The Insurance Advocate, in its issue of August 31, 2010 (Vol. 121, No. 14), published an Article entitled “Retail Risk Management and Other “Special Duties” of New York Insurance Brokers”. In the article, the author provides an analysis of a recent case handed down by the Appellate Division, First Department of the New York State Supreme Court, Abetta Boiler & Welding Service, Inc. v. American International Specialty Lines Insurance Company, et al., ___ N.Y.S.2d ___, 2010 WL 3119466 (N.Y.A.D., 1 Dept.), 2010 N.Y. Slip Op. 06349. In the article, the author attempts to make the case that “…Insurance agents and brokers who promise clients a fullservice insurance manager in their corner had better be prepared to go the distance.” This quote, a lead-in to the Article, is the author’s own opinion and not the opinion of the Court.

The article, in our view, overstates the importance of the Abetta case in several important respects:

First, the Appellate Division did not and could not make a finding that a “special relationship” between the retail broker and the insured existed, so as to impose an enhanced duty of care upon the retail broker, based upon a “promise” to an insured that the broker would be a “full service insurance manager.” Rather, the trial court, as well as the Appellate Division, simply found that there existed a course of dealing upon which the insured relied, in which the retail broker would refer claims to insurers and handle all questions regarding claims. What is problematic with the Courts’ findings, and the author’s analysis of those findings, is that neither the single claim pleaded against the retail broker by the insured in the amended complaint, nor the evidence adduced in the record before the trial Court, asserted a theory of recovery based upon a course of dealing between the insured and the retailer. Rather, the single cause of action alleged in the complaint against the retailer, and the evidence adduced in the record, supports a claim for recovery under a much more narrower, and easier to prove theory of breach of contract.

Second, in our view, the article overstates the impact of Abetta with respect to the potential liability of wholesalers to retailers and minimizes the findings in the record relative to the specific conduct of the wholesaler in the Abetta case. The dismissal of the retailer’s claims over against the wholesale broker, in this case, was simply due to procedural issues relating to the specific legal theories asserted in the case. The evidence presented in the record, as found by the trial court, belie the suggestion that the wholesale broker was free of holding, which did not overrule or need to overrule the trial court’s factual findings, simply found that a legally sufficient case had not been pleaded in the case against the wholesale broker, not that one was not supported. Interestingly, the author of the article was the attorney that represented the wholesale broker in the Abetta case, a fact absent from the lengthy article.

Third, the article overstates the importance of the Appellate Division’s finding that a trial was required with respect to the retail broker’s liability regarding notification to the excess insurer of a wrongful declination suit of which the retail broker was not made aware by the insured. In our view, the failure of the insured to forward the actual suit to the retail broker precluded any finding of liability against the retail broker as a matter of law. Put simply, contrary to the Appellate Division’s decision, no trial was needed.

The Abetta Case

In order to put the instant analysis in context, the following is a brief summary of the facts of the Abetta case. The New York case involved the following facts:

In August, 2001, the plaintiff-insured, Abetta Boiler, was hired to perform welding repairs on a cabbage-drying machine used for food preparation. In June, 2002, an accident occurred in which several employees of the owner of the machine were injured and one was killed. In September, 2002, Abetta received a letter from an attorney representing the injured employees (but not the estate of the deceased employee) placing Abetta on notice of the claim. Two days later, Abetta faxed a copy of the letter to its retail insurance broker who prepared an Acord form and forwarded it to the wholesale broker through which both a primary and excess liability policy was placed. The wholesale broker, in turn, forwarded the Acord to the claims administrator for the primary (but not the excess) insurer. A few weeks later, in October, 2002, the injured plaintiffs (not the deceased employee’s estate) commenced suit. The retail broker was not provided with a copy of this complaint, but it was sent directly by Abetta to the claims administrator in November, 2002. The complaint sought damages in the amount of $40,000,000. The primary insurer provided a defense to the claim. At a renewal meeting in December 2002, Abetta advised the retail broker that the accident had resulted in not only personal injury but also a fatality. At that time, the claims administrator, not Abetta, provided the retail broker with a copy of the personal injury complaint. The retail broker prepared an Acord form for the excess insurer, in which it noted that several parties had been injured and that there was a fatality. This Acord form was faxed to the wholesale broker but the Acord was not sent to the excess insurer.

