Brokers Face Legal Battles
It’s an increasingly litigious world for brokers and agents.
When disaster strikes, a growing number of policyholders taking their brokers and agents to court for a “failure to advise” them about the severity of potential risks and the breadth of their coverage options.
And according to lawyers on both sides of the issue, the courts seem more inclined than ever to rule in favor of insureds.
“My sense is that, overall, there’s been a growing trend that agents and brokers are being held to a higher standard than they used to be, and this trend is not going to change,” said Peter Biging, a partner with Goldberg Segalla, who is working on a report for the American Bar Association about this issue. He represents regional and large national brokerages.
“Previously, brokers were more protected. I think there was more insulation from these types of claims,” he said.
Legal experts say storm wreckage in New Jersey last year illustrated this pattern.
“The last several years there’s been a general increase in actions filed against the broker and agent community,” said Harry Baumgartner of Bressler, Amery & Ross, who represents brokers, agents and insurance companies. “It has been spotlighted as a result of Hurricane Sandy, in particular.”
The results of the Sandy cases remain to be seen, and suits are still being filed. But the issue often boils down to this: Beach town homeowners are disappointed with their insurance payouts. Private homeowner’s insurance does not generally cover flood damage. That means homeowners have been paid for damages attributed to wind, but much of the water damage has not been covered.
“Many people are claiming they weren’t properly advised about ‘the flood exclusion’ from homeowner’s insurance,” Baumgartner said. “They feel they did not have adequate insurance for the damages that occurred. We’re seeing a spike of that type of activity.”
Some voices in the insurance industry view this litigation as predatory.
“Trial lawyers descended on the Northeast immediately after Sandy,” said Robert Hartwig, president of the Insurance Information Institute. “The business model is one that is a little bit like ambulance chasing. They follow disasters and hope to sue the agents in this space.”
Expectations for brokers and agents vary by state and the cases tend to be highly fact-specific. But overall, experts said, the courts seem primed to favor insureds more than ever before.
“What I’m seeing as a developing trend in the case law is, there’s much more of an opportunity to argue there should have been a duty to advise,” Biging said.
He pointed to a “sea change” in the case law last year due to the New York lawsuit, American Building Supply Corporation vs. Petrocelli Group. The court decided to go lenient on policyholders who failed to do their homework, acknowledging that policyholders often fail to read their policies, he said.
Prior to this case, if a client requested a particular policy but the broker or agent got them something different, the broker would be protected as long as the insured received the policy and did not object. But in this case, the court found that “receipt and presumed reading of the policy does not bar an action for negligence against the broker.”
The big picture is that Information Age insurance practices may be spurring more “duty to advise” lawsuits, according to Biging. As buyers increase their tendency get policies online, brokers and agents are trying to hold onto the business by promising customers more and more, he said.
“Agents really need to be aware of this issue. And they need to make wise choices on who they purchase their E&O coverage from.”
— David Hulcher, assistant vice president of agency professional liability risk management, Independent Insurance Agents & Brokers of America
Nowadays, brokers are selling their services “on the premise that ‘we are going to help you really understand the types of risks you’re facing and help you get the right product,'” he said. “I can’t just step back and say ‘it’s your own fault’ when it doesn’t work out.”
For brokers and agents, that means it is important to have solid errors and omissions (E&O) coverage, according to David Hulcher, assistant vice president of agency professional liability risk management at the Independent Insurance Agents & Brokers of America. He said litigation by insureds is a “huge” problem for insurance professionals.
“Agents really need to be aware of this issue. And they need to make wise choices on who they purchase their E&O coverage from,” he said. “The reality is something to the effect [that] one in seven agents will have an E&O claim every year.”
To stave off lawsuits, clear communication with insureds is key. “When brokers and agents don’t get out in front of the problem or aren’t communicating clearly, policyholders get angry,” said Gene Killian, a New Jersey lawyer who represents policyholders.
And more than anything, leave a paper trail, lawyers said. “Unfortunately we have gotten to the point where you have to do everything in writing,” Killian said.
It may be that lawsuits provide a “wakeup call” to the insurance industry about documenting client communications, according to Baumgartner.
“Oftentimes, things that are said and done are not recorded comprehensively in client files,” he said. “Those gaps become litigation battle grounds.”