Insurance Broker Liability

MEALEY’S

LITIGATION REPORT

Insurance Broker

Liability

Multi-State Analysis Of An Insurance Broker’s

Duties To Non-Clients

Stroock & Stroock & Lavan LLP New York

A commentary article

reprinted from the

March 2014 issue of

Mealeys Litigation Report:

Insurance Broker Liability

Commentary

Multi-State Analysis Of An Insurance Broker’s Duties To Non-Clients

By

Andrew S. Lewner David V. Simunovich and

Daniel J. Yost

[Editor’s Note: Andrew S. Lewner, a Partner in the Insurance Practice Group of Stroock & Stroock & Lavan LLP, and David V. Simunovich, an associate in Stroock’s Insurance Practice Group, and Daniel J. Yost, an associate in Stroock’s Litigation Practice Group. All are in New York. Copyright # 2014 by Andrew S. Lewner, David V. Simunovich and Daniel J. Yost. Responses are welcome.]

On a Saturday afternoon, Douglas Johnson and David Brown attended a baseball game between the Cleveland Indians and the Washington Nationals. Before the first pitch, while in the stadium’s concourse, they heard screaming behind them. They turned around but could not avoid a collapsing 25-foot tall inflatable slide, which had been set up for children attending the game. Johnson and Brown were pinned under the 400-pound slide, and while Brown managed to free himself, Johnson suffered more severe injuries that ulti-mately led to his death.

Though the inflatable slide was located at the Cleveland Indians’ stadium, it was part of an event run by National Pastime Sports, LLC (‘‘National’’). Pursuant to a contract with the Cleveland Indians, National was required to obtain a comprehensive general liability insurance policy that named the Cleve-land Indians as an additional insured.1To procure the required coverage, National engaged an insurance bro-ker, CSI Insurance Group (‘‘CSI’’). In the insurance application given to CSI, National expressly stated that it required coverage for ‘‘bounce houses or in-flatables.’’ CSI procured a policy and issued certificates

of insurance to National and the Cleveland Indians. The policy, however, excluded losses arising from bounce houses or inflatables. Thus, when Johnson and Brown brought personal injury claims, the Cleve-land Indians learned that the loss was not covered by the policy purchased specifically for the event. Notably, while CSI had issued certificates of insurance, it did not distribute the policy to National or the Cleveland Indians before the loss occurred.

The Cleveland Indians sued CSI for negligence, and that case raises the issue of whether, and under what circumstances, an insurance broker may be held liable for negligent performance or professional mal-practice to parties other than the party that engaged the broker’s services. Different schools of thought have emerged regarding this recurrent issue, and state courts generally follow one of three approaches (with the Cleveland Indians case, discussed in Section III, illustrating a middle-ground approach). This article explores these three approaches.

The Near-Privity Approach

Perhaps the narrowest approach to the question of whether an insurance broker may be held liable to third parties is the one adopted by New York (as well as several other states), under which New York courts generally do not uphold negligence claims by third parties against insurance brokers.2 See, e.g., Arredondo v. City of New York, 6 A.D.3d 328, 329 (N.Y. App. Div. 1st Dep’t 2004) (‘‘It is well settled that the duty of an insurance broker runs to its customer and not to any additional insureds since there is no privity

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of contract for the imposition of liability.’’); Halali v. Vista Env’ts, Inc., 245 A.D.2d 422, 423 (N.Y. App. Div. 2d Dep’t 1997) (‘‘Where an insurance agent’s negligence causes an insured to be without coverage, the agent cannot be held liable to an injured third party.’’); Oathout v. Johnson, 88 A.D.2d 1010 (N.Y. App. Div. 3d Dep’t 1982); Ordonez v. Lovelace, Inc., No. 02-cv-6193, 2007 WL 496445, at *6 (E.D.N.Y. Feb. 12, 2007) (noting that the plaintiff ‘‘was not a party to the original contract for insurance and thus can establish neither that it was in privity of contract with [the insurance broker] nor that the [the insurance broker] owed it a duty of care’’).

The few New York cases that have permitted third party claims against insurance brokers have done so only where the third party can demonstrate both a foreseeable harm and that it stands in a ‘‘near privity’’ relationship with the broker. In Credit Alliance Corp. v. Arthur Andersen & Co.,3 the New York Court of Appeals articulated a three-part test to determine whether a near-privity relationship exists between the third party and the broker. Under that test, it must be shown that (1) the broker is aware that its services are to be used for a particular purpose; (2) the broker is aware of the third party and the third party’s in-tention to rely on the broker’s procurement of an appropriate policy; and (3) there is some conduct linking the broker to the third party.

