Breaking news! The New York Court of Appeals has more insurance cases than just K2.

On one hand, cases addressing whether a policyholder can sue its broker, for failing to obtain insurance to cover a claim, aren’t coverage cases in the true sense of the word. They do not address whether an insurer is obligated to provide coverage, under certain policy provisions, for a specific loss that took place. That being so, it is easy to overlook such cases if your focus is on judicial opinions addressing insurance coverage.

But it could also be said that cases addressing broker liability are nothing short of coverage cases. After all, if a policyholder fails to obtain any, or adequate, insurance from its own insurer for a claim, and, if its insurance broker is legally responsibility for the coverage deficiency can be established, then the broker’s errors and omissions policy may fill the void. Thus, the broker’s errors and omissions policy can sometimes be an insured’s policy of last resort. When you look at it this way, a broker liability case is a coverage case with a different name.

Even if broker liability cases are designed to get the insured to the same place as a traditional coverage case, I still don’t follow them that closely. But sometimes you have to stand-up and take notice of a broker liability decision. Sometimes such cases simply can’t be ignored – like when they are from the New York Court of Appeals and especially when the court decides that the policyholder may be able to hold its broker liable. This is Voss v. Netherlands Insurance Company, No. 11 (N.Y. Feb 25, 2014). [Indeed, the last time I addressed a broker liability case was in the December 19, 2012 issue of Coverage Opinions -- American Building Supply Corp. v. Petrocelli Group, Inc. This decision was from the New York Court of Appeals and the court decided that the policyholder may be able to hold its broker liable.]

Deborah Voss operated two modeling agencies at a building on Henry Clay Boulevard in Liverpool, New York. In 2004 Voss met with a representative of CH Insurance Brokerage Services (CHI), Joe Convertino, Jr., to discuss insurance coverage for the premises and her two companies. The court described their initial meeting as follows: “[T]hey discussed property insurance, professional liability coverage and business interruption insurance. Convertino asked Voss to disclose sales figures and other pertinent information to enable him to calculate an appropriate level of business interruption coverage for her companies. According to Voss, Convertino also represented that CHI would reassess and revisit the coverage needs as her businesses grew.”

Convertino ultimately recommended a policy with The Netherlands Insurance Company that afforded $75,000 per incident in coverage for business interruption losses. “When Voss questioned whether the $75,000 limit was adequate, Convertino allegedly assured her that it would suffice based on the condition of the building as well as the size of her businesses. According to Voss, Convertino also averred that he calculated the level of coverage at a threshold level and reemphasized that, each year, CHI ‘would take it up as the business evolved.’ As a result, Voss accepted Convertino’s recommendations and paid the premium for the Netherlands policy. No claims under the Netherlands policy were made while the businesses were located at Henry Clay Boulevard.”

In 2006 a company that Voss controlled purchased a building on First Street in Liverpool. The new building contained more than twice the square footage of the previous location. Voss moved the modeling agency to the new building and opened two new businesses there. After Voss discussed the move and the new business arrangements with Convertino, CHI renewed the Netherlands policy with the same $75,000 business interruption limit for the new location and entities.

Voss suffered a water damage loss in March 2007 on account of a roof leak. The damage disrupted her business operations and a roofing contractor was retained to replace the roof. The following month the new roof failed, resulting in far more extensive water damage to both floors of the premises. All three of Voss’s businesses were required to close for various periods of time. Voss recouped only $3,197 for the first loss and $30,000 for the second loss under the Netherlands policy.

In the spring of 2007, Voss met with another CHI representative, Carrie Allen, to discuss the renewal of the Netherlands policy. Voss received a proposal indicating that the business interruption coverage would be reduced from $75,000 to $30,000. She asserted that she questioned Allen about the reduction and Allen’s response was that she “would take a look at it.” Voss did not follow up and when the Netherlands policy was renewed in April 2007 it reflected a per occurrence limit of $30,000 in business interruption coverage. In February 2008, the roof failed a third time, causing significant damage to the premises and further disrupting Voss's businesses. In May 2008, while the insurance claims stemming from the third loss were still pending, Voss commenced an action against CHI, Netherlands and the roofing contractor.

Putting aside how the case was resolved by the trial court and Appellate Division, the issue before New York’s highest court was this: Voss alleged that a special relationship existed with CHI and that CHI had negligently secured inadequate levels of business interruption insurance for all three losses.

First, the court addressed an insurance broker’s duty of care: “As a general principle, insurance brokers ‘have a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage’. Hence, in the ordinary broker-client setting, the client may prevail in a negligence action only where it can establish that it made a particular request to the broker and the requested coverage was not procured.”

Voss did not allege that she specifically requested higher business interruption policy limits. Thus, she was not proceeding against CHI under a common-law theory of liability, but, rather, on the basis of the existence of a “special relationship.” “Where a special relationship develops between the broker and client, we have also indicated that the broker may be liable, even in the absence of a specific request, for failing to advise or direct the client to obtain additional coverage. In Murphy [v. Kuhn, 90 N.Y.2d 266 (1997)], we recognized that ‘particularized situations may arise in which insurance agents, through their conduct or by express or implied contract with customers and clients, may assume or acquire duties in addition to those fixed at common law’ and that the question of whether such additional responsibilities should be ‘given legal effect is governed by the particular relationship between the parties and is best determined on a case-by-case basis.’”

The Voss court noted three exceptional situations that may give rise to a special relationship, thereby creating an additional duty of advisement: “(1) the agent receives compensation for consultation apart from payment of the premiums; (2) there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent; or (3) there is a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on.”

It is important to note that Voss was a summary judgment decision. The court did not decide whether a “special relationship” existed. Rather, the court’s decision was that CHI did not satisfy its burden of establishing the absence of a material issue of fact as to the existence of a special relationship. To the contrary, the court described the possible formation of a “special relationship” on the basis of the following: “[V]viewed in the light most favorable to plaintiffs, the evidence suggests that there was some interaction regarding a question of [business interruption] coverage, with the insured relying on the expertise of the agent. Voss testified that she and Convertino discussed business interruption insurance from the inception of their business relationship. She asserts that he requested sales figures and other relevant data in order to calculate the proper level of coverage. When Convertino later returned with a proposal that included $75,000 in business interruption insurance, Voss avers that she questioned that amount and that Convertino assured her that it was adequate based on his review of her business finances as well as the layout of the building. Moreover, although the $75,000 per occurrence limit was originally placed in 2004, before plaintiffs moved to 105 First Street and expanded their businesses to include a restaurant and catering operation, Voss testified that Convertino repeatedly pledged that CHI would review coverage annually and recommend adjustments as her businesses grew.”

The court concluded that the possibility existed that Voss relied on CHI’s expertise in calculating the proper level of business interruption coverage during the relevant time frames.

The Voss court was quick to point out that special relationships in the insurance brokerage context are the exception and not the norm. However, given that brokers are in the business of providing service to their insured-clients – and use high levels of service as a selling point and competitive advantage -- it is not inconceivable that a close working relationship can develop between brokers and their clients that leads to “a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on.”

When you consider that the test for whether a “special relationship” exists is handled on a case-by-case basis, i.e., there are no bright lines, brokers need to be sure that, if their client relationship is moving into the “special relationship” category, they recognize the obligations that come with that.