Dec 6, 2016

Court case reminds brokers to submit accurate applications

In a recent court case (Romil Joseph v. Interboro Insurance Co.) the Appellate Division of the Supreme Court of New York, Second Department issued an opinion dismissing a lawsuit that sought to recover damages for breach of contract and negligence on the part of an insurance broker and insurance company.

The plaintiffs are the owners of residential property in Brooklyn. Prior to purchasing the premises, the plaintiffs' mortgage broker informed them that they needed insurance in order to close. Thereafter, the mortgage broker, on the plaintiffs' behalf, contacted an insurance broker to procure a homeowners' insurance policy based upon representations the plaintiffs made in their loan application that they would occupy the premises as their primary residence. Based on the information provided by the mortgage broker, the insurance broker completed an application for insurance, which said the premises would be occupied by the plaintiffs as their primary residence. The plaintiffs signed the application, and thereafter, on the date of closing, a homeowners' insurance policy was issued by the defendant insurance company.

After a fire occurred at the premises, the insurance company discovered that the plaintiffs did not occupy the premises as their primary residence and rescinded the policy, contending that the plaintiffs, through a material misrepresentation, induced them to issue a policy that it normally would not have issued. The plaintiffs then commenced this action, inter alia, to recover damages for breach of contract and negligence. The Supreme Court granted the separate motions of the insurance company and the insurance broker for summary judgment dismissing the case against them. The plaintiffs appealed the case to the Appellate Division and this decision found that the Supreme Court had properly granted the insurance company’s motion for summary judgment dismissing the complaint. The representation made in the application that the premises was an owner-occupied primary residence established, in effect, a material misrepresentation of a then-existing fact that the premises would be owner occupied, which was sufficient for rescission under New York Insurance Law Section 3105.

Generally, 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." (Murphy v. Kuhn, see Voss v. Netherlands Ins. Co., American Bldg. Supply Corp. v. Petrocelli Group Inc., Waters Edge @ Jude Thaddeus Landing, Inc. v B & G Group Inc.). Thus, generally, "to set forth a case for negligence or breach of contract against an insurance broker, a plaintiff must establish that a specific request was made to the broker for the coverage that was not provided in the policy" (American Bldg. Supply Corp. v. Petrocelli Group Inc., Voss v. Netherlands Ins. Co., Hoffend & Sons Inc. v. Rose & Kiernan Inc.).

However, where a special relationship develops between the broker and client, the broker may be liable for failing to advise or direct the client to obtain additional coverage even in the absence of a specific request (see Voss v. Netherlands Ins. Co., Hoffend & Sons Inc. v. Rose & Kiernan Inc., Murphy v. Kuhn). The Court of Appeals had identified 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'" (Voss v. Netherlands Ins. Co., quoting Murphy v. Kuhn).

Here, the insurance broker established its prima facie entitlement to judgment as a matter of law by presenting evidence which demonstrated that it procured the insurance requested and that there was no exceptional situation giving rise to a special relationship.