And, unfortunately, it is true regardless of whether a longstanding relationship of trust, confidence and reliance upon the agent or broker preceded the loss, with the agent or broker having provided years of dedicated service. In fact, where such a relationship existed prior to the uncovered or insufficiently covered loss, then that is all the more likely not only to give rise to a claim, but to give the claim some real teeth.

The basic duty owed by agents and brokers to their clients is to procure the requested coverage or inform the client within a reasonable period of time of their inability to do so. Once this duty has been fulfilled, courts have generally held that there is no ongoing duty to advise a client of the sufficiency of coverage, either as to limits or available optional coverages.

In setting this standard, courts have generally concluded the insured is best positioned to know what risks it can afford to retain, and the insurance premiums it is willing or able to pay in relation thereto. Further, courts have also indicated a reluctance to make agents and brokers guarantors of their clients' judgments in this regard. It is for that reason that courts generally only find a continuing duty to advise or provide guidance on coverage where there is a “special relationship” between the agent/broker and the client. (See “Feeling Special,” this page.)

Where a “special relationship” can be said to exist, insureds can argue that they need not bear the responsibility alone for failure to have sufficient coverage in place; they can argue that the agent/broker is as much or more to blame.

Absent the existence of a “special relationship”, agents and brokers typically cannot and will not be held responsible for the failure of their clients to have sufficient coverage in place to fully cover the losses they may sustain. However, with the growing perception publicly and in the judiciary of agents and brokers as “experts” providing sophisticated “professional” advice, the breadth of claims against them continues to expand.

Indeed, not only are traditional claims being made by the agents'/brokers? clients regarding failure to procure the requested coverage, claims are being made and sustained by insureds alleging that the agent/broker failed to advise of available coverage, and even by insurers claiming that brokers owe them a duty to ensure that misrepresentations are not made in a policy application!

A review of some recent decisions in the United States District Court for the District of Columbia and the Pennsylvania Superior Court reveals an E&O landscape that just seems to be getting more treacherous for agents and brokers with every passing day.

Earlier this year, in Burlington Ins. Co. v. Okie Dokie Inc., the District of Columbia district court refused to dismiss claims made by a commercial general liability insurer, Burlington, against a broker for allegedly negligently misrepresenting in the policy application the nature of the business at an establishment seeking insurance. The insurer believed the application misstated and concealed the true nature of the business (the “nightclub”).

The case involved claims under a commercial general liability policy after an under-aged drunk driver, who had allegedly been drinking at the insured premises, struck and killed a police officer. The decedent's estate sued the owner of the alleged “nightclub,” and Burlington provided its insured with a defense.

However, Burlington then brought a declaratory judgment action against its insured, seeking a declaration that it had no duty to indemnify or defend it, and rescission of the policy on the grounds that the insured misrepresented the “nightclub” as merely a restaurant with a dance floor, which derived no more than 25 percent of its revenue from the sale of alcohol and did not sponsor “social events.”

Burlington claimed that, in fact, the business was run as a nightclub, hosted concerts, derived more than 25 percent of its revenue from the sale of alcoholic beverages, and regularly featured an “open bar.”

Not content to limit its claims to those seeking declaratory relief vis-a-vis the insured, Burlington also brought a claim for “negligent misrepresentation” against the broker in preparing the application and, in so doing, failing to advise of relevant information concerning how the establishment was run.

The broker moved to dismiss, arguing that it owed no duty to Burlington, because its sole contractual relationship was with its client, the insured. However, the court held that Burlington had properly stated a claim against the broker, relying upon Section 552 of the Restatement (Second) of Torts.

In making this determination, the Court noted that, pursuant to the Restatement: “One who, in the course of his businesssupplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.”

The fact that the broker had no contractual privity with the insurer, in the court's judgment, was irrelevant.

In Wisniski v. Brown & Brown Ins. Co. of Pa., decided on June 7 by the Pennsylvania Superior Court, the insureds were owners of a business which had sustained significant property damage when a stream that traversed the insureds' property underneath the building housing the business overflowed and flooded the building. The insureds had no flood insurance and sued their insurance agent, alleging that the agent should have investigated the insureds' coverage needs, inspected the insureds' property, informed the insureds that flood insurance was not included in the policy they had in place, and recommended that the insureds purchase flood insurance.

