Guest blog written by John R Gonzo, ESQ.
Mr. Gonzo is the Managing Partner of the Gonzo Law Group and specializes in professional lines defense.
Superstorm Sandy devastated portions of New Jersey, impacting individuals and companies of all types, including insurance brokers. Stories of insurance brokers, whose offices had no power, heat, or internet access as a result of the storm, utilizing generators, cell phones, and wi-fi hotspots to handle claims from insureds have been reported in the media. These brokers were making every effort to remain in touch with and assist insureds.
Unfortunately, any goodwill engendered by these efforts is likely to be short-lived. There have been reports expressing doubts as to whether insurance companies have sufficient reserves to cover all of the claims related to Superstorm Sandy, while others, including Lloyd’s of London, an exchange, and Credit Suisse, say that sufficient reserves are available. Regardless, there are likely to be a number of claim denials given the magnitude of the storm and the damage it wrought. As insureds across New Jersey receive coverage denials, many will be seeking to hold their broker responsible. Thus, as seen after other natural catastrophes, such as Hurricane Katrina, all of these denied claims will undoubtedly lead to an increase in E&O claims against brokers.
In an effort to provide some clarity as to what brokers may expect to see over the coming months, and years, we look at the types of scenarios which may give rise to E&O claims and some best practices to help put insurance brokers in the best defensible position.
A Broker’s Standard of Care
In New Jersey, a broker is held to a high standard of care and is expected to possess reasonable knowledge of the types of policies, their different terms, and the coverage available in the area in which the insured seeks to be protected. A broker is required to use that knowledge, skill, and diligence to procure valid insurance in the amount and of the type of coverage the broker undertook to provide the insured. Brokers can also incur additional duties when there is a special relationship between the broker and the insured. Such a special relationship arises where a broker’s conduct invited reliance by the insured or the insured relied upon that broker’s conduct. Thus, while insureds may attempt to argue that the broker failed to procure the coverage requested in the amount requested, many claims may essentially be that the broker “should have” provided advice regarding the need for a certain type of coverage, such as, for example, flood insurance.
“But You Never Told Me I Needed Flood Insurance!”
As happened with Hurricane Katrina, many insurance claims may be denied because it is determined that the loss was due to flood instead of wind. In such an instance, insureds may very well look to their insurance broker. Insureds may claim that they requested flood coverage, but the broker failed to act. Insureds may claim they were told that the regular homeowner’s policy covered damage due to flooding. More likely, the claim may be that they were told by the broker that flood coverage was not needed as the property was not located in a flood zone or the issue was not even raised.
Similar issues can arise with respect to commercial accounts which declined to obtain business interruption coverage or an endorsement for off-premises or utility coverage, particularly given the extensive power outages. Many businesses were closed for weeks resulting in loss of income. Again, the insured could ask why business interruption coverage was not addressed by the broker.
Best Practice Tip: Documentation
When confronted by such a claim, documentation is key. A broker should have a written set of policies and procedures for the office requiring documentation of all requests for coverage by insureds, all offers of coverage, and all advice rendered regarding coverage. A broker should also consider providing a quote for flood and wind coverage whenever dwelling coverage is requested by an insured. If the insured declines such coverage, supporting documentation, including a signed and dated statement by the insured declining the coverage, should be maintained by the broker.
“But I Completed the Flood Insurance Application!”
Another potential E&O claim can occur when the insured believes that coverage is in place, but, at the time of the loss, no coverage was, in fact, in place. Coverage under the New Jersey Windstorm Market Assistance Program, the FAIR Plan, and the National Flood Insurance Program is not effective until the application and premium payments are received by the Plan. Delays by the broker in submitting either the application or the premium payment could result in coverage under these programs not being in place at the time of loss. Additionally, confusion could arise when a broker provides a binder or other evidence of coverage under these programs at a real estate closing. Again, even when the closing occurs, coverage is not in place until the premium is received.
Best Practice Tips
The requirements for coverage to be bound should be made clear to the insured. A broker should provide documentation to the insured specifically stating when coverage will be bound. Coverage documents for use at closings should contain notices that coverage will not be in place unless and until the premium is paid. Copies of all of this documentation should be maintained by the broker.
Policies and procedures should also be in place for handling and tracking applications and premium payments. All steps of the process, including following up with the insurer to ensure that the application and premium has been received, should be fully documented.
“But Mv Stuff Is Worth So Much More Than This!”
Even if an insured’s claim is fully paid by an insurer, the possibility of an E&O claim against the broker still exists. To the extent that the broker has a special relationship with the insured assuming additional duties, an insured could assert a claim against the broker. This could involve the broker determining or otherwise assisting the insured in calculating coverage limits. The broker could fail to take into account upgrades to the insured’s property, to use accurate information to calculate the replacement value, or to take into account a co-insurance penalty. To the extent that the broker fails in making a proper calculation, the insured could seek to file an E&O claim.
Best Practice Tips: Document the Calculations
Again, documentation regarding any calculations performed by the broker as well as documentation from the insured used to create those calculations should be maintained. Documentation indicating that the insured was advised of the type and extent of the limits should be kept as well.
E&O Claims May Come from Every Corner
An insured who was denied coverage would most likely assert claims against both the broker and the insurer in the same action, due in part to the requirements of New Jersey’s Entire Controversy Doctrine. Strategically, the insured might wish to involve both the broker and the insurer in the hopes that the broker, in defending an E&O claim, would argue that the insured’s loss was covered by the policy in question.
However, litigious insureds claiming that a broker failed to advise them to seek flood insurance are not the only avenue for an E&O claim to be asserted. Even if the insured was entirely satisfied with the work performed by the broker and files a bad faith denial of coverage action against an insurer, an E&O claim could still arise. It is entirely possible that an insurer could file a Third-Party Complaint against the broker claiming that any issues with the policy are “point of sale” issues.
Best Practices to Establish the Best Defense
Regardless of the avenue through which the E&O claim is asserted, practices and procedures can and should be put into place to help provide a broker with the best possible defense to an E&O claim. Much like those brokers who anticipated the impact of a natural disaster on their business by developing a plan and utilizing technologies to minimize any interruption, similar planning should be undertaken with respect to potential E&O claims.
As in most things, preparation, in the form of documentation, is key. Plans and procedures should be instituted to document all coverages offered and declined and to track and follow up on any and all premium payments made. In the absence of documentation of these efforts, the proofs needed to defend a broker would likely devolve into a “he said, she said.” This can complicate a defense leaving the issue of credibility to a jury, which can tend to be predisposed to dislike insurers and those associated with insurers, particularly when everyone seems to know someone affected by Super Storm Sandy.