters that we have recently handled. Each of these issues can help reduce E&O exposure for an agency or brokerage or, at the least, provide a strong foundation for its defense if, or when, it faces an E&O claim or lawsuit.
The Quote and Binder
Recently, we have seen several cases where a particular endorsement that was listed in the quote transmitted to the broker, becomes the subject of a denial of coverage, or some type of limitation on the claim. That, of course, triggered an E&O claim for its inclusion in the policy and the insured's claim that they were never advised of the endorsement being a part of their insurance policy. In each of the situations where this has been an issue, an E&O claim resulted because the broker failed to transmit the full quote to the insured just as the broker had received it.
In one case that we handled, the 2-page quote listed all of the forms and endorsements that would be included in the policy, including the one that became an issue in the E&O case. We understand that industry practice is to put that quote on your letterhead and transmit it to the insured, (as opposed to forwarding the quote that you received) and that is fine. But, if that is what is done, you must be sure to list every form and endorsement that is on the quote that you receive on what you then provide to the insured. Doing this triggers the duty to read[1] which applies to more than just the insurance policy that is ultimately issued; it applies to all insurance procurement documents.[2]
In one of our cases the insured received the insurance policy 3 months after the effective date and read it at that time. They saw the offending endorsement and complained to the agency about it, but by then it was too late. The policy was in effect with that endorsement which, happened to be applied to a claim that occurred in the second month the policy was in effect.
Following this approach is a simple, cost-efficient preventative measure to implement that will help provide E&O protection for the agency or brokerage. One final word of caution in this regard is to make sure that the quote you send to the insured, matches, identically, with what you received from the insurer, the MGA, or the wholesale broker.
Binders and the Ability of the Insurer to Change the Insurance Policy at Issuance
While we are on the subject of the pre-issuance part of the policy procurement there is another small, inexpensive task an agency or brokerage can do that can help prevent a potential E&O claim and, again, provide it with a defense if an E&O claim or lawsuit arises. That is to simply compare the policy to the application, quote and binder and make sure that there are no discrepancies that exist among the documents.
It is the conventional wisdom that whatever is on the binder controls. Thus, the thinking goes, if the forms and endorsements listed on the binder are correct, then there is no need to review the policy when it is received. The conclusion being that any offending form or endorsement can be removed. Unfortunately, that is wrong!
While we have been fighting this fight for decades, and while the law is 100% wrong, the current law is that the policy as issued is what controls. Accordingly, an insurer can issue an insurance policy that is different than what it quoted and bound and the insured is then stuck with it if the discrepancies are not caught and corrected at once. In 2000 the highest court in New York, the Court of Appeals stated the following regarding this issue:
“It has long been settled in this State that an insurance binder is a temporary or interim policy until a formal policy is issued. A binder provides interim insurance, usually effective as of the date of application, which terminates when a policy is either issued or refused. A “binder does not constitute part of an insurance policy, nor does it create any rights for the insured other than during its effective period."[3]
The fact that the insurance contract is merely the physical representation of the meeting-of-the-minds and not the other way around, seems to have escaped the New York Court of Appeals. But as the Golden Rule says... “He who has the gold, makes the rules." Thus, until this aspect of the law is changed, the best way of dealing with it is by making sure that the insurance policy as issued, does not vary from the information contained in the application, quote and binder.
Policy Delivery
Finally, one of the simplest things that an insurance agent or broker can do to defend against an E&O claim or lawsuit is to make certain that the insured receives their insurance policy. When it comes to policy delivery, the US mail is still better than email for policy delivery because the rules of evidence in New York provide that mail that is sent pursuant to a standard office practice or procedure is presumed to have been properly received by the recipient.[4] Unfortunately, email is not afforded the same legal presumption. This is due to the fact that emails are often lost in cyberspace or read receipts that are requested may be sent back falsely. Therefore, if you send insurance documents by email, the best practice is to request that the recipient affirmatively acknowledge receipt of the email and the attachment by responding to the email. Following these practices triggers the insured's duty to read, which is a defense that is often used in E&O lawsuits.
Regardless of what you might have read or heard about the lack of teeth in the application of the duty to read in New York, due to certain court decisions, it is still an important defense in many E&O matters. Here is the current state of the law.
For the past hundred years, New York courts have held that an insured is chargeable with knowledge of the provisions of the policy in its possession, and that in deciding the issues presented in litigation regarding the terms and conditions of the policy, it must be conclusively presumed that the insured received the kind of policy it desired, that it understood and assented to the terms and conditions of that policy based upon receipt of that policy.[5] At the time an insured receives an insurance policy, it becomes his/her duty to examine it or have it examined and read for him/her.[6] The duty to read defense even applies if the insured cannot read or write English.[7]
Many cases against New York insurance agents and brokers over the years have been dismissed where the agent or broker established that the insurance policy was delivered to the insured.[8] In 2012, the New York Court of Appeals stated in the American Building Supply case that in some situations an insured's failure to read an insurance policy they received may not always be an absolute bar to pursuing an E&O action against their insurance agent or broker; instead, it would be a defense of comparative negligence that may be considered in determining liability.[9] But, the limitations on the application of the duty to read defense stated in the American Building Supply case only applies to (1) a negligence cause of action, and (2) where the insured specifically requested the coverage at issue. Both elements must be present for a comparative negligence standard to apply to the duty to read. Otherwise, for a breach of contract claim or a negligence claim that is asserted against an insurance agent or broker without a specific request for coverage, the duty to read may still be an absolute bar to a claim against the agent or broker.
The prudent insurance agency or brokerage that follows the steps we have discussed above can help avoid an E&O claim or lawsuit from occurring in the first place, or be in the best position to defend itself, should a claim or lawsuit ultimately arise.
Submitted by:
Howard S. Kronberg, Esq.
Keidel, Weldon & Cunningham, LLP
[1] Metzger v. John Hancock Mutual Life Insurance Company, 254 N.Y. 33d (1938).
[2] See, Curanovic v. New York Central Mutual Fire Insurance Company, 307 A.D.2d 435 (3rd Dept. 2003).
[3] Springer v. Allstate Life Insurance Company of New York, 94 N.Y.2d 645 (2000).
[4] Nassau Insurance Company v. Murray, 46 NY2d 828 (1978).
[5] See, Danner v. Equitable Life Assurance Society.of the U.S., 156 A.D. 562 (1st Dept. 1913).
[6] Minsker v. John Hancock Mutual Life Insurance Company, 254 N.Y. 338 (1930).
[7] Curanovic v. New York Central Mutual Fire Insurance Company, 307 A.D.2d 435 (3rd Dept. 2003).
[8] See, Stone v. Rullo, 40 A.D.3d 1185 (3rd Dept. 2007); McGarr v. Guardian Life Insurance Company of America, 19 A.D.3d 254, 256 (1st Dept. 2005); Busker on Roof Ltd. Partnership Co. v. Warrington, 283 A.D.2d 376 (1st Dept. 2001).
[9] American Building Supply v. Petrocelli, 81 A.D.3d 531, 19 NY3d 733 (2012)