Department of Amplification

– Notice to Broker is Not Notice to Insurer

– Late Notice Update

– A Broker’s Duties to the Insured

– Improving Crime Protection for Employee Benefit Plans

Let’s look at some recent developments in areas we’ve looked at before.

 Notice to Broker is Not Notice to Insurer

This combines three topics that we’ve looked at in the past few months:

• NY Labor Law Section 240,

• Late notice, and

• Broker’s errors and omissions.

In March 2007, Joseph P. Stoeckeler hired a contractor to replace the garage doors for a tenant’s auto repair shop in the building Stoeckeler owned. Kenneth Rosier, an employee of the contractor, was working about three feet above the garage floor on a five or six-foot ladder disassembling a door when he fell into the garage pit and was injured. Two or three months later, Stoeckeler heard about the accident from his tenant.

This case has Section 240 written all over it—an employee repairing a building falls from a ladder and is injured. Sure enough, in November 2008 Stoeckeler receives a letter from Rosier’s attorney asserting a Section 240 claim against Stoeckeler as the building owner. At that point Stoeckeler notifies his broker, C.S. Benson & Sons, Inc. (Benson)

To continue this comedy of errors, Benson, doesn’t forward the report to the insurance company. In February 2009, Stoeckeler is served with a summons and complaint that he promptly delivers to Benson. However, Benson (you can’t make this stuff up) misplaces the documents and doesn’t send them to American Western Home Insurance until June 1, 2009. That is the first notice of the claim that American Western has received and it promptly denies coverage claiming late notice. The court agreed. It pointed out that notice to the broker is not notice to the insurer. Stoeckeler is left to defend the action himself.1

The result of any errors and omissions claim against Benson hasn’t been reported. However, this accident occurred before the 2009 change in the law on late notice to an insurance company. Prior to that date, unreasonably late notice voided the insured’s coverage without the requirement that the insurance company show that the late notice prejudiced2 its interests. Therefore, if the November 2008 notice that Stoeckeler gave to Benson was unreasonably late, Stoeckeler may be unsuccessful in any claim against his broker. This may very well be the case. The accident occurred in March 2007 and the insured learned of it in May or June of 2007, much more than a year before Stoeckeler gave the first report to his broker. Even if Benson had promptly sent the insurance company the first report it received from Stoeckeler, it would still have been late. Thus, the broker’s mistake in not forwarding the notice to the insurer wasn’t what caused Stoeckeler to lose coverage (No harm, no foul.)

If the current late notice law had been in effect at the time of the accident, the broker’s defense would be more difficult. The delay in giving notice until Stoeckeler received the attorney’s letter may not have been prejudicial, but the added delay created by Benson’s failure to promptly transmit that notice to the insurer, or the added delay in forwarding the summons, might very well be deemed prejudicial.3

Late Notice Update

I haven’t seen any reports of cases involving late notice under the new law— don’t worry, we will. However, a recent case sheds some light on what prejudicial to the insurer may mean.

In March 2003, KNK Poultry rented a truck from Budget Rent A Car. While driving the vehicle, KNK’s employee Barry Barker, collided with a vehicle driven by Samuel Weber. Weber claimed serious bodily injury and, as he was working at the time, filed a workers compensation claim. Barker claimed that Weber had backed into him.

In 2005, Weber sued Barker, Budget and KNK. Primary auto liability coverage was provided by Budget’s insurer, Empire Fire & Marine. KNK auto liability coverage with Travelers provided excess liability coverage.4

In 2007, Weber moved for summary judgment on the question of liability. Barker was no longer employed by KNK and the defense counsel provided by Empire was unable to locate him. As a result, no affidavit by Barker giving his side of story was submitted to the court. On January 25, 2008, the court granted Weber summary judgment on the issue of liability. In March 2008, the claim was reported to Travelers. Travelers promptly denied for late notice. Under the prior law in NY, which is what applied to this accident, it looks like an open-and-shut case; notice was first given five years after the accident. That’s hardly prompt. However, the Travelers policy contained a provision not commonly found in New York policies prior to the 2009 late-notice law change. It said that coverage was precluded only if the failure to provide notice “is prejudicial to us (Travelers).”

That’s similar to what the revised New York law says. Travelers asserted that the late notice was prejudicial to its interests. It that it was prevented from conducting its own investigation, attempting to locate Barker prior to the summary judgment motion, canvassing the area for witnesses and seeking a reconstruction of the accident prior to the destruction of the truck Barker was driving,

KNK argued that Travelers as the excess insurer must show more than lost opportunities to establish actual prejudice. The cited numerous cases in other jurisdictions in support of that position.

