The New York Court of Appeals recently found that the insured’s failure to read the insurance policy does not bar claims for broker negligence in failing to procure requested insurance.
Almost one hundred years ago the New York Court of Appeals held that when an insured receives an insurance contract, he or she has a duty to read and examine its contents. See, Metzger v. Aetna Ins. Co., 227 N.Y. 411, 416 (1920).
The Court held that when he or she signed or accepted the contract the insured was “conclusively presumed” to know the contents of the insurance contract and assented to it. Indeed, many states have upheld a general duty of the insured to read the insurance policy. See, Steven Plitt & Jordan R. Plitt, Practical Tools For Handling Insurance Cases, § 2:28 (Thomson Reuters 2012 Supp. p. 43).
A few courts had held that the insured’s reasonable reliance upon an agent’s representations could override the insured’s duty to read the policy; in general, this exception negated the insured’s duty to read part of the policy if an agent insisted that a particular hazard would be covered. See, e.g., Filip v. Block, 879 N.E.2d 1076 (Ind. 2008).
The Metzger decision did not resolve the question of whether the presumption applied to protect an insurance broker that had allegedly failed to obtain requested coverage. The Intermediate Appellate Divisions of the New York Court had reached differing conclusions on the issue.
Some of the Intermediate Appellate Divisions held that once the insured had received the policy the insured was presumed to have read and understood it and therefore could not rely on the broker’s word that the policy covered what was requested. See, e.g., Busker on The Roof Ltd. Partnership Co v. Warrington, 283 A.D.2d 376, 376-377, 725 N.Y.S.2d 45 (N.Y.A.D. 1st Dept. 2001); Rotanelli v. Madden, 172 A.D.2d 815, 817, 569 N.Y.S.2d 187 (N.Y.A.D. 2nd Dept. 1991); Madhvani v. Sheehan, 234 A.D.2d 652, 654-655, 650 N.Y.S.2d 490 (N.Y.A.D. 3rd Dept. 1996); and Chase’s Cigar Store, Inc. v. Stam Agency, Inc., 281 A.D.2d 911, 912, 722 N.Y.S.2d 320 (N.Y.A.D. 4th Dept. 2001).
Other New York Intermediate Appellate Divisions had been more forgiving, holding that receipt and presumed reading of the policy did not bar an action for negligence against the broker. See, e.g., Kyes v. Northbrook Property and Cas. Ins. Co., 278 A.D.2d 736, 737-738, 717 N.Y.S.2d 757 (N.Y.A.D. 3rd Dept. 2000); Reilly v. Progressive Ins. Co., 288 A.D.2d 365, 366, 733 N.Y.S.2d 220 (N.Y.A.D. 2nd Dept. 2001).
American Building Supply Corp v. Petrocelli Group Inc.
This split of authority between the Intermediate Appellate Divisions of the New York Court has now been resolved by the New York Court of Appeals in American Building Supply Corp v. Petrocelli Group, Inc., — N.E.2d –, 19 N.Y.3d 730, 2012 WL 5833969 (Nov. 19, 2012).
In American Building Supply, the Court of Appeals of New York held that while the better practice is for an insured to read its policy, an insured should nevertheless have a right to look to the expertise of its broker with respect to insurance matters.
The Court held that the insured’s failure to read the policy, in a failure-to-procure-insurance case, at most, may give rise to a defense of comparative negligence but should not bar, altogether, an action brought against the broker.
Under this holding, insureds can evade a conclusive presumption and can bring a failure-to-procure case against a broker months and possibly years after the policy was actually procured. An inevitable “he said-she said” battle will occur months and possibly years after the policy was procured.
What Brokers Should Do to Minimize Exposure in N.Y.
In order to minimize exposure in New York, insurance agents and brokers should get a commitment from insureds that they will read their insurance policy upon receipt to make sure that all of the coverages that were requested by the insured are reflected in the policy as issued.
This will help bolster a comparative negligence defense. Sending a follow-up letter to the insured within a month after receiving the policy requesting that the insured review the policy to make sure that it is compliant with the insured’s request for specific coverages will further reinforce the comparative negligence defense.
The follow-up letter containing a provision that says “I have reviewed the policy and it complies with my requests for coverage” with a signature line would be optimal.
The letter can be sent to the insured advising that the insured should acknowledge having read the policy to confirm coverages and that the letter, once signed, can be faxed back to the insurance agency as confirmation. Where the follow-up letter is not received within a reasonable time frame, a customer service representative can reach out to the insured on the issue.