Benjamin Shapiro Realty v. Kemper National Insur-ance Cos. highlights how restrictive New York Courts have been with regard to claims by third parties against insurance brokers.4 There, a building owner leased space to a tenant and required the tenant to name the owner as an additional insured under the policy. The tenant hired a broker to procure an appropriate policy and the broker thereafter issued certificates of insurance to both the tenant and the owner. After a loss occurred, it was discovered that the owner was not, in fact, cov-ered by the policy. Affirming the trial court’s ruling in the insurance broker’s favor, New York’s Appellate Division, First Department held that the owner could not state a claim against the broker because their rela-tionship did not approach privity. The court reached this conclusion despite the broker’s awareness that the owner required that it be added as an additional insured and the direct contact between the broker and the owner via the certificate of insurance.

It should be noted, however, that without expressly rejecting the Credit Alliance test, some New York courts have analyzed the viability of a third party’s claim against a broker under an ‘‘intended beneficiary’’ analysis. For instance, in Henry v. Guastella & Associ-ates, the Appellate Division, Fourth Department cited Credit Alliance, but explained that ‘‘[u]nder New York law, a duty directly assumed to benefit one person does not extend to third parties who are not intended ben-eficiaries of the undertaking to perform, even if it is foreseeable that someone else might be damaged by the nonfeasance.’’5

Yet even the cases applying the intended beneficiary analysis require the same sort of ‘‘linking conduct’’ dis-cussed in Credit Alliance. For example, in Dominion Finance Corp, the Appellate Division, First Depart-ment held that a broker could be liable to the non-client plaintiff where it is shown that the broker ‘‘was aware, from the moment its client contacted it about procur-ing coverage, that plaintiff was the intended beneficiary of the coverage, and that plaintiff participated on its own behalf in discussions with defendant and its client about the coverage to be provided.’’6 Thus, while the formal elements of the intended beneficiary test and Credit Alliance test may be different, both inquiries focus heavily on the broker’s knowledge of the third party and the level of the third party’s involvement in the broker’s procurement of the policy.

The Zone Of Harm Approach

On the other end of the spectrum are states that impose a much broader duty on brokers—one that can even extend to the public at large. New Jersey courts, for instance, examine whether the injured party is ‘‘found within the zone of harm emanating from the broker’s actions.’’7The scope of this ‘‘zone of harm’’ is limited only by the principle of foreseeability and considera-tions of fairness and public policy.8Thus, in contrast to New York, a broker may have a duty to a foreseeable class of claimants for whose benefit the insurance is procured, even if the precise identity of a potential claimant is unknown to the broker.9

This broad duty was affirmed by the New Jersey Supreme Court in Carter Lincoln-Mercury, Inc., Leas-ing Division v. EMAR Group, Inc. In that case, the plaintiff leased a tractor to All Points, Inc., a commer-cial trucking company, pursuant to a lease agreement

that required All Points to maintain collision insurance. All Points engaged a broker to procure the required policy. After the truck was damaged in a collision, the plaintiff submitted a claim to the insurer. While the insurer never formally denied the claim, it simply ignored the requests for payment, and was eventually found insolvent. Plaintiff then brought suit directly against the broker for failing to exercise due care in selecting an insurance company.

The New Jersey Supreme Court explained that, under New Jersey tort law, a plaintiff may sue for purely economic harm so long as the plaintiff is ‘‘a member of an identifiable class that the defendant should have reasonably foreseen was likely to be injured by the defendant’s conduct.’’10 The court also explained that whether a plaintiff is within the foreseeable ‘‘range of harm’’ is more important than whether the parties are in contractual privity. The court concluded that a ‘‘reasonable broker’’ should foresee that failure to inquire into the financial security of an insurance carrier may result in the carrier’s inability to pay potential claimants, even if the ‘‘exact identity’’ of the claimants is unknown at the time.11

The Intermediate Approach

In between New York’s conservative ‘‘near-privity’’ and New Jersey’s liberal ‘‘zone of harm’’ approaches lies an intermediate approach.12 This approach, followed in Michigan and California, for instance, determines bro-ker liability to third parties by considering a range of factors.

