Insurance brokers often can get caught in between when the interests of policyholders and insurance companies diverge. In the obvious case of a claim denial, brokers should take care to protect themselves as well as their policyholder clients. But potential broker liability can arise much earlier in the insurance procurement or claims processes, and brokers must be aware of these potentially thorny issues.
This article highlights five common issues that insurance brokers should consider as they maneuver through the world of clients, claims, and coverage.
Avoid Application Angst and Policy Pitfalls
Insurance companies assert that material misrepresentations on an insurance application allow them to rescind the policy. As such, brokers must take great care to work with policyholders in ensuring accurate application submissions. A misrepresentation is considered material if it affects the insurance company’s decision to issue the policy, influences the premium rate, or impacts the assessment of risk. Materiality can be established by documentary evidence establishing that the policy would not have been issued if the correct information had been provided.
On the other hand, the answer to an ambiguous question on an insurance application cannot be the basis for a claim of misrepresentation. Ambiguous questions are those that lend themselves to more than one reasonable interpretation. Still, even innocent misrepresentations in certain situations may be sufficient to allow the insurance company to avoid its obligations under the policy, and omissions can count as material misrepresentations. Thus, it is essential for policyholders to be as clear as possible when answering application questions.
Ultimately, it is the responsibility of the broker to ensure accuracy and completeness of application materials, and actual knowledge that a statement is false is not a requirement. Therefore, brokers must consistently check in with policyholders to ensure that all information is up to date–especially for renewals–because even a minor change, if not updated, can open the door for the insurance company to attempt to void the policy. For long-term clients with annual renewals, brokers should be sure to remind their clients that renewing for a new year means updating all appropriate information so that the new policy reflects any changes and the proper coverage is secured.
Know When You Have Established a ‘Special Relationship’
Brokers owe their policyholders a duty of care that includes obtaining requested coverage for clients within a reasonable time, securing a policy that is not void or materially deficient, and informing clients if coverage cannot be acquired. Brokers are expected to possess reasonable knowledge regarding types of policies, policy terms and conditions, and the coverage available in all relevant locales. Brokers must exercise the requisite, industry-standard skill and diligence when fulfilling those obligations. Otherwise, liability can arise.
A “special relationship” between the broker and policyholder can arise when the broker agrees, whether explicitly or implicitly, to go beyond these general duties and accept greater responsibilities. For instance, in New Jersey, courts have held that a special relationship between broker and policyholder can arise when the broker contracts to assume additional duties or there is some custom or course of dealing between broker and policyholder that goes beyond the ordinary relationship. In New York, the Court of Appeals has recognized three situations that may give rise to a special relationship: (1) where the broker receives compensation for consultation apart from payment of premiums; (2) where there was some interaction regarding a coverage question, and the policyholder relied on the expertise of the broker; and (3) where there is a course of dealing over an extended period that should have alerted the broker that their advice was being sought and relied upon for a specialized purpose.
The key considerations for a broker’s special relationship are “advice” and “expertise.” If a broker steps into an advisor role or the client relies on the broker’s specific expertise, these are factors potentially indicating a “special relationship.” One option worth considering is whether to enter into a written agreement with the client that addresses the scope of services provided as well as compensation. This written agreement should indicate if the broker will be expected to provide advice and expertise to assist the client in their selection of insurance or handling of claims.
‘A ‘special relationship’ between the broker and policyholder can arise when the broker agrees, whether explicitly or implicitly, to go beyond these general duties and accept greater responsibilities.’
Once the special relationship between broker and policyholder exists, the broker may be subject to liability for failing to advise the client, even in the absence of a specific request to do so. This is a high standard to meet, and New York courts have stated that special relationships in this context are the exception, not the norm. Still, it is always best for brokers and policyholders to set expectations for the relationship with clarity when it comes to the responsibilities of the parties.
When Giving Notice, It Is Better to Go Broad
There is often a push and pull between brokers and policyholders surrounding notice of claims because policyholders fear an increase in claims will lead to a corresponding increase in premiums, which can be true. Yet, more often than not, it is better for brokers to recommend giving notice early and under all potentially responsive policies. The flip side to potentially increased premiums could be no coverage for a costly claim based on a late notice defense that easily could have been avoided.
Courts typically interpret insurance policy notice provisions to mean that notice must be given within a reasonable time based on the facts and circumstances of the case. Failure to comply with a notice requirement can result in forfeiture of an otherwise meritorious claim for coverage. For example, in New York, notice of an occurrence given more than two years after practical to do so excuses the insurance company’s duty to defend unless the policyholder can show that the delay was reasonable or did not prejudice the insurance company. This is why it is essential to understand notice provisions and give notice as broadly as practicable. While every situation is subject to its unique facts, the most protective option for brokers is to recommend broad and early notice of any circumstances likely to result in a claim.
Protecting Privilege Is Paramount
Brokers must exercise caution when engaging with defense counsel in an underlying case involving their policyholders, as privilege issues may apply, and the insurance company may seek access to communications between brokers, clients, and defense counsel. The attorney-client privilege applies when a communication from an attorney to the client is for the purpose of facilitating legal advice in the course of a professional relationship. Additionally, the communication itself must be of a legal nature. Generally, disclosing a communication to a third party waives the attorney-client privilege. However, the privilege is not waived if the third party is acting as an agent of the attorney or the client. This is true in New York and in other jurisdictions and can apply to brokers where they are consulting directly on legal matters.
Whether a third party is an agent for the purpose of not waiving the privilege depends on what the client believes regarding the communications. If the client had a reasonable expectation of confidentiality under the circumstances, the third party is likely to be considered an agent under the circumstances.
One New York case, TC Ravenswood, LLC v. National Union Fire Insurance Company, 2013 WL 3199817 (N.Y. Sup. Ct. 2013), is illustrative on this point: where the broker specifically was hired by the policyholder and its counsel to explain the complex insurance policies at issue, the attorney-client privilege was not waived because the policyholder had a reasonable expectation of privacy. (Disclosure: the authors’ law firm, Anderson Kill P.C., represented the policyholder in this case.) Thus, when a broker’s activity is directly tied to a litigated claim, it is more likely that privilege will be maintained.
Correctly Contacting Coverage Counsel
It is never too early for brokers to recommend that their clients reach out to an attorney who specializes in insurance recovery if an insurance company is not engaging fairly or will not engage with the policyholder’s claim. Situations where it is beneficial to speak with an experienced insurance coverage attorney include, but are not limited to:
An insurance company denying a claim
An insurance company threatening to terminate or deny coverage
An insurance company offering less money than the claim is worth
An insurance company being unresponsive to a claim
An insurance company neglecting to resolve a claim while the statute of limitations is approaching
Malone is a shareholder in Anderson Kill’s New York and Stamford offices. Cort focuses his practice on insurance coverage litigation and dispute resolution, with an emphasis on commercial general liability insurance, cyber insurance, employment practices liability insurance, advertising injury insurance, directors and officers insurance, and property insurance issues.
Gatti is an attorney in Anderson Kill’s New York office. Kathleen focuses her practice on insurance recovery and complex financial litigation. She is also a member of the firm’s Restaurant, Retail and Hospitality and Sports, Media and Entertainment industry groups.
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