Insured’s Failure to Read Policy Does Not Automatically Bar E&O Claim Against Broker Dot The “I’s” and Cross the “T's" on NFIP Claims False Address on Auto Policy Voids Coverage If Contract Doesn’t Require Additional Insured Status, You Don’t Get It

A Breech in the Dike?

Successful lawsuits against producers by New York insureds alleging errors or omissions are few and far between. The key word is “successful.” Hope springs eternal, so there are plenty of lawsuits—just not many successful ones. A recent New York Court Of Appeals decision may change that. American Building Supply Corp (“ABS”) subleased a warehouse in the Bronx from DRK, LLC (‘DRK”). The lease required ABS to procure liability insurance with a limit of $5,000,000 covering both ABS and DRK. ABS obtained CGL coverage from excess insurance carrier, Burlington Insurance Company. It changed brokers when its CGL policy was cancelled for non-payment. Its new broker, Petrocelli Group, Inc. (“Petrocelli”), arranged to have the policy reinstated with Burlington. Effective June 14, 2005, the Burlington policy was renewed by Petrocelli and was essentially the same as the expiring one.1 The condition that triggered the dispute, was a cross-liability exclusion; it was included in both policies. It read as follows: “This insurance does not apply to any actual or alleged “bodily injury”, “property damage,” “personal injury” or “advertising injury” to . . . a present, former, future or prospective partner, officer, director, stockholder or employee of any insured.” 2 In October 2005, one of ABS’s employees sued DRK when he was injured in the building. DRK sought coverage as an additional insured under the Burlington policy. Lease requirements requiring that the lessor be included as an additional insured are so common that coverage is automatically provided in CGL policies via an exception to the contractual liability exclusion. However, based on the cross-liability exclusion, Burlington denied coverage for DRK. DRK commenced an action against ABS for its failure to comply with the lease condition and ABS sued Petrocelli for negligence and breach of contract in placing ABS’s insurance. The Supreme Court ruled in ABS’s favor, pointing out that “ABS testified that it informed Petrocelli it required coverage if any employee injured himself and that a jury could rationally conclude that ABS made a specific request for such coverage.”

The First Department NY Appellate Court reversed the decision. In its view, whatever coverage ABS may have requested did not matter. Once the policy was delivered, ABS’s failure to read the policy and seek correction of the coverage barred its claim against Petrocelli. (The Court of Appeals decision notes that Petrocelli did not read the policy either.)

Appellate Courts are split on the issue of whether failure to read a policy provides a basis for an insured to escape a policy’s provisions. The First and Fourth Departments3 have held that once an insured has received the policy, it is bound by its terms and cannot rely on the broker’s description of coverage. The Second Department has held that receipt of the policy does not bar an action for negligence against the broker.4

Differing decisions by the Appellate Courts often set the stage for a New York Court of Appeals decision. In this case, the Court of Appeals ruled that, although it is better practice for the insured to read the policy, the insured should have a right to look to the expertise of its broker with respect to insurance matters.

The “insured must read the policy” rule has always troubled me. First, a substantial portion of the population isn’t going to understand the policy even if they did read it. “Simple-English policies” haven’t cured the problem. For example, I agree that “subrogation” is not a word that most insureds would understand, but is “transfer of rights of recovery against others to us” better? The first sentence of that “simple- English” provision runs 35 words. I prefer the word “subrogation.” The average person will realize that it’s a word to look up. American Building is a perfect example of the problem. Even if they had read the exclusion, would they appreciate the problem? I suspect that, at most, they would see it as an acceptable exclusion feeling that workers compensation protects them from suits by their employees. The interaction between the lease agreement with the property owner and their insurance policy would escape them.

In a case like this, where the broker was told their situation (the warehouse was not open to the general public), I agree with the court. Even if the broker had not been told, I think the broker should know that almost every lease requires that the tenant’s insurance provide protection for the landlord. The non-standard exclusion in the policy should jump out at the broker, but of course, first they would have to read the policy.

The concept that the insured should have a right to look to the expertise of its broker with respect to insurance matters is a new approach in New York. New York courts have been adamant in their position that an insurance broker is not a professional (sorry about that gang!) and therefore does not have a higher duty of care unless there is a “special relationship” between the broker and the insured. It is difficult for an insured to demonstrate special- relationship standing. Even a history of long and exclusive service as the insured’s insurance broker has been held insufficient to create a special relationship. A First Department Appellate Division decision in an E&O case against Marsh just a week earlier than the ABS case, affirmed this approach. In the Marsh case, the Appellate Court wrote: “Absent a specific request for the insurance, defendant, as broker, had no duty to obtain coverage.”5 I’ve discussed the ABS case with a number of insurance attorneys. All agree that it is a departure from prior case law. One emailed that it was “If not a 180, (it was at least) a 90, with respect to past precedent.”

New Jersey courts have long held that a broker does have a duty to the insured and that the insured can rely on the broker’s expertise with often disastrous results for the broker.6 Is New York headed in that direction? It will be interesting to see how this plays out in future cases—you can be sure there will be many.

Dot the “I’s” and Cross the “T’s” on NFIP Claims

Many more brokers and insureds will be dealing with National Flood Insurance Plan (NFIP) claims because of Sandy, so it’s a good time to point out that NFIP plays by slightly different rules than those that apply to commercial insurers. Here’s a case that illustrates the point:

In 2007, Robert Jacobson purchased a Standard NFIP policy from Metropolitan Property & Casualty covering his home in New York’s Catskill Mountains near the juncture of two creeks. Metropolitan is a Write-Your-Own (“WYO”) Program carrier. Although it services the policies it writes, the ultimate loss is covered by NFIP7. Between 2004 and 2006, Jacobson had experienced the creeks’ flooding nine times. In June 2007, the creeks around Jacobson’s home overflowed again, rising over 46 feet and washing away 50 feet of his land.