However, the New York Court of Appeals, our highest court, has ruled that “excess carriers have the same vital interest in prompt notice as do primary insurers.”5 The court in this case ruled that Travelers was prejudiced by the delay in providing notes and therefore, it had no duty to defend or indemnify KNK.

Two Learning Points: The three rules for dealing with liability insurance claims are still: Report, Report, and Report. If this case is any guide, New York courts may be more lenient in finding that late notice is prejudicial to the insurer than courts in other states.6 In addition, while most states agree that the insurer must show prejudice to deny liability for late notice, that’s not true in all states. A recent decision based on Alabama law held that the requirement to give prompt notice was a condition precedent.7 (A condition precedent is a provision that a party must comply with before the other party is obligated to perform its part of the agreement.) You don’t want your insured forced to go to court to establish its rights. Tell your clients to report all occurrences promptly.

The second point involves notice to an excess insurer. Excess liability policies usually provide that notice is required when the claim appears likely to involve the excess insurer. For example, ISO’s commercial umbrella form says:

You must see to it that we are notified as soon as practicable of an “occurrence” or an offense, regardless of the amount, which may result in a claim.8

As this case shows, not every excess policy contains that wording; that’s particularly true when the excess policy is one that is ordinarily primary as was the case here. If the excess policy does not contain such a provision, it would be wise for insureds to give prompt notice of all occurrences to excess carriers also. I know that this will generate a flurry of meaningless reports to excess insurers, but unless the insurer agrees to waive the notice requirement, Report, Report, Report.

A Broker’s Duties to the Insured

Last month I discussed the New York Court of Appeals decision that the insured’s failure to read the policy was not fatal to the insured’s errors or omissions claim against its broker. The Court held that the insured should have a right to look to the expertise of its broker with respect to insurance matters. The issue of the insured not having read the policy would be one of comparative negligence, not an absolute bar to the insured’s claim. A Second Department Appellate Court decision was just published holding essentially the same position. The decision affirmed the Supreme Court’s denial of summary judgment to the insurance company. The court held that broker “did not satisfy its … burden of demonstrating that the plaintiffs’ failure to read the terms of the applicable insurance policies, despite their having been in effect for approximately nine months prior to the fire, warranted judgment in its favor as a matter of law.9

We’ll have to wait to see if the insured will actually be indemnified for its loss. If the parties settle, there may be no published decision on the resolution of the insured’s claim.

As I pointed out, these cases represent a loosening of the standard for insurance broker E&O in New York. I should have mentioned one area where a broker does have a clear obligation to the insured. That’s the obligation “to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so.”10 The issue to be resolved now is whether the insured’s failure to read the policy, and complain about its shortcomings, will outweigh the insured’s claim that the broker did not obtain the requested coverage.

On the plus side for agents and brokers, there doesn’t seem to be any change in the court’s position that agents and brokers “have no continuing duty to advise, guide or direct a client to obtain additional coverage.” (Although New York courts don’t see any legal obligation for agents and brokers to advise clients once the policy has been procured, I think there’s an ethical obligation. And besides, it’s good way to build lasting relationships with clients.)

Improving Crime Protection for Employee Benefit Plans

In the January 24, 2011 issue of the Insurance Advocate. I recommended combining the crime protection for a firm with the coverage ERISA requires for the firm’s employee benefit plans in. The chief advantage of combining them is the increased limit available to both the plans and the firm, if the amount of insurance carried by the firm on its own is increased by the amount that the plans would carry in separate policies. To illustrate, if the firm has $2,000,000 crime coverage and the plans would carry $500,000 on their own, the combined policy would have a $2,500,000 limit.

One of the other advantages that I cited was broader coverage for the plans beyond just the employee theft. For example, the firm has have funds transfer fraud coverage (and should) that could apply to the plan also. What I should have pointed out is that the combined policy will have to be extended to provide coverages other than fidelity. ISO’s and other insurers’ standard crime wording provide only fidelity insurance for employee benefit plans. Employee benefit plans are exposed to crime perils in addition to employee theft. Pension, profit-sharing, and 401k plans can have substantial assets that need protection. One of our clients, a firm with approximately 50 employees has over $10,000,000 in it employee benefit accounts.

Even without the added coverages for the ERISA plans, I still recommend combining the coverages. A stand-alone ERISA fidelity bond that I looked at named the ERISA plan as the named insured. It defined “employee” to mean an “employee, trustee, officer, administrator or manager” of the ERISA plan. The only non-employees covered were directors or trustees of the plan sponsor while handling funds or other property belonging to the plan. That leaves out coverage for theft by an employee of the sponsor who is not an employee, trustee, officer, administrator or manager of the plan. Under a combined policy, an employee of any insured is considered to be an employee of every insured. Get the policy amended. Many insurers will broaden your insured’s coverage.