Court Decision: Retail Risk Management and Other Special Duties of New York Insurance Brokers
Insurance agents and brokers who promise their clients a full-service insurance manager in their corner had better be prepared to go the distance – either through flawless performance or through old-fashioned indemnification, when coverage is TKO’d by broker error.
That is, according to a recent decision from the Appellate Division, First Department, who had to step in and referee a broker liability fight between a retail insurance broker, The Amerisc Corp. Insurance and Financial Services, and a wholesale insurance broker, Program Brokerage Corp., in Abetta Boiler & Welding Services, Inc. v. American International Ins. Lines Co. et al, after the trial court upheld the excess insurer’s denial of coverage for late notice of claim and allowed Amerisc’s contribution crossclaim against Program proceed to trial.
The Appellate Division called the fight and held that Program’s motion for summary judgment dismissing all cross-claims should have been granted — with a punchy holding that Amerisc’s “attempt to shift the blame onto Program on the ground that ultimately it was Program that failed to pass the claim on to the insurer is unavailing” — and not only found Amerisc responsible as a matter of law for the insured’s loss of coverage for reported claims, but properly faced a trial to determine whether it had assumed an affirmative duty to monitor and report its client’s claims even if the insured did not.
That broker fight is therefore not the only lesson from this litigation. The real lesson is one of client service and risk management – an increasingly difficult task in New York City, all five boros of which, at least according to the American Tort Reform Foundation, have earned the distinction as a “judicial hellhole”. Abetta, a small family-owned welding and repair business in Manhattan, quite literally was trapped in the New York State Court system for the better part of this decade following an industrial kitchen accident in June 2002 when a cabbage-drying machine exploded in New Mak Noodle killing one employee, leaving his widow and children without a father, and three other employees with serious injuries including a young man in the prime of his life without an arm. Unfortunately for Abetta, New Mak had asked it to repair the cabbage-drying machine — albeit a full ten months before the explosion — and it was this innocuous business call to Chinatown in August 2001 that ultimately led Abetta to the Supreme Court building a few blocks away on Centre Street.
According to Abetta, during that singular visit it discovered a dilapidated machine with, in addition to several visible prior welds, hairline spider-web cracking, and fatigued metal that would not hold a new weld. According to Abetta, it declared this literal basket-case irreparable and warned New Mak not to use it. Naturally, New Mak proffered a different version of that visit, which not only resulted in the machine being put back into service but, thanks to New York’s convoluted workers compensation statutory framework, quite literally forced Abetta into defending the multi-million dollar wrongful death and personal injury litigation in the inevitable search for third-party deep pockets. These claims and Abetta’s third-party action against New Mak, filed in 2002 and 2003, were only just tried in the Spring of 2010. Even though the Manhattan jury returned a multi-million dollar verdict, Abetta was ultimately, and quite fortuitously, “protected” by the jury’s apportionment of liability of 15-85 between it and the employer, respectively. Between September 2002, when the first claim came in, and October 2003, when its excess carrier denied coverage, Abetta thought it was fully protected because Amerisc promised to take care of everything.
Amerisc had built a successful, and as its full name suggests, multi-faceted business operation by offering not simply insurance brokerage services, but, as in this case, full-service insurance consulting services. Under New York law, however, a broker has a limited common law duty until he or she stops acting as a broker and agrees, either explicitly or by conduct, to take on other special roles – an increasingly common business platform that brokers offer to distinguish themselves from the competition.
Amerisc embraced that role and was therefore more than Abetta’s insurance broker. While it had placed Abetta’s primary and excess commercial general liability coverage with a non-admitted carrier through a wholesale broker, Program, testimony in this case demonstrated that Amerisc offered soup-to-nuts insurance consulting services, encouraged Abetta to rely on it for all of its insurance needs, including claims reporting, and was acting very much like a risk manager. When Abetta received the first claim related to the New Mak explosion, Abetta forwarded the claim to Amerisc, who forwarded it to Program, who forwarded it the primary carrier, who delivered a defense to the insured – all just as one would expect to find in the ordinary course of business. However, after that, the claims process fell off the tracks due to one variable – the wholesale broker never actually agreed to report claims and had established a business practice contrary to the norm precisely to avoid claims reporting litigation.
When Amerisc agreed to ensure claims were properly reported for insureds, however and as Program later argued, under New York law Amerisc was obligated to ensure that its clients were protected and the claim actually reported to the carrier because retail brokers have no right to rely on a wholesale broker to perform special services. In other words, the “ordinary course of business” is not adequate protection when business is no longer ordinary. When Abetta learned that a there was a fatality involved in the New Mak explosion, it reported the fatality to Amerisc, who forwarded “notice of excess claim” to Program, with instructions to notify the excess carrier and provide immediate confirmation. While nothing out of the ordinary had occurred thus far, Amerisc had failed to notice that while its claims department was reporting the excess claim to Program, its underwriter was renewing coverage and had received a renewal binder from Program advising Amerisc to report claims directly to the carrier — binders, discovery revealed, that Program had sent to Amerisc in the “ordinary course” of business. While Amerisc was telling Abetta that everything was taken care of and that the claim had been reported, Program was telling Amerisc to report all claims directly, and the excess claim was never was actually reported at all. Amerisc had effectively delegated its “special duty” to ensure Abetta was protected to a commercial party at arms’ length and never followed up with Program to make sure that was the case and seemingly relied on nothing more than “business as usual” and, unfortunately, assumed that it would get done.Over the course of the following year, the wrongful death claim was filed, and even consolidated into the personal injury action, but Abetta never sent written notice of the wrongful death claim, its summons, or complaint to Amerisc. More importantly, no one forwarded notice of the original occurrence or either claim to the excess carrier for an additional nine months when Amerisc discovered the error and provided first notice of claim, which prompted a late notice disclaimer. When the personal injury and wrongful death claims were trial ready in 2006 the trial judge learned that Abetta had another potential $2,000,000 in excess coverage and effectively directed Abetta to commence a declaratory judgment action to challenge the denial.