Prior to trial, the insurance agent moved to dismiss the claims against it on summary judgment, and the motion was granted. However, on appeal, the Pennsylvania Superior Court reversed and reinstated the claims. In so doing, while noting that “[we do not declare, as a matter of law, that insurance agents always have a duty to inspect the businesses on which they offer coverage,” the court asserted that the duty of an insurance agent depends upon the facts and circumstances of the case.

In the court's judgment, the insureds had presented sufficient evidence, in that case and in those circumstances, to have a jury decide whether the agent had exercised the skill and knowledge normally possessed by members of its profession in representing the insured with respect to the coverage at issue. Significant in the court's ruling in this regard was the fact that the insureds had offered a report from an expert who contended that it was grossly negligent for the agent not to have inspected the site in the course of procuring coverage for the insured.

In Saylab v. Don Juan Restaurant Inc., the federal district court for the District of Columbia considered claims by the owner of a restaurant and relatives of the victims of a drunk driver who had killed two people after allegedly being permitted to drink to the point of inebriation at the Don Juan Restaurant.

When the restaurant sought coverage under its commercial general liability policy, the insurer disclaimed, citing the policy's liquor liability exclusion. The restaurant then brought suit against the insurer for a declaration that, in fact, the claims made by the relatives of the people killed were covered.

Joined by the relatives, the restaurant then sued the broker for breach of common law and contractual duties owed to them in failing to apprise the owner of the restaurant of the availability of liquor liability coverage for the restaurant.

After upholding the insurer's disclaimer based upon the liquor liability exclusion, the court dismissed the claims of the relatives against the broker. In doing so, the court noted that the loss they had suffered as a result of the broker's alleged negligence was “economic loss” as opposed to “personal injury.” The court's rationale was that the relatives' injury resulting from the broker's failure to properly advise the restaurant regarding available coverage was their inability to collect on their judgment. The broker had nothing to do with the injuries caused by the drunk driver.

Accordingly, the court held that the broker owed no common law duty to the relatives arising from the accident, and no contractual duty either because they had no direct relationship with the broker and were not identified third-party beneficiaries of the broker's contractual relationship with the restaurant.

As to the restaurant's claims against the broker, however, the court, construing Maryland common law, denied the broker's motion for summary judgment. Although the restaurant acknowledged it had never requested liquor liability coverage, and there was apparently no contention made that the broker had a “special relationship” with the restaurant, the court held that a broker is a “professional” who possesses “specialized knowledge and skill,” and therefore must be held to a higher standard than the average salesman.

And, despite acknowledging Maryland case law confirming that a broker has no ongoing duty to advise as to the amount of coverage an insured should have in place, the court held that the question of whether a broker has performed his duties in procuring coverage for his client with reasonable skill and ordinary diligence can encompass the question of what could and should have been done by the broker with regard to informing the restaurant about the availability of liquor liability coverage.

Reviewing these decisions, natural questions arise What is to be made of them? Do they indicate a trend?

The answer, in this writer's opinion, is that the decisions reflect expanded notions of what duties agents and brokers can reasonably be expected to provide and, with that, expanded notions of the potential avenues for maintaining claims against agents and brokers.

And they do, indeed, reflect a trend.

The judiciary's perception of agents and brokers is more and more of people and organizations with specialized knowledge and skills who are retained and relied upon for their specialized skills.

In a decision reflecting this perception, the New York Appellate Division, First Department, succinctly summed up what appears to be the perception the judiciary has developed in this regard, stating: “An insured has a right to look to the expertise of its broker with respect to insurance matters. And, it is no answer for the broker to argue, as an insurer might, that the insured has an obligation to read the policy.”

“It is precisely to perform this service as well as others that the insured pays a commission to the broker,” according to the 2002 ruling in Baseball Office of the Comm?r v. Marsh & McLennan.

With this perception increasingly taking hold, even in the absence of a “special relationship,” the courts are becoming more receptive to claims that broaden the scope of agents? and brokers' duties to do more than simply procure the coverage requested. And, at least in the Burlington case, the courts are evidencing an expansive view of to whom agents? and brokers' duties may run.

Peter J. Biging, Esq. is a partner in the New York office of Lewis Brisbois Bisgaard & Smith, LLP. He can be reached at [email protected].

Reproduced from National Underwriter Edition, October 28, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.