Whose side will the insurance broker be on when you have to make a claim? Like so many things, it depends on where your relationship is at: figuratively and literally.
A recent New York Court of Appeals case highlights the differences in broker obligations between New York and states like New Jersey and provides insight into ensuring that you and the broker have the necessary “special relationship.”
In Hoffend & Sons, Inc. v. Rose & Kiernan, Inc., 7 N. Y. 3d 152 (2006), New York’s highest court held against a policyholder’s malpractice claims involving the broker. The decision turned on whether the broker had assumed a duty to obtain appropriate insurance coverage. The lower appeals court held that no such duty existed, in part, because the policyholder admitted to reading the insurance policy and had not subsequently demanded any changes.
New York’s Court of Appeals, however, explained that to create the special relationship necessary to give rise to an obligation come claim time, a policyholder generally would have to do one of three things. First, a special relationship could arise out of payment for services beyond the typical broker commission taken out of the premium. Second, a specific coverage issue would have to be identified prior to insurance policy procurement regarding which the policyholder seeks out and relies upon the broker’s advice. This standard seems intuitive because policyholders inevitably rely on broker’s expertise just as business people rely on other professionals such as architects, engineers or accountants. Many courts, however, are reluctant to bestow traditional professional status upon insurance professionals and thereby require them to meet a legal standard such as the standards architects, engineers and accountants must meet routinely. These courts argue that buying insurance is a simple arms-length commercial transaction. Third, the “course of dealing” between the broker and its policyholder client can serve to put the broker on notice that the policyholder was relying on its expertise. Again, this seems intuitively inherent to almost any insurance policy acquisition. If it were not, what purpose would the broker serve? Of course, a lot depends on the nature of the coverage and the business imperatives involved.
New York’s law contrasts with that of other states. Some states have statutes clarifying the roles and obligations of insurance brokers and agents. Other states rely on case law to address these issues. Companies in New Jersey, for example, will ordinarily have a special relationship as broker clients. See Aden v. Fortsh, 776 A. 2d 792 (N.J. 2001). Given this split of authority, the question may be: which side of the river will you and the insurance broker be on at claim time?