Jacobson did not see any damage to his home and he did not report the flooding to Metropolitan. He first noticed damage to his house in December 2007 when he returned from an extended vacation. Jacobson sent Metropolitan a notice of claim on January 22, 2008.

Metropolitan investigated the claim; and, on February 4, 2008, notified Jacobson that the terms of the SFIP required that Jacobson provide a proof of loss. Jacobson submitted a partially completed proof of loss. It did not show a specific amount of damages, instead it listed the value of the loss as “undetermined”.

On February 13, 2009, Metropolitan sent Jacobson a letter rejecting the claim on the basis of the incomplete proof of loss. Metropolitan’s letter noted that Jacobson could appeal the decision to FEMA, which he did. FEMA rejected the appeal. The agency based its decision, not on the incomplete proof of loss, but on three different grounds: (1) failure to promptly notify after the alleged damage occurred; (2) the actual damage resulted from nine floods that preceded the June 2007 flood; and (3) that the engineers hired by both parties concurred that “land subsidence was the proximate cause of damage to the insured building.”

Jacobson then sued Metropolitan in U.S. district court arguing that Metropolitan’s initial denial of coverage on the basis of Jacobson’s incomplete proof of loss amounted to “repudiation” under New York law, and that such repudiation relieved Jacobson of the proof of loss requirements. This assertion might succeed against a commercial insurance company, but different rules can apply to NFIP policies. The U.S. Court stated that “Where federal funds are implicated, the person seeking those funds is obligated to familiarize himself with the legal requirements for receipt of such funds.” To enforce a claim for federally provided insurance, the U.S. Supreme Court held that an insured must comply strictly with the terms and conditions of such policies. See, Fed. Corp. Ins. Corp. v. Merrill, 332 U.S. 380 (1947). The Court of Appeals affirmed the U.S. District Court’s grant of summary judgment to Metropolitan.

NFIP policies are federally subsidized and are governed by regulations issued by FEMA. Be sure that you advise your insureds to comply strictly with NFIP policy conditions. If you’re new to NFIP claims, and probably even if you’ve handled previous NFIP claims, recommend that your insureds look for expert assistance in processing their NFIP claims.

False Address on Auto Policy Voids Coverage

Lisa Ferrato purchased an auto insurance policy from Preferred Mutual Insurance Company listing her address as one in Pearl River, NY. Lisa actually lived with her husband and child in Cliffside Park, NJ. Her father owned the house in Pearl River. In affirming the lower court’s denial of coverage, the court wrote: “The standard for determining residency for purposes of insurance coverage requires something more than temporary or physical presence and requires at least some degree of permanence and intention to remain8.” Each year, thousands of New York State residents register their vehicles in states other than New York to take advantage of significantly lower auto insurance rates.9 This impairs the auto insurance market. Insurers are paying claims that are generated by high-claim area drivers, but are receiving premium at low-claim area rates. Losses in the low-claim areas are inflated resulting in higher rates for those who do reside there.

Note that this was a no-fault claim. The rule is different for auto liability insurance. Sadly, it is much more difficult for insurers to void the auto liability portion of the policy. Larry Rogak wrote in discussing another no-fault case:

“Although Vehicle and Traffic Law § 313 does not permit an insurer to cancel an automobile insurance policy retroactively on the grounds of fraud or misrepresentation (see Matter of Liberty Mut. Ins. Co. v McClellan, 127 AD2d 767, 769 [1987]), an insurer may assert misrepresentation or fraud as an affirmative defense in an action by an insured to recover benefits under the policy (see Matter of Insurance Co. of N. Am. v Kaplun, 274 AD2d 293, 298-299 [2000]; Matter of Liberty Mut. Ins. Co. v Mc- Clellan, 127 AD2d at 770).”10 We can hope that New York will some day amend that ruling. (Dum spiro spero. While I breathe I hope. My translation as a Latin student was: It’s stupid to keep hoping.)

If the Contract Doesn’t Require Additional Insured Status, You Don’t Get It

ISO’s and most other automatic additional insured agreements are clear, additional insured status is only provided when the contract between the parties calls for it. Even more important, New York courts enforce this requirement.

Zahid Zaidi, an employee of LTC Electric, Inc (“LTC”) was injured while working for his employer. He sued the owner of the building where he was working and the general contractor. The owner and the general contractor asserted that it was understood that they were to be added as additional insureds to LTC’s insurance. The New York Supreme Court, Queens County, denied LTC’s motion for summary judgment on one of the counts. It ruled that there was an issue of fact as to whether LTC breached an agreement to obtain insurance naming the owner and general contractor as additional insureds.

The Appellate Court reversed this decision. It held that the written agreement between the parties was clear. It did not require LTC to procure insurance naming the owner and general contractor as additional insureds. LTC was granted summary judgment. The owner and the contractor did not receive protection as additional insureds.

Being named as additional insureds on contractors’ policies is a basic risk management technique. It places the expense of the claim on the contractor who can actually control the exposure and protects your client’s loss record. Furthermore, some insurance companies require it and every insurance company recommends it and looks askance at insureds that fail to obtain it. Alert your clients to the importance of including additional insured requirements in all contracts.