In the Cleveland Indians case, the District Court, applying Michigan law, dismissed the Indians’ claims against the insurance broker, CSI, holding that CSI owed no duty to the team. Fundamental to the court’s dismissal of the claims was the fact that CSI was not the Cleveland Indians’ broker, but rather, was engaged by National. On appeal, the Sixth Circuit reversed. With respect to claims for negligent performance of a contract, the court noted that Michigan law does not require privity, near-privity, or a fiduciary relationship in order to create an independent duty of reasonable care to third parties.13In fact, Michigan courts impose an independent duty of care specifically on professional service providers toward third parties ‘‘where the harm was foreseeable and where the defendant had specific knowledge that its actions might harm a specific third party.’’14 The Sixth Circuit noted that CSI made

express representations to the Cleveland Indians (by issuing a certificate of insurance directly to the team) and that CSI was aware of the contractual requirement that National obtain a policy that would cover the inflatable slide. The court found that it was ‘‘reasonably foreseeable’’ that the team, as an additional insured, would be harmed if CSI ‘‘fail[ed] to procure the intended coverage,’’15 reversed the trial court, and remanded for further proceedings.

Another example of the intermediate approach is Biakanja v. Irving, the leading California case analyzing a broker’s duty to third parties.16There, the California Supreme Court held that liability to a third person absent contractual privity ‘‘involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, the moral blame attached to the def-endant’s conduct, and the policy of preventing future harm.’’17 Applying these factors, the Biakanja court held that a notary public who prepared a will which was denied probate for lack of sufficient attestation was held liable to the decedent’s sister, who stood to take all of the decedent’s estate had the will been properly witnessed. The Court held that ‘‘the ‘end and aim’ of the transaction was to provide for the passing of [the decedent’s] estate to plaintiff,’’ and that the ‘‘[d]efendant must have been aware from the terms of the will itself that, if faulty solemnization caused the will to be invalid, plaintiff would suffer the very loss which occurred.’’18

Almost forty years later, the California Supreme Court articulated three additional public policy considera-tions, namely: (1) whether the imposition of liability is out of proportion to the fault; (2) the sophistication of the plaintiff and its ability to take protective measures to guard against risk; and (3) whether it would be most efficient to place the loss on the class of defendants involved rather than the plaintiff.19In practice, courts have tended to emphasize the foreseeability of the spe-cific harm alleged by the plaintiff and the closeness of the connection between the plaintiff and the def-endant.20 But, at the same time, courts have held that foreseeability of harm, particularly purely eco-nomic harm, is insufficient by itself to impose a duty on a broker.21

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Comparing Cleveland Indians with Benjamin Shapiro Realty highlights the difference between the intermedi-ate approach and New York’s more restrictive approach. The operative facts of the cases are almost identical but the courts reached opposite results. Thus, in contrast to New York’s ‘‘near privity test,’’ where there is a sufficient nexus between the negligence and harm, courts following the ‘‘intermediate ap-proach’’ may impose a duty on an insurance broker even where ‘‘the two parties had no direct contact, were not in privity of contract, and [the non-client] was not named in the policy.’’22 And in contrast to the broad ‘‘zone of harm’’ test applied in New Jersey, states adhering to an intermediate approach tend to require some connection between the third party and the broker. So, for instance, passengers in a car accident typically cannot assert a malpractice claim against the driver’s insurance broker.23

Conclusion

The strength of a third party’s claim against an in-surance broker for negligence can depend largely upon the jurisdiction in which the claim is asserted and the applicable law. Although this article provides an overview of the three most commonly-followed approaches to the issue, it is important to note that the law of each jurisdiction is different, and each claim must be analyzed carefully.

Endnotes

1. Nat’l Pastime Sports, LLC v. CSI Ins. Grp., 830 F. Supp. 2d 348, 351 (E.D. Mich. 2011).

2. For example, Ohio and Georgia impose a similarly narrow duty on insurance brokers. See, e.g., Lu-An-Do, Inc. v. Kloots, 131 Ohio App. 3d 71, 76 (1999) (‘‘An insurance agent, however, owes no duty to ensure that a party is named as an insured on a policy when there was no oral or written agreement to obtain insurance coverage between the party and the agent and when the party never contacted the agent or any other insurance agent about procuring coverage.’’); Workman v. McNeal Agency, Inc., 217 Ga. App. 686, 687 (1995) (denying negligence claim by addi-tional insured against insurance broker for lack of privity).

3. Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 550 (1985) (quoting Ultramares Corp. v. Touche, 255 N.Y. 170 (1931) (Cardozo, J.)). 4. 303 A.D.2d 245 (1st Dep’t 2003).

5. Henry v. Guastella & Assocs., 113 A.D.2d 435, 437 (4th Dep’t 1985).

6. Dominion Fin. Corp. v. Asset Indem. Brokerage Corp., 60 A.D.3d 461, 462 (1st Dep’t 2009). 7. Carter Lincoln-Mercury, Inc. Leasing Div. v. EMAR

Grp., Inc.,135 N.J. 182, 196 (1994).