In March, 2003, the estate of the deceased employee commenced suit against Abetta. This lawsuit was never forwarded by Abetta to the retail broker. In September 2003, the claims administrator for the primary insurer contacted the retail broker and advised that it appeared likely that the claim would pierce the umbrella layer and wanted to contact the adjuster assigned by the umbrella insurer. The retail broker contacted the wholesale broker and was advised that there was record of receipt of the Acord form for the excess insurer. The retail broker then faxed an Acord directly to the excess insurer which disclaimed due to late notice.

The Retailer’s Liability was not Based upon Promises of “Full Service”

Under New York law, an insurance agent or broker’s liability at common law is limited to procuring requested insurance on behalf of an insured or advising the insured that the requested coverage could not be obtained. However, the law expands the liability of an agent or broker where the agent or broker, either through their conduct or express or implied contract with their customer or client, assumes or acquires additional legal duties.

In Abetta, the trial court predicated its finding of liability against the retail broker solely upon evidence that there existed a course of dealing over time between the insured and the retailer wherein the retailer would accept notices of occurrence or claims from the insured and forwards them to the insurer. This “course of conduct”, according to the trial court, and affirmed by the Appellate Division, “… imposed upon (retail broker) a duty to (insured) to exercise a reasonable degree of care in notifying the appropriate primary or excess insurer of any claim reported to it by (insured)…” There are two important points to be emphasized with respect to the Court’s findings:

First, contrary to the suggestions made by the author of The Advocate article, the Court did not base its findings of liability upon the offer of “full service insurance consulting services.” Rather, the Court made a much more narrow finding that the retail broker undertook to accept notices of occurrence or claim and transmit them to the insurer, a fact not disputed by the retailer. What was argued by the retailer before the Court was that by forwarding all notices of occurrence or suit to the wholesaler in accordance with past practices with the wholesaler and industry practice, the retailer “exercised a reasonable degree of care in notifying the primary or excess insurer…” This argument was rejected by the Court.

Second, in our view, in rendering their decisions both the trial court and the Appellate Division conflated the concepts of “course of dealing”, which if found imposed a duty upon the retailer to exercise reasonable care, with the concept of an implied or express contract between an insured and an agent or broker, in which the agent or broker simply assumes a duty to achieve a specific result and fails to do so. The former concept, as recognized by the Appellate Division, is a tort concept wherein the latter is, obviously, based in the law of contract. In the instant case, Abetta never asserted a claim in its complaint predicated upon a course of dealing which would have entailed proving the existence of the course of conduct, reliance by Abetta on the course of conduct and the lack of reasonable care by the retailer. The breach of contract claim is much simpler to both plead and prove. All that need be proven is the contractual undertaking, here an agreement to provide notice to the insurer, and the failure to discharge that undertaking, resulting in damage.

The conflation of the concepts by the Court leads to an inherent inconsistency in the Appellate Division’s decision to dismiss the cross-claim against the wholesaler, as will be discussed in the succeeding point.

The Liability of the Wholesaler

In The Advocate article, the author urges that by virtue of its ruling, the Appellate Division “apparently” agreed that the retailer could not “foist” its duty to notify the excess insurer by simply forwarding a notice of claim to the wholesaler without following up to ensure that the claim was received and reported. Moreover, the author urges that evidence adduced in the record before the Court established that:

a) the wholesale broker never agreed to report claims so as to avoid the prospect of litigation over claims handling issues;

b) when notices of claims were sent to the wholesaler by a retailer, they were returned with instructions to the retailer to report the claims directly to the insurer; and

c) that at the time the retailer was forwarding notice of the excess claim to the wholesaler, the retailer’s underwriting department was advised in a renewal binder issued by the wholesaler that all claims were to be reported directly to the insurer.

