When I was nine years old, my parents took me to Radio City Music Hall to see the musical film, Dr. Dolittle. The Dr. takes his “Push-Me, Pull-You,” (a llama with a head on each end) to the circus to generate income to fund his sea voyage. The world-weary, jaded circus owner, sight unseen, tells the Dr. that he is not interested because he has seen it all before. As Dr. Dolittle leaves, the circus owner sees the llama. Shocked beyond belief, he breaks into a song entitled, “I’ve never seen anything like it.”  Life is like that, lest we forget and get jaded ourselves. 

Recently, a unique fact pattern came to my attention that made me exclaim with similar astonishment, albeit not into song… (at least not that I will admit to). It brings to the fore a troublesome issue that needs to be addressed.​

Here are the facts. ABC Contractor contacts the broker for insurance on its equipment. Coverage is bound with an MGA (managing general agent) for the insurance carrier. The policy incepts 1/1/21. On 1/4/21 a piece of equipment is damaged by a covered peril. This is where it gets interesting. Even after the loss, despite getting the premium invoice and repeated attempts by the broker to get payment, ABC simply never pays the premium because the checks it provided to the broker all bounced.  

Two weeks after the loss, and 17 days after the policy incepts, the broker contacts the MGA and requests a flat cancellation of the policy. An endorsement is issued to the policy that cancels coverage effective as of the inception date. 

The question is, did the broker breach any duty or commit any wrongful act? While I am told this is more common that one might think, this is my first experience with this situation. 

First, please keep in mind that you should not do this.  Remember that a policy of insurance is a contract, like any other. The parties to the contract are the insurer and the insured. The broker is not a party to the insurance contract. Thus, once the insurance policy is issued and effective, the broker’s role is over, except for providing servicing that the parties may require. Parties to a contract can change it, modify it, terminate it or even rescind it as if it never existed. But a stranger to the bi-partite (two-party) contractual relationship can do nothing to that agreement, unless requested to do so by one of the parties. Consider that the insurance carrier, thinking that the broker is speaking for the insured, may acquiesce to the request when, if it were aware this was being done unilaterally, would not. This creates a world of headaches between the broker and the insured. While it is still highly defensible (for many reasons beyond the scope of this report), a judge or an appellate court may have a hard time accepting a highly technical argument supporting the broker under these facts. 

All that appropriate gloom and doom aside, our research found nothing directly on point, but something that suggests that the broker’s conduct may be permissible. (But let’s not test it.)

On January 24, 2002, the NY Department of Financial Services issued an informal opinion as to a fact pattern not directly on point, but illustrative of the issue. The questions set forth in that opinion were as follows: 

Limiting its analysis to the fact pattern where the broker “advanced” the premium payment for its insured, NOT the situation I described above, the DFS said that a broker may not order the insurer to cancel the policy when the insured fails to reimburse the insurance agent or broker for the premium advanced. 

What is illustrative is that this rule does not apply to an assigned risk automobile insurance policy. The DFS said that “the insurer shall, at the request of the producer, cancel the entire policy where a producer submits proof that a check, tendered by the insured to be used for the payment of premium, and which has been deposited in the producer’s premium account, has been refused payment by the bank upon which it was drawn.” While that carve-out was based on §18(4) of the Rules of New York Automobile Insurance Plan (2001), we think there is an inherent logic that can be argued to be applicable to situation discussed above.

Simply, the lack of the broker in my scenario making an advance payment is the key difference. As stated above, a policy of insurance is a contract between the insured and the insurer. The premium is the consideration for that contract. Consideration is an essential element for the creation of a legally enforceable agreement, without which no contract exists. Thus, where the premium is advanced, it is paid….the consideration exchanged and the policy becomes effective in a legal sense. Once the insurance contract takes effect, only the insured or the insurer can cancel it. But, in my hypothetical situation discussed above, the premium was not advanced and was never paid. Thus, the legal consideration for insurance contract creation was never provided, negating contract creation in the first place. While the insurance carrier did cancel the policy flat, I would argue that they did not have to even do that as it never became effective in the first place and there was nothing to cancel. 

We bring this scenario to your attention in order to caution you to handle it carefully, if it is something that you should face.  By proceeding in this manner, the prudent insurance agency or brokerage, will help avoid a potential E&O lawsuit or regulatory matter from arising.    

Submitted by:

Howard S. Kronberg, Esq.
Keidel, Weldon & Cunningham, LLP         

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