Appellate Court Decision Dismissing (E&O) Case against an Insurance Broker
Appellate Court Decision Dismissing (E&O) Case against an Insurance Broker07.01.2017
Over the last few weeks, there have been several articles written on an May 1, 2017 Appellate Court decision out of New Jersey dismissing a professional negligence (E&O) case against an insurance broker. In C.S. Osborne v. & Co., Inc. v. Charter Oak Fire Insurance Company, the Court held that, absent a “special relationship” an insurance producer does not have an obligation to advise a client concerning the possible need for higher policy limits. While the Court and the articles discussed the facts that did not create a special relationship, they were remiss to point out what is required under the legal theory to create such a duty. I thought it useful revisit this especially since I just completed teaching a seminar on the subject and, again last month, another article discussed an Appeals Court decision Atic Enterprises v. Cottingham & Butler where a negligence claim against an insurance broker was dismissed finding there was not duty to advise without mentioning “special relationship”. (That Court, however, did touch upon the elements to support a “special relationship” duty”.)
A good place to start this discussion is that an insurance agent has a common law obligation to the client to obtain the coverage that was requested within a reasonable period of time or inform the client of the inability to do so. Courts have recognized that, as a general proposition, an insurance agent does not have a duty to advise or guide or recommend insurance coverages. That being said, such a duty is imposed on an insurance agent if a “special relationship” exists between the parties. The question then becomes what creates a “special relationship” between an insurance professional and the client.
The Courts (depending on your jurisdiction) have found that a “special relationship” exists under the following scenarios:
- An agent holds himself/herself out as an insurance specialist, and receives additional compensation for consulting or advise (separate and apart from commission from the payment of premium);
- There is a long-standing relationship between the parties, there is some kind of interaction (communication) on a question of coverage, and the client relies on the agent’s expertise to his or her detriment;
- An insurance broker affirmatively goes beyond the common law duty mentioned above, but misrepresents the nature, extent or scope of coverage being offered or provided.
I would be remiss if I did not point out that these are not the only type of situations where an insurance professional could create a “heightened” duty of care. For example, I have seen insurance brokers charge fees beyond commissions and/or require their clients to sign “management fee agreements” or “service agreements’, and those written contracts can be interpreted to create an obligation to advise and guide. My purpose in this discussion and similar comments in the past is not to discourage these agreements or to not discourage an insurance professional from providing a level of service needed to meet his or her client’s needs. Rather, my goal is to simply point out that such actions could create additional liability exposures and a prudent insurance professional should have risk management tools in place to support such additional activities.
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