The above assertions, argued by the wholesaler before the trial court, were rejected by the trial court in its findings. In its decision, the trial court found that although the wholesale broker denied that it undertook the obligation to process claims, it did in fact do so with respect to the notice to the primary insurer. This, the Court found, induced reliance by the retailer upon the wholesaler to process claims. More important, although the wholesaler urged that its procedure was to return notices of claim to the retailer for direct reporting to the insurer, it was uncontroverted that in this case, the wholesaler did not do so thereby again inducing reliance by the retailer upon its course of dealing with the wholesaler and industry protocol. In addition, while it is true that in a renewal binder the wholesaler advised that claims were to be directly reported to the insurer, the Court found that the notice on the binder, by its terms, applied prospectively the claims under the renewal policy and not the policy under which the Abetta claim was filed. Although the trial court’s holding of liability was reversed by the Appellate Division, the Appellate Division did not reject the factual findings regarding the wholesaler’s conduct. It did not need to. Rather, the Appellate Division reversed the trial court and dismissed the retailer’s claims against the wholesaler on a very narrow and technical legal ground. Under New York law, and the law of most jurisdictions, the legal claim of contribution, the claim asserted by the retailer agreement the wholesaler in the Abetta case, will not lie where the claim against the party seeking contribution is predicated in contract. As noted above, this portion of the Appellate Division’s decision is somewhat contradictory because in fact, both the trial court and the Appellate Division based the retailer’s liability on the failure to exercise due care, a concept founded in tort and not contract.

Contrary to the premise of the article, the Appellate Division did not reject the retailer’s efforts to “fast” liability upon the wholesaler on the merits. It simply found that due to the pleadings and theories in this case, a claim for contribution would not lie. The trial court, although in error on the law of this case, made it clear that the evidence in this case supported a finding against the wholesaler based upon a course of conduct.

The Wrongful Death Claim

The Appellate Division’s decision held that the record before the Court presented a question of fact as to whether the retail broker owed a duty to monitor Abetta’s pending claims to ascertain whether they had given rise to lawsuits that needed to be reported to the insurer. This holding related solely to a wrongful death lawsuit which, it was conceded, was never provided to the retailer for submission to the insurer.

This particular finding is again inconsistent with the actual claim pleaded against the retailer which was a claim solely in contract. Thus, whether the retail broker owed a duty of care was not an issue in the case. The issue is whether the retail broker agreed, in contract, to submit the lawsuit to the insurer and was found to do so. Because it was uncontroverted that the retail broker never received notice of the lawsuit, it could not have agreed to do so because it was never advised by the insured of its existence.

Even if the Court was correct in its holding that the retail broker assumed a duty to the insured to exercise due care to monitor claims for potential lawsuits, in our view, the insured’s conceded failure to apprise the retailer of the existence of the lawsuit broke the causal connection between any breach of duty by the retailer and the insured’s lack of coverage. Put simply, in order to succeed as against the retailer on the wrongful death claim, it was necessary for the insured to establish that the retailer’s negligence was the sole, exclusive care of the insured’s lack of coverage. That element was lacking here.

Conclusion

The Advocate article overstates the significance of the Abetta claim and its potential impact upon insurance agent and broker liability.

The legal underpinning of Abetta is not that insurance agents assume enhanced liability by virtue of holding themselves out to the public as full service firms. Rather, Abetta did nothing more than apply long standing concepts that an insurance agent or broker, once they have undertaken tasks on behalf of an insured, are responsible for any failure in properly discharging these tasks if the failure results in damage to the insured. Undertaking these additional duties in an effort to provide enhanced customer service to insureds is not something to be avoided since the risks and exposures are something that can be mitigated using simple loss control technique. In addition, Abetta does not stand for the proposition that retail brokers cannot pass through liability to wholesale brokers where wholesale brokers contribute to the loss of coverage to the insured. Abetta, in our view, presented a procedural anomaly. Contribution claims may be asserted against wholesale brokers by a retail broker and, as made clear by the trial court in Abetta, fact patterns may provide an independent basis for claims against a wholesale broker by a retailer.

Put simply, Abetta does not breach any new ground in the law of insurance agent or broker liability.