As an insurance broker, you procure coverage for a client from an insurance company. Unfortunately, your client suffers a loss, and the policy doesn’t cover it. Does your client have a claim against you, the broker? Like many areas of the law, it depends.
Different states impose various obligations on insurance brokers, and some states make it relatively easier for plaintiffs to successfully bring a lawsuit against brokers. New Jersey has higher standards for brokers than certain other states, including neighboring New York, and it’s important to understand your increased exposure in the Garden State.
Brokers Must Procure the Policy Requested
Based on the seminal 1964 New Jersey case Rider v. Lynch, an insurance producer has a duty to (i) have the degree of skill and knowledge requisite to its employment responsibilities; (ii) exercise good faith and reasonable skill, care and diligence in the execution of his or her employment responsibilities; (iii) possess reasonable knowledge of available policies and terms of coverage in the area in which the insured seeks protection; and (iv) either procure the coverage necessary for the client’s exposures or advise the client of his or her inability to do so.
If you as a broker neglect to procure the insurance or if the policy is void or materially deficient or does not provide the coverage that you undertook to supply, due to your failure to exercise the requisite skill or diligence, you become liable for the loss (Johnson v. MacMillan).
Furthermore, the coverage requested can be implied from the circumstances. Rider involved an 18-year-old with limited ability to read English. She told her broker that she needed auto insurance for a car owned by her fiancé, who had given her permission to use the car while he was out of state. The broker issued a non-owner’s insurance policy but did not explain that the policy only covered automobiles not used regularly by the insured or any relative. The coverage procured was thus useless because she and her family planned to use the car on a regular basis, a fact the broker knew or should have known from the circumstances.
Brokers Must Notify the Client if a Policy is Not Obtainable
New Jersey insurance brokers must inform the client when the requested policy coverage is not obtainable. In DiMarino v. Wishkin, an Appellate Court determined that a broker was liable for the client’s damages where the broker expressly agreed to procure insurance at the request of the client but failed to do so and did not inform the client of the failure, even though the broker did not do so because coverage could not be obtained. Even if the type of coverage requested was not available from any carrier, the broker had to warn the client at once the coverage could not be obtained. This adds another layer for New Jersey insurance broker’s responsibility.
Some Courts Have Held Brokers Must Advise about Available Coverage
In Brill v. Guardian Life Insurance Company of America, the New Jersey Supreme Court found a broker must tell a client about the availability of immediate insurance coverage through a binder. A widow sued her husband’s insurance broker and his agency for failing to advise her husband, a prospective insured, that he could secure immediate, temporary life insurance coverage upon completion of a life insurance application. When the plaintiff’s husband died, the life insurance application seeking a $750,000 death benefit was still under review, and no policy had been issued. In discovery, the broker admitted that he never advised Brill that he could obtain coverage immediately in the form of a conditional receipt. The Court found that a broker has a duty to inform the potential insured of the availability of immediate coverage through a temporary binder and, thus, failure to do so constituted professional negligence.
Moreover, a request to obtain “best available” insurance puts a duty on the broker to find the best coverage possible (Walker v. Atl. Chrysler Plymouth).
Brokers in Some Cases Have a Fiduciary Duty to Clients
Because of the specialized knowledge required to understand the insurance industry’s many intricacies, the New Jersey Appellate Division has held insurance professionals often stand in a fiduciary capacity to the client and should be required to use their expertise with every client (Sobotor v. Prudential Property & Casualty Insurance). However, an insurance broker is also not an insurance consultant, and some cases have held a broker has no duty absent a “special relationship” to advise that higher limits are available and might be advisable, absent such a request (Cheng Lin Wang v. Allstate Ins. Co.). The Appellate Division also held that whether a special relationship exists is a determination to be made by the trial court. In Glezerman v. Columbian Mutual Life Insurance Company, the Court held an insurance broker may assume duties in addition to those normally associated with the agent-insured relationship, and New Jersey courts regularly review the record for evidence of greater responsibilities. The prior conduct of and length of relationship between the parties can create or negate the existence and scope of the duty owed to the insured.
Factors of whether a special relationship exist include: (1) whether advice was given on coverage and policy limits previously; (2) whether the producer’s website promises to provide advice on insurance needs; (3) the length of the relationship; (4) the comprehensiveness of coverage; (5) the extent the producer plays in decision-making; (6) whether a fee is charged above the earning of commissions; (7) any reliance on the part of the policyholder; and (8) whether the producer claims to be an expert in a certain type of risk (Avery v. Arthur E. Armitage Agency).
Client’s Failure to Read the Policy Is not a Defense
In New Jersey, an insured’s failure to read the policy and discover the insurance requested was not obtained is not considered comparative negligence in a suit against the broker and can not be relied upon by the broker as a defense (Aden v. Fortsh). Instead, the insured is entitled to rely on the broker’s representations. It is the broker, not the insured, who is the expert, and the client is entitled to rely on that professional’s expertise in faithfully performing the very job she was hired to do.
Zone of Harm
As explained by the New Jersey Supreme Court, an insurance broker may owe a duty of care not only to the insured who pays the premium and with whom the broker contracts, but to other parties found within the “zone of harm” emanating from the broker’s actions. Carter Lincoln–Mercury v. EMAR, Group, Inc. held that an insurance broker and agent owed a duty of care to a loss-payee found within the zone of harm stemming from the broker’s negligent actions. “[T]hat a plaintiff may be found within the ‘range of harm’ emanating from a tortfeasor’s activities is more significant than whether the parties stand in a direct contractual relationship.”
New Jersey imposes heightened standards on insurance brokers, who can be liable for failing to procure insurance requested or advise that the coverage does not exist. Some courts have held that a broker must advise about available coverage, and requests to obtain best available coverage place a duty on the broker to find the best available coverage and not just the minimum. Whether a broker has a duty to advise about possible coverage that was not requested will depend on the facts of the case.
This creates important and significant professional responsibilities upon New Jersey insurance brokers, who should ensure they have structured their business and put protocols in place to ensure they are protected from claims by their insureds concerning the procurement of insurance coverage.
If you or your business has a claim that is disputed, denied or unreasonably delayed by an insurance company, do not hesitate to give us a call.
Contact us today for a free consultation.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack