By Louis H. Kozloff and Kenneth S. Merber of Nelson Levine de Luca & Hamilton
Superstorm Sandy’s impact on the insurance industry has been and will be profound. Predictably, the most direct impact will be claims for property damage and business interruption made under homeowners and commercial first-party property policies. Certainly, many claims will be accepted and paid. Yet, in many cases, policyholders will find they are without coverage because their claim does not fall within the coverage provided by their policy. When faced with a significant uninsured claim, impacted policyholders will attempt to find ways to recoup their losses. One avenue will likely be claims against insurance “producers” – insurance brokers and agents – alleging that the producer failed to obtain necessary and sufficient coverage that was required to protect the policyholder from the Sandy-related loss it sustained. Therefore, the insurance companies that underwrite insurance producers’ Errors & Omissions (“E&O”) liability may face an additional form of exposure due to Superstorm Sandy.
This article will discuss circumstances in which these E&O claims against brokers and agents may arise. We will also discuss issues that may arise in litigation between policyholders, brokers and agents, and insurance companies involving Sandy-related claims.
CLAIMS THAT MAY GIVE RISE TO SUITS AGAINST BROKERS AND AGENTS
Sandy’s storm surge caused unprecedented flooding in New York and New Jersey. Flood damage is typically not covered under homeowners and commercial insurance policies. Therefore, many policyholders whose homes or businesses were damaged by Sandy’s flood water will discover that their insurance policies will not cover their loss. Although coverage for flood can be obtained through FEMA’s National Flood Insurance Program (the “NFIP”), many individuals and businesses who suffered Sandy related losses do not have an NFIP policy. According to the Insurance Information Institute, only 14% of homeowners in the Northeast have flood insurance. FEMA reports issued during the last year indicate that the percentage is even lower in New York and New Jersey. Policyholders without flood insurance may question why their broker or agent did not suggest flood coverage or advise them that it was available. Brokers and agents likely will have to answer these questions in litigation initiated by homeowners and businesses when those policyholders seek to recoup uninsured Sandy-related losses.
Common misconceptions exist regarding the availability and need for flood coverage under the NFIP. First, many home and property owners believe that flood coverage is available or necessary only if their property lies in a “floodplain.” This mistaken understanding is based on mortgage lenders’ requirements that properties in high-risk flood zones have flood insurance. Although flood coverage is mandated by mortgage lenders in these situations, flood coverage under the NFIP is available in all flood zones, including moderate and low risk flood zones. The fact that a mortgage lender does not require flood insurance does not mean that coverage is not available.
Second, although NFIP coverage is offered through participating insurance companies and many insurance companies participate in this program, not all companies participate. Therefore, many policyholders may have been led to believe, incorrectly, that coverage is not available merely because it is not required by their mortgage lender or because their insurer or agent does not participate in the NFIP program.
Policyholders without flood coverage due to one these misconceptions may call upon their agents or brokers to answer for the absence of flood coverage that was available, and in post-Sandy’s 20/20 hindsight, proved to be necessary. In addition, because of the connection between flood coverage and mortgages, it is also possible that mortgage brokers and real estate agents will find themselves brought into these disputes.
Utility Service Interruption Claims
Sandy also caused significant business interruption losses as a result of widespread and prolonged power outages. Many businesses were forced to close for days or weeks, resulting in loss of income. Businesses with merchandise or perishable stock that required refrigeration or another climate controlled environment suffered damage as a result of the power outages following the storm. Most commercial policies contain an exclusion barring coverage for loss caused by widespread power failure. However, insurers offer endorsements providing supplemental coverage for business interruption or property damage to perishable stock caused by power loss. Policyholders who find themselves without coverage for losses resulting from power failure may question why their agent or broker failed to procure, recommend or offer this coverage. Again, these questions likely will need to be answered in response to litigation policyholders file against producers after their property damage or business interruption claim has been denied.
Sandy’s combination of wind, storm surge-related flooding and rain together with the Nor’easter that brought heavy snow days after Sandy struck present unique claim scenarios with the potential for damage from a number of causes, some covered and some excluded from coverage. Because many policy exclusions that will apply to Sandy claims are subject to “Anti-Concurrent Cause” provisions, damage caused by a combination of covered and excluded causes, likely will be denied in full or in part. It is possible that disagreements over these denials will result in litigation between policyholders and their insurers. Broker and agents may find themselves parties to these suits based on the policyholders’ claims that if the insurer’s position is correct, the broker or agent failed to procure adequate insurance.
LITIGATING SANDY-RELATED E&O CLAIMS AGAINST BROKERS AND AGENTS
Lawsuits against insurance producers in Sandy-related claims will involve issues that frequently arise in these types of claims plus issues that are unique to the circumstances.
One critical issue will be the nature and extent of the producer’s duties and obligations to the policyholder. Brokers and agents both owe certain duties to policyholders, but these duties vary depending on the producer’s relationships with the policyholder and the insurer. Generally, a producer must use reasonable diligence and skill to obtain the coverage requested by its customer and to advise the customer if such coverage cannot be obtained. However, depending on the nature of the relationship between the producer and its customer, a producer may be held to a higher standard under which it is required to advise its customer about its insurance needs and attempt to obtain coverage to satisfy those needs. For example, a broker serving as a “risk management consultant” providing this type of advice to its customers would likely be held to this higher standard. This will be a significant battleground in the litigation of these E&O claims, as it should be expected that policyholders suing producers will argue that the producer should be held to the higher standard.
An additional complicating factor is the distinction between agents and brokers. An insurance agent can be held to be an agent for the insurer and thus, may cause an insurer to be held liable for the agent’s conduct. Conversely, a broker’s acts or omissions generally are not attributable to an insurer. For these reasons, the producer’s role in procuring insurance for a policyholder who has an uninsured loss will be an important issue in litigation involving Sandy claims if policyholders attempt to create coverage by holding their insurance company responsible for promises or representations made by producers.
Practically speaking, a producer can also find itself caught in the crossfire between the policyholder and its insurer when the policyholder challenges the denial of its claim. It is not uncommon for a policyholder to bring suit against both the insurer and the producer. The policyholder’s claim against the insurer will be that the insurer incorrectly denied coverage. As an alternative claim, the policyholder will allege that if the insurer’s denial was correct, the producer was negligent in failing to procure or recommend the coverage necessary to adequately protect the policyholder’s property or business.
Frequently, the policyholder’s claims against the insurer and producer will be litigated in the same action. A policyholder may need to bring both claims in one suit because of a procedural rule, such as New Jersey’s Entire Controversy Doctrine, which requires that related suits be litigated together, or because a statute of limitations would require the policyholder to initiate suit against the producer before the conclusion of its suit against the insurer. Notwithstanding whether it is necessary for both the insurer and producer to be joined in a single action, in many instances, it will be advantageous to the policyholder to pursue both claims in one lawsuit. Naming both insurer and producer as defendants might result in the policyholder gaining the producer as an ally in its claim against the insurer. This happens because the producer seeks to insulate itself from liability and will often argue that it procured the coverage requested by the policyholder and that the policy or policies procured provided coverage for the claim.
The disputes and litigation that will arise from claims caused by Superstorm Sandy will take many forms. Suits against insurance producers are one form that will involve a combination of issues ranging from what coverage was available to the policyholder to the producer’s relationship with the policyholder and the role it had in procuring the insurance at issue. The stakes will be high in many of these E&O claims and the issues and facts presented will be unique. Producers, their insurers, and counsel retained to represent them must anticipate and be prepared to defend the lawsuits that are certain to be filed in the months and years ahead.
Originally posted on Advisen FPN
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