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June 2017 -- The E&O Report

 
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 June 2017
Volume 29, Number 6

The Importance of Understanding Trends in the Law Affecting Insurance Agents, Brokers

New York State has historically provided great protections for insurance agents and brokers based on the narrow duties common law imposes and the limited class of persons and entities allowed to assert direct claims against them. Over the years, we have assisted insurance agents and brokers in identifying best practices based upon legal trends that can help prevent potential errors and omissions claims and lawsuits. As trends and changes in the law evolve over time, we have offered suggestions as to how you should adapt your practices, procedures and overall approach to E&O risk management. In this issue of The E&O Report, we discuss a trend that could potentially affect E&O exposure for New York insurance agencies and brokerages.

On a Related Note
IIABNY's annual Errors and Omissions Loss Control Seminar series concludes Wednesday, June 7 with live videoconference seminar and webinar options presented by James Keidel and Chris Weldon, assisted by IAAC President Brian Bixby. Register online for the videoconference seminar or webinar.

Over the past few years, we have seen an uptick in the number of failure to procure lawsuits against New York insurance agencies and brokerages by individuals and entities claiming additional insured status on liability insurance policies. In the past, and still for the most part, we were able to have those cases dismissed by the court before we ever answered the complaint by making what is called a pre-answer motion to dismiss. The grounds for those motions were based upon the facts that New York law allowed only the customer of the agent or broker to sue, since the customer was the only party to whom the agent or broker had privity with and owed a legal duty to.[1]

In March 2009, a New York Appellate Court in the “Dominion” case allowed, what we viewed as a third-party, to sue the insurance broker. In that case, the court said the broker “was aware, from the moment its client contacted it about procuring coverage, that plaintiff was the intended beneficiary of the coverage, and that plaintiff participated on its own behalf in discussions with defendant and its client about the coverage to be provided. Accordingly, plaintiff has stated a cause of action for negligence both on its own behalf and as the assignee of defendant's client's claims against defendant.” The distinguishing fact in the “Dominion” case was the broker had procured a surety bond and was being sued by the obligee, who was an indispensable party on and to the surety bond. A surety bond is by definition a tri-partite insurance instrument, which unlike a liability policy is a bi-partite insurance instrument even when it provides additional insured coverage.

In the years since the “Dominion” case was decided, the case has been used by attorneys for additional insureds to try and support a claims that standing exists for the additional insured to sue the insurance agent or broker. Thankfully, based upon the unique nature of the facts in that case, the New York courts have declined to change the law in this area and have dismissed actions based upon the lack of privity with the agent or broker.

However, a widow, the revocable beneficiary of a term life insurance policy written on the life of her husband, recently sued the agent who procured the policy after the insurance company denied paying the death benefit. The insured/her husband had lied on the medical questionnaire about his history of drug and alcohol abuse, and he died within the policy’s two-year contestability period. In opposition to our motion to dismiss, which we based on the lack of privity law in the additional insured cases, the attorney asserted the “Dominion” case and claimed the widow had direct dealings with the agent, while admitting that her husband was the customer, not she. Relying on the case, the court issued a troubling decision that dismissed certain claims but allowed the widow to proceed in her own name against the agent, claiming she was in privity. This court decision is now on appeal in the Appellate Division, since it is contrary to controlling New York law.

Both court decisions discussed above relied on direct contacts between the third-party and the agent/broker to support the existence of privity. Applied to the typical additional insured context, you should consider your direct interactions with an owner, general contractor or their brokers, if any, when you issue a certificate of insurance. Be mindful of the fact that any such direct contacts can potentially be used to support an argument that privity exists with the agency or brokerage sufficient to maintain a legal claim. Also, please remember that the current version of the ACORD 25 certificate of insurance form itself is one of the best tools for defense against an E&O claim or lawsuit. Courts have relied upon the language contained in the form that sets forth a clear declaration advising that the form does not serve to confer insurance coverage.

As highlighted above, it is important for insurance agents and brokers to be mindful of the trends or changes occurring in the law that could affect them. The prudent insurance agent or broker is one that takes this information and then uses it to structure their regular office practices and procedures in a way that protects them from potential E&O claims and lawsuits, while providing inimitable customer service. The insurance agencies and brokerages that proceed in this fashion will not only help avoid potential E&O claims and lawsuits but will thrive and survive in the years ahead.

Submitted by:
Howard S. Kronberg, Esq. and
James C. Keidel, Esq.
Keidel, Weldon & Cunningham, LLP

[1] Privity is a legal term defined as the relationship that exists between two contracting parties; such as exists between a customer and their insurance agent or broker.

Keidel, Weldon & Cunningham, LLP concentrates its practice in the defense of insurance agents and broker's errors and omissions claims and litigation, errors and omissions loss control counsel and education, insurance coverage analysis and litigation and insurance regulatory matters. Please direct any comments or questions to James C. Keidel, Esq. by mail to the main office of Keidel, Weldon & Cunningham, LLP, at 925 Westchester Avenue, Suite 400, White Plains, NY 10604, telephone at (914) 948-7000 or e-mail at jkeidel@kwcllp.com. The law firm also maintains offices in Syracuse, New York; New York City, New York; Wilton, Connecticut; Fair Lawn, New Jersey; Warwick, Rhode Island, Philadelphia, Pennsylvania, Williston, Vermont and Naples, Florida.
 
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