Broker Liability

Duty to Advise

Courts are increasingly ruling that brokers should be held liable for the insurance purchasing advice they provide.
By: | May 1, 2014 • 7 min read

An increasing number of courts are taking a fresh look at whether insurance brokers should be held liable for their insurance purchasing recommendations.

One case weaving through the Florida courts now is Tiara Condominium Association Inc. vs. Marsh USA Inc., in which the condo association alleges that the Marsh broker failed to procure an adequate insurance policy on its building, which subsequently suffered extensive wind damage from two hurricanes in September 2004.

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The case, which revolves around whether the broker had a “special relationship” with the client, is provoking interest around the country.

Marsh had secured windstorm coverage through Citizens Property Insurance Corp., which issued a policy that contained a loss limit in an amount close to $50 million, according to the lawsuit. After the condo building sustained significant damage caused by hurricanes Frances and Jeanne, Tiara claims Marsh assured the association that it would be entitled to nearly $100 million for both occurrences, and the association proceeded to repair the building.

However, when Tiara sought payment from Citizens, the carrier claimed that the loss limit was $50 million in the aggregate, not per occurrence, according to the lawsuit. The carrier settled with Tiara for roughly $89 million — less than the more than $100 million spent by condo association.

Tiara’s attorney Mark L. McAlpine, founding principal of McAlpine & Associates, P.C. in Auburn Hills, Mich., said it will be up to the jury to decide whether Marsh did, indeed, have a special relationship with the condo association, which affects its liability in the case.

A broker is determined to have a special relationship that imposes enhanced duties to the insured, he said, if:

• They hold themselves out to have special expertise;

• The broker is an integral part of the claimant’s decision-making process;

• The broker receives additional compensation for risk advising services; or

• The broker is in a position to affect such decisions and the insured is known to be relying on the broker’s advice in making an insurance purchase decision.

A Marsh spokeswoman said Marsh did not have a “special relationship” with the condo association, and noted that the association’s “purchasing decisions were made by the association’s special insurance committee which included a former senior insurance executive, a lawyer and a CPA.”

“The law in virtually all states is that an insurance broker has a duty to obtain the insurance requested by the client or inform the client that it could not be obtained. Some courts have created an exception to this rule when the plaintiff alleges the existence of a ‘special relationship’ between the broker and the client,” she said.

“However, those courts have also made clear that the ‘special relationship’ exception should be applied only in very limited circumstances. For example, New York’s highest court recently stated that ‘[we] reiterate that special relationships in the brokerage context are the exception, not the norm.’”

Typical Skills and Experience

Bryson Popham, a partner in the Annapolis, Md. law firm, Popham & Andryszak, P.A. who represents agents and brokers, said that they are generally held to a legal standard of care based upon typical skills and experience, and that they should be accountable for the advice they give.

There’s always the exception, Popham said, but on typical issues such as whether a client has the right coverage, an agent or broker should advise a client based on the client’s needs.

“Agents and brokers are knowledgeable about insurance coverage, but they are not property appraisers,” he said. “They should not take on that responsibility unless they have a special ability to make that determination, and most do not.

“Sometimes they take on those additional responsibilities unwisely,” he said, “and then they may have liability issues that could be hazardous to their professional health.”

“Where a broker says that he will evaluate risk and tell you what insurance to buy, the broker is going to be held to a very high standard.”
—Robert D. Chesler, shareholder, Anderson Kill

Issues over broker liability are also being scrutinized in the Northeast, where hundreds of insureds have not collected on insurance claims following Superstorm Sandy flooding.

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There are many pending lawsuits alleging that insurance brokers did not advise their insureds on the availability of flood insurance, said Robert D. Chesler, a shareholder based in the Newark, N.J. office of the Anderson Kill law firm.

The law differs from state to state regarding the duty of an insurance broker to advise a client.

“In New Jersey, we’ve seen insurance brokers trying to market themselves as professionals with more expertise and greater standards,” Chesler said. “Where a broker says that he will evaluate risk and tell you what insurance to buy, the broker is going to be held to a very high standard.

“It used to be that policyholders just bought general liability insurance, but now they also must consider employment, cyber, environmental, flood insurance — the types of insurance that are now available has mushroomed,” Chesler said.

“This has led to some brokers in some cases not being fully up to speed on having the necessary knowledge to deal with their clients,” he said.

In New York, a February ruling by the N.Y. Court of Appeals in Deborah Voss vs. The Netherlands Insurance Co. found that a broker can only be liable if it has a special relationship with the insured, he said.

“It’s a major development, as it’s the first time a New York court found that a special relationship may exist,” Chesler said.

Business owner Deborah Voss claimed, among other things, that her broker from CH Insurance Brokerage Services Co. Inc. assured her that $75,000 per incident in coverage for business interruption losses was adequate, even after she questioned the limit, according to the lawsuit.

Moreover, the broker promised to reassess her coverages as her business grew, but failed to do so after she moved into another building that subsequently sustained water damage from a leaky roof on multiple occurrences, according to the lawsuit.

The court denied the insurance broker’s motion to dismiss the litigation and found that a special relationship could have existed — particularly since the broker promised to re-evaluate her policies as her business grew.

Specialized Advice

The concept of when an insurance broker has a duty to advise used to be “a much greater mountain to climb,” said Peter Biging, a partner at Goldberg Segalla LLP in New York City.

Peter Biging, a partner with Goldberg Segalla

Peter Biging, a partner with Goldberg Segalla

“I think these types of decisions are indicators of the judicial system increasingly identifying agents and brokers as experts providing highly specialized advice, instead of just being order-takers,” Biging said.

Such perceptions are due to the realities of “the competitive marketplace of today,” which demands that agents and brokers promise greater risk management services, either expressly or implicitly, he said.

“These types of decisions are indicators of the judicial system increasingly identifying agents and brokers as experts providing highly specialized advice, instead of just being order-takers.”

When that risk management duty is implied, it may be harder for clients to prove broker liability, he said. But if the agent’s or broker’s contract states they will act as the insured’s “exclusive risk manager” or “financial risk adviser,” courts will now likely require a higher level of care and responsibility on the part of the agent or broker.

In the Tiara case, McAlpine said, the condo association that made the insurance purchasing decisions “is actually run by volunteers who don’t have the expertise to make commercial insurance risk decisions and thus have no choice but to rely on the broker’s advice, which I believe, is an important consideration in determining whether or not its broker has a special relationship.”

He said Marsh was part of Tiara’s decision-making process as to the type and amount of hurricane coverage to obtain, and evaluated the condo association’s outdated replacement value appraisal, advising that a new appraisal was not necessary.

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The trial is scheduled to begin in October, following a ruling in federal district court that the special relationship test should apply, McAlpine said.

“I think Florida is taking an enlightened path in recognizing that brokers in certain circumstances undertake enhanced duties to properly advise their clients as to their insurance risks,” he said.

If the special relationship exists, the broker may have a duty to properly advise them on the type and amount of insurance they need to buy, McAlpine said. Moreover, once the client has made its decision, the broker may have a further duty to warn the client if it has made a risky decision.

“Obviously, the broker’s duties may be tempered either way by the sophistication of its client,” he said.

“An experienced risk manager can be expected to know and understand its insurance risks, while a condo association making decisions through a voluntary board will likely be perceived by a jury to be particularly vulnerable and therefore reliant on the broker’s advice.”

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Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]