8. See id. at 194-96 (‘‘Once the foreseeability of an injured party is established, we must decide whether considerations of fairness and policy warrant the impo-sition of a duty.’’). A similar rule is followed in Wis-consin. See also See also K-Mart Corp. v. Todd & Co., 193 Wis. 2d 639 (Wis. Ct. App. 1995) (holding insur-ance broker liable to third party with whom it was not in privity because it was foreseeable that its conduct would harm third party); A.E. Inv. Corp. v. Link Builders, Inc., 62 Wis. 2d 479 (1974) (‘‘The duty of any person is the obligation of due care to refrain from any which will cause foreseeable harm to others even though the nature of that harm and the identity of the harmed person or harmed interest is unknown at the time of the act.’’).

9. See id. at 203 (‘‘The exact identity of those claimants may be unknown at the time the broker places the insurance, but the existence of a class of claimants is predicated and indeed the insurance is procured for their protection.’’).

10. Carter Lincoln-Mercury, 135 N.J. at 195.

11. Id., see also Impex Agric. Commodities Div. Impex Overseas Corp. v. Parness Trucking Corp., 576 F. Supp. 587, 591 (D.N.J. 1983) (finding that, under New Jersey law, neither contractual privity nor third party beneficiary status were required to impose a duty on the broker in favor of plaintiff, a third party, and holding that broker could be liable to plaintiff because ‘‘[n]egligent performance of [the] contractual under-taking would have an adverse effect’’ on plaintiff’s business).

12. Biakanja v. Irving, 49 Cal. 2d 647 (1958). Other states, including Florida, for instance, follow variations of this intermediate approach. Hamer v. Kahn, 404 So. 2d 847, 849-50 (Fla. Dist. Ct. App. 1981); Aero Techs., LLC v. Lockton Cos. Int’l, Ltd., No. 09-cv-20610, 2011 WL 7657475, at *4 (S.D. Fla. 2011). To recover on a negligence claim brought against an insurance broker in Florida, a plaintiff need not be in privity of contract with the broker nor have substantial contact with the broker. However, foreseeability of harm is insufficient. Rather, the plaintiff must show that they were the intended third-party beneficiary of not only the insurance contract but the contract between the insured and the broker governing the procurement of insurance. Id. As discussed earlier in this article, Michigan also follows this approach. 13. Cleveland Indians Baseball Co. v. New Hampshire

Ins. Co., 727 F.3d 633, 638 (6th Cir. 2013). 14. Id. at 639.

15. Id. at 639.

16. 49 Cal. 2d 647 (1958). 17. Id. at 650.

18. Id.

19. Bily v. Arthur Young & Co., 3 Cal.4th 370, 398-407 (1992); see, e.g. Kielholtz v. Hertel, No. D061198, 2013 WL 5877968 (Cal. Ct. App. Nov. 15, 2013) (applying Bily factors to claims of negligence against insurance broker).

20. See, e.g., J’Aire v. Gregory, 24 Cal.3d 799, 808 (1979) (‘‘[T]he factors enumerated in Biakanja and applied in

subsequent cases place a limit on recovery by focusing judicial attention on the foreseeability of the injury and the nexus between the defendant’s conduct and plaintiff’s injury.’’); see also Kielholtz v. Hertel, No. D061198, 2013 WL 5877968, at *8-9 (Cal. Ct. App. Nov. 15, 2013) (refusing to impose duty on an insur-ance broker to individual owners in a condo associa-tion, where condo association passed a special assessment on to the unit owners to cover a loss that the unit owners alleged should have been covered but for the broker’s negligence; holding that the damages sought were ‘‘far less foreseeable than direct, uninsured property damage’’).

21. Bily, 3 Cal. 4th at 398 (quotations and alterations omitted).

22. Id. at 168; compare Pressman v. Warwick, 213 A.D.2d 386, 387-88 (N.Y. App. Div. 1995) (holding that a third party injured by a negligent broker’s failure to procure insurance ‘‘is not in privity with the agent and is not an intended beneficiary of the insurance contract’’), with Business to Business Markets, Inc. v. Zurich Specialties, 135 Cal. App. 4th 165 (Cal. Ct. App. 2005); Cayo v. Valor Fighting Mgmt., LCC, No. 08-4763, 2008 WL 5170125 (N.D. Cal. Dec. 9, 2008).

23. Napier v. Bertram, 191 Ariz. 238, 243-44 (1998) (holding that an insurance agent did not owe a duty of reasonable care to passengers injured in a taxi that failed to carry uninsured motorist insurance because doing so would ‘‘work a fundamental change in our law’’ by ‘‘impos[ing] on agents a duty to a vast number of non-clients—literally all who reside in or travel in this state’’).I

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