E&O: “Voss” Decision Raises the Bar for Agents

Court of Appeals 4-3 “Voss” decision: Agents’ and Brokers’ Liability Heightened as a Result of “Special Relationship” Decision

With Sandy claims looming over the heads of many Long Island and New Jersey agents, carriers and residents, the New York State Court of Appeals has heightened insurance brokers’ liability to their clients for the possible failure to recommend sufficient, proper coverage for their property. The upshot of what is now termed “the Voss decision” may be far-reaching for agents and brokers and their errors and omissions insurers.

In Voss v Netherlands et al, the Court of Appeals ruled that a “question of fact” exists as to the liability of an insurance broker in the recommending of an insurance policy or cover. This means that juries in the future must determine whether or not a “special relationship” in fact existed between the broker and client / insured. Under New York law, a broker has been limited to the obligation of obtaining the coverage requested by the insurer or to provide advice to the insurer that the broker is unable to secure the desired coverage, but not to offer coverage advice or analysis except in the case of a “special relationship” between the broker and client.

In rendering its decision, the Court expanded the agent’s exposure and indicated that the fact of a “special relationship” would need to be decided as a matter of fact by juries before a summary judgment favoring the agent could be granted. The “special relationship” until now could be evidenced by one of the standards outlined in a 1977 case, Murphy v Kuhn. It holds that a special relationship exists if the broker receives compensation from the client other than commission, such as a service fee or retainer; if there was any discussion between the broker, and the client concerning the coverage, with the client depending upon the advice, experience, and expertise of the broker or if there is a history of the relationship between the client and the broker that would imply that the advice of the broker was being relied upon for the client’s decision.

In the Voss case, decided in February of this year, the Court of Appeals reversed two lower court decisions which granted summary judgment to the defendant broker, dismissing a negligence claim against the broker. The higher court ruled that “question of fact” does exist as to the extent of involvement and therefore liability of the broker.

In the present case, the plaintiff, a modeling business owner, obtained property coverage and business interruption insurance beginning in 2004. According to the plaintiff’s testimony, the broker asked for sales figures and other information to determine the amount of coverage appropriate for the client. The broker recommended $75,000 in coverage and assured the plaintiff it was adequate. According to the plaintiff, the broker told her that he would review the coverage annually as the plaintiff’s business grew. Two years after the original coverage was placed, she relocated premises. The broker renewed the business interruption policy with the same limits at the new, larger location.

One year after the move, the insured had its first loss for roof damage and leaks from dripping water. After this loss, the insurance company lowered the plaintiff’s business interruption limits to $30,000 from $75,000. The insured questioned the broker who replied “we will look at it”. No changes took place and four months after the first loss more water damage occurred and six months later a third water leakage resulted in the claim that the court considered. The client sued the broker for negligence and sued the insurer, but the issue before the court at present was only the broker’s liability.

The business owner’s claim was based on the broker’s alleged failure to procure sufficient business interruption coverage. According to the court the broker’s commitment to review the coverage annually, that is, to give her advice in the future was found to be sufficient to deny summary judgment to the broker so that the insured would be able to demonstrate that a special relationship existed and that the broker, who moved for summary judgment, would now have the burden of proving that no special relationship existed.

The court also held that, even though the insured client admitted that they were of aware of the business limits and of the reduction in coverage, this does not defeat the claim since the claim is based upon the “special relationship”. It was deemed wholly irrelevant whether the plaintiffs were aware of the limits.

The decision moves New York closer to the standards of other states with regard to brokers exposure to their customers.

In New Jersey, for example, the following is the modicum governing the relationship between broker and client:

“One who holds himself out to the public as an insurance broker is required to have the degree of skill and knowledge requisite to the calling. When engaged by a member of the public to obtain insurance, below holds him to the exercise of good faith and reasonable skill, care and diligence in the execution of the commission. He is expected to possess reasonable knowledge of the types of policies, the different terms and the different coverage available in the area in which his principal seeks to be protected. If he neglects to procure the insurance or if the policy is void or materially deficient or does not provide the coverage he undertook to supply, because of his failure to exercise the requisite skill or diligence, he becomes liable to his principal for the loss sustained thereby”.

New York agents and brokers will find it more difficult to obtain summary judgments dismissing E & O complaints once a customer alleges a “special relationship”. This may also mean that E & O cases will now be urged toward earlier settlement under this new, pro-consumer standard.