The dividing line between “order taker” and “trusted advisor” can be a blurry one, and become even more so when viewed through the microscope of a lawsuit.

A lot has been written about a decision by the New York Court of Appeals (the State's highest court) earlier this year, Voss v. The Netherlands Insurance Company, 22 N.Y.3d 728 (2014), in which the Court squarely framed the issue as “[W]hether a special relationship existed between the insureds and their insurance broker.” If, under New York law, such a “special relationship” existed, the broker might be liable for (allegedly) failing to recommend adequate business interruption insurance limits to Debra Voss and three of her businesses.

What was so “special” about Voss' relationship with the broker?

• Her business interruption losses were not unusual: water damage occurred over two years at a building owned by Voss, disrupting operations in the building, including two other businesses owned by her and housed in her building. The water intrusion damages began in 2007, the year after Voss bought the building.
• The relationship was not particularly long-term: Voss became a customer of an insurance brokerage firm in 2004, just two years before she bought the building, and three years before the first loss.
• The policyholder was familiar with the insurance product: she had purchased business interruption insurance before buying the building, with a $75,000 per-incident limit, and maintained the same limit in the policy year after the purchase.
• The broker didn't recommend lower limits: after the first two losses the carrier offered a renewal with a $30,000 per-incident limit, rather than $75,000. Voss accepted the limit, though she alleged that the broker promised to “look into” obtaining a higher limit. The third loss, occurring in 2008, took place when the $30,000 limit was in place.

Yet, the court in Voss departed from the rule that it recognized to be the “general” one:

[I]n the ordinary broker-client setting, the client may prevail in a negligence action only where it can establish that it made a particular request to the broker and the requested coverage was not procured. Plaintiffs in this case do not allege that they specifically requested higher business interruption policy limits and have not proceeded against [the broker] under this common-law theory of liability. Rather, their claim hinges on the existence of a special relationship.

The court reviewed earlier cases that had found exceptions to the general rule, and summarized:

We 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.

The court found that the second exception could apply to Voss' claim against the broker. Voss had testified that one broker with the firm had promised to “review her coverage annually as the business grew,” but failed to do so.

The Voss decision was four-to-three, but even the dissenters agreed that the alleged promise to annually review coverage could create a “special relationship.” They disagreed with the majority opinion because the evidence also showed that the brokerage firm had not kept the supposed promise for several years, so there was no reason for Voss to rely on it. As the dissenting opinion reasoned, “there is no authority for finding a special relationship based on a gratuitous promise to consult, where no consultation takes place.”

The dissent concludes:

Agents are not insurance companies and do not earn premium income. They earn, ordinarily, relatively modest commissions for bringing insurers and insureds together. It is natural for a client that has suffered a loss not covered by its insurance to blame its insurance agent; and if lawsuits by clients against their agents are welcomed by the courts, the consequence may be to make the agent into a kind of back-up insurer, a result neither sensible nor fair.

(The dissent dryly commented, “It is true that, if Voss has described the facts accurately, [the brokerage firm] should not get a high mark for client service.”)

The result in Voss may be explained by its procedural setting. The trial court judge had granted summary judgment to the broker. In New York, as elsewhere, courts should not decide the case on the merits if there is a disputed, material fact on which the outcome depends. The majority of the New York high court found Ms. Voss' testimony to create such a disputed fact; the dissent treated the “fact” as irrelevant. In their view, the bare “promise” to annually review the insurance program, without either the insured hiring the broker to do so, or the broker actually performing the task and giving erroneous advice, could not give rise to a special duty of care.

How easy it is, after an under-insured loss, to allege such “promises.” Coming as it did within sixteen months after Superstorm Sandy devastated parts of the Mid-Atlantic and Northeast states, the Voss decision could encourage insureds with under-insured (with benefit of hindsight) business interruption and other losses to have enhanced memories of similar promises, without a written promise, a course of conduct, or any independent evidence to support them.

Brokers sometimes make matters worse by over-promising their levels of service in marketing materials and on their Web sites. Promising added no-cost services may be create a competitive advance in marketing; doing so without following through can create a competitive disadvantage in court.

The Voss decision does not address a related issue: How long does such a “promise” to procure adequate coverage last? (The dissent would cut the promise short because the broker repeatedly failed to perform as promised.) Another 2014 decision by a state's highest court sheds light on the subject.

On April 3, 2014, the Indiana Supreme held that the two-year statute of limitations on negligence actions against brokers began to run when the policyholders could have discovered—by reading their homeowners insurance policy—that it did not afford full replacement cost coverage for their home in the event of a fire. (Groce v. American Family Mutual Ins. Co., No. 48S02-1307-CT-472 (2014).) The limit for fire losses had been raised several times over the years as the home had appreciated, but when the house was destroyed by fire in 2007, the carrier's payout was capped near $186,000; the actual cost of reconstruction was over $225,000.

The agent in the Groce case had asked in 2003, when the customers purchased the home, “I'm assuming you want replacement cost coverage . . . if anything ever 9 happens—fire, tornado, wind—[the residence] will be replaced 100%?” The couple replied that they did want that level of protection. But the policy, as issued and as annually renewed, capped the insurer's obligation to pay for reconstruction.

Not all states strictly enforce policyholders' duty to read their policies. The Groce decision thus does not provide a safe harbor outside the Hoosier State. That said, there seems to be some judicial recognition that policyholders should not be allowed to sit on their rights for years, paying less in premiums for lower limits, then “recalling” promises by agents or brokers to procure “adequate” limits, with benefit of post-loss hindsight.

Engagement letters by agencies and brokerage firms to their new clients can provide strong evidence of the scope of services that will be provided, though many insurance professionals do not use such letters, particularly with personal lines customers and small businesses.

We can't all be taxidermists.