With its back against the wall, Abetta went out-of-pocket and sued the excess insurer, Amerisc, and Program. After discovery, there was little factual dispute: while Program had in fact received and forwarded the first notice of claim and occurrence to the primary carrier, it never responded to or did so for the excess claim. The brokerage agreement between the two offices said nothing about claims reporting and Amerisc was relying on its understanding of standard business practices in reporting the claim to Program but never made any effort to ensure that the claim was received and actually reported to the carrier.
On summary judgment the trial court upheld the excess carrier’s late notice denial and held Amerisc liable to Abetta as a matter of law for failure to report the personal injury claim to the excess carrier but held a question of fact existed with regard to the loss of coverage for the wrongful death claim. Even though Abetta neither provided any written notice of the wrongful death claim to Amerisc, due to its special relationship the trial court held that a trial was necessary to determine if Amerisc had assumed the duty to monitor and report its client’s claims even if Abetta had failed to do so itself. While the trial court dismissed Abetta’s complaint against Program, as well as Amerisc’s common law indemnification claim due to Amerisc’s own negligence, it relied on Second Department authority to hold that a contribution claim could exist between retailer and wholesaler where the wholesaler owes an independent duty to the retailer. The trial court went further, however, and found that the “course of conduct” between the Amerisc and Program created an ongoing duty to report claims, Amerisc reasonably relied on that course of conduct, and that Program had breached that duty as a matter of law. Accordingly, because Amerisc itself was negligent, a trial was only necessary to apportion liability between the brokers.
On appeal, Program argued that a single instance of claims reporting in an otherwise arm’s length relationship between two commercial brokerages does not create a special duty and, even if it did, no contribution claim would lie for loss of coverage under an insurance contract. The First Department apparently agreed and held that while evidence that, “as a matter of routine”, Amerisc handled all of Abetta’s insurance needs did create a special duty between in favor of Abetta, Amerisc could not foist that duty on Program merely by forwarding a notice of claim without following up to ensure that the claim was received and reported. Not only was Amerisc therefore negligent, as a matter of law, but the First Department rejected the notion that a contribution claim could exist between insurance brokers for the purely economic loss arising out of breach of contract and held that all cross-claims against Program should have been dismissed. Notably, the Appellate Division affirmed the finding that a trail was necessary to determine whether Amerisc assumed a special duty to monitor its client’s claims, take notice of the wrongful death action, and report it to the carrier even though Abetta never did so itself. The conclusion in this case is little more than a juxtaposition of Amerisc’s successful and multi-facted business platform, which was its own undoing, with a standard arm’s length relationship between retailer and wholesaler and serves as a cautionary tale for service oriented brokers.
When a broker caters to all of its client’s insurance needs and begins acting like risk managers, it assumes a special continuing duty and must take reasonable care to ensure their clients rights are protected wholesalers and retailers, however, negligence still “does not exist in the air.” A retail broker cannot entrust its special duties to the vagaries of the marketplace and must be certain to get a wholesaler’s agreement to report claims in writing if it is to rely on a wholesaler for that role in the ordinary course. Absent a factual showing that an independent special relationship existed in favor the retail broker, like an insured, a broker reports claims to its wholesale broker at its own peril.
Finally, while Abetta in this case will likely be made “whole” and receive the full benefit of its insurance premiums and coverage, and actually faces minimal excess exposure due to the jury’s heavy apportionment of liability on the employer, there is a lesson here to for small businesses: fortuity is no way to run a business in a “judicial hellhole.” Two key facts stand out: Amerisc did not dispute that it owed Abetta a special duty. If Amerisc had, it likely could have won a trial on both claims. Second, Abetta itself was forced into litigation on two fronts and put its fate in the hands of a jury in large measure because it had nothing but its own testimony to support its version of the facts – not one note was made to the file regarding the state of the cabbage-drying machine, no follow-up letter was sent, nor notation made on the receipt given to New Mak, which likewise did not include a limitation of liability clause. There simply was no pre-litigation record to demonstrate that in Abetta’s professional metallurgical opinion as experienced welders the machine was unsound and should not be used. All of that may be beyond the foresight of a small family-run business, but then again, that is why such a business wants more than just an insurance broker in its corner.
Matt Bryant works and lives on Long Island where he is Counsel to Ohrenstein & Brown, LLP of Garden City, New York. His practice focuses on commercial dispute resolution, litigation, and appeals. Matt works regularly with insurance agents and brokers in all manner of disputes including business torts and fraud, insurance coverage, D&O and E&O matters, and has argued appeals before the United States Court of Appeals for the Second Circuit and New York State Supreme Court, Appellate Division, First Department in Manhattan. Matt subscribes to the Lincolnian theory of the practice of law and endeavors to protect his clients by keeping them out of court and regularly employs ADR and extrajudicial tribunals to bring matters to a quick and cost effective resolution. Matt is a volunteer certified Arbitrator for the Civil Court of the City of New York, Small Claims Part, and a member of the Association of Arbitrators, New York State Bar Association, Nassau County Bar Association, and New York County Lawyers Association. Matt is an honors graduate of both The George Washington University Law School and The University of Oregon.