High Court Considers Insured's Failure To Read Policy In Action Against Broker
New York’s highest court recently resolved a split among lower courts as to whether an insured is precluded from pursuing an action against its broker where the insured received a copy of its policy but failed to read it to ensure that the appropriate coverage was secured. According to the Court of Appeals, the insured’s failure to read the policy only serves as some evidence of the insured’s negligence, but does not altogether preclude an insured from pursuing an action against its broker.
In American Building Supply Corp. v. Petrocelli Group, Inc., __ N.Y.3d __, 2012 N.Y. Slip Op. 7849 (Nov. 19, 2012), the plaintiff insured entered into a sublease for the use of a premises which required the insured to obtain general liability insurance from an insurer licensed to do business in the state of New York. The insured’s first broker secured a policy from an insurer that was not licensed in New York, prompting the insured to change brokers to correct the alleged deficiency. The insured then retained the services of the defendant broker, Petrocelli, which allegedly proceeded to secure the identical coverage from the same insurer that was unlicensed in New York. The insurance did not provide coverage for injuries to the insured’s employees, coverage which the insured had allegedly specifically requested when the new policy was secured.
One of the insured’s employees was subsequently injured, prompting the insurer to disclaim coverage. The insured attempted to challenge the insurer’s denial of coverage in a declaratory judgment, but, after that action was dismissed, the insured commenced a new action against the broker claiming that the broker failed to secure the appropriate coverage.
The trial court initially denied the broker’s motion for summary judgment, finding that there was an issue of fact whether a specific request for coverage had been made by the insured that had not been honored. The Appellate Division, First Department reversed, holding that the insured’s failure to read the policy was a complete bar to recovery, regardless of whether plaintiff specifically requested insurance for its employees. The Court of Appeals granted leave to appeal to resolve the apparent split among the Appellate Divisions concerning this issue.
The Court of Appeals began by reciting the well-settled law that insurance brokers have a common-law duty to obtain requested coverage for their clients, but “they have no continuing duty to advise, guide or direct a client to obtain additional coverage.” The Court reiterated that to establish a case for negligence or breach of contract against a broker, a plaintiff must establish that a specific request was made to the broker for the coverage that was not contained in the policy. On this issue, the Court concluded that there was an issue of fact whether the insured made a specific request for coverage for injuries to its employees and whether the defendant broker knew of that request and failed to obtain the specific coverage.
Turning to the issue of the insured’s receipt of the policy without complaint, the Court acknowledged that several appellate courts had previously held that once an insured has received its policy, the insured is presumed to have read and understood it and cannot rely on the broker’s word that the policy covers what had been requested. However, the Court rejected such holdings and followed the opposing view that the insured’s receipt and presumed reading of the policy does not bar an action for negligence against the broker. According to the Court, the insured should be permitted to look to the expertise of its broker regarding insurance matters. Accordingly, “[t]he failure to read the policy, at most, may give rise to a defense of comparative negligence but should not bar, altogether, an action against a broker.”
Two Judges dissented on the basis that insureds have a duty to examine the terms of their policy, are “conclusively presumed” to know its contents and that the relationship between a broker and its insured does not create a special duty to provide continuous advice.
This recent decision resolves any dispute among the lower courts, and holds that an insured’s failure to read its policy is only evidence of possible culpable conduct by the insured, but does not constitute a complete bar to recovery against an insurance broker. On the other hand, where an insured seeks coverage from an insurer based upon an alleged omission of coverage in the policy, the insured’s failure to read the policy is generally fatal.
If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Insurance Coverage & Regulation Practice Area.