We close out the year with an update on two recent New York insurance related court decisions that might have significant impact. One that affects you directly: a special relationship/proximate cause insurance agent E&O decision. The other indirectly, but important to your insureds, and thus to you: the interplay of the other insurance clause and priority of coverage provisions in contracts.

THE SPECIAL RELATIONSHIP/PROXIMATE CAUSE CASE

On October 26, 2021, the Appellate Division First Department issued an interesting decision in a failure to procure E&O case against an insurance broker.^[1] While the appellate decision was limited to a proximate cause issue, the lower court's summary judgment decision from which the appeal arose addressed special relationship issue too.

AON was the insurance broker for a business known as Shedler & Cohen, LLP (S&C) for many years. S&C provides business management and individual tax services to actors, directors, set and lighting designers, producers, and writers. In March 2008, Aon placed a professional errors and omissions insurance policy on S&C's behalf with Chubb. The Chubb policy required Chubb to defend and indemnify S&C for all claims arising from S&C's “insured services." The definition of insured services in the Chubb policy for the policy year 2008-2009 did not include “business management" services. It was found during litigation that the application submitted to Chubb stated that S&C also provided business management services as part of its business.

A lawsuit was brought against S&C by a client, and Chubb agreed to defend under a reservation of rights based on two exclusions: (1) business management; and, (2) the commingling of funds. It was the broker's position that even if it had failed to procure coverage for business management, the other exclusion (whose inclusion in the policy no one claimed was the fault of Aon), would have negated coverage. Thus, if the policyholder would not have had coverage anyway, proximate cause against the broker should be negated. The lower court and appellate court both ruled that because the insurance broker stands in the shoes of the insurer, it had the burden, (the same as Chubb would have), to prove the applicability of the commingling exclusion. And, since the broker did not sustain that burden, it failed to negate proximate cause.

This is an important legal principal to know. What your burden is when there are multiple grounds for the denial of coverage and the acts or omissions of the broker is only related to one such ground. We generally agree with the court's decision. However, what concerns us is the lower court opinion as it relates to a special relationship. As to that issue, the lower court simply got it wrong. It found that AON, based on a special relationship arising from a decades long relationship, had an affirmative duty to tell S&C that the policy contained the business management exclusion. The problem is that no such duty arises just because of the existence of a special relationship. The lower court made the same errors that many courts do when they view the existence of a special relationship as a broad all-encompassing, general, and non-defined duty to do things without being asked or having done them before as to the specific thing at issue. Better reasoned recent decisions from the same appellate court have upheld dismissal of claims against our clients because we have successfully argued that the alleged special relationship was unrelated to the exact thing at issue.^[2]

Worse, in the S&C case, the lower court treated the special relationship as a doctrine applicable to a broker's duty, no matter what the cause of action. That is simply wrong and was significant for the case. It is important to understand that each cause of action recognized in the law has certain required elements that must be met; they are called prima facie elements. Think of a cause of action as a recipe and the prima facie elements are the ingredients that you must put into that recipe. Simply put, if you want to make chicken soup, you need to have chicken!

A special relationship is an ingredient/element, but it is limited in the law to two recipes/causes of action. (1) The creation and existence of a fiduciary duty; and/or, (2) negligent misrepresentation. A special relationship is not applicable to any other cause of action against an insurance agent or broker. It is not an element of a negligence or breach of contract cause of action. Since S&C did not argue the existence of a fiduciary duty with Aon, all that was at issue was a claim for negligent misrepresentation. Despite the name, that cause of action does include the affirmative duty to speak under limited circumstances. Therefore, since the lower court found that Aon had a duty to speak, to affirmatively advise the insured of the existence of the business management exclusion, it meant that the court was dealing only with a negligent misrepresentation claim.

But a negligent misrepresentation cause of action has other elements that must also be considered. One such element is called justifiable reliance.^[3] In a practical sense this means that the insured cannot win a negligent misrepresentation cause of action if it had unrestricted access to the same sources of information that the broker had.^[4]

In the Aon case, the lower court should have dismissed the case because in its very decision it stated that S&C was legally aware of the inclusion of the business management exclusion in the policy as follows:

Ms. Cohen signed and returned the Quotation to Aon, approving the terms and conditions and instructing Aon to bind the Chubb Policy. Aon provided S&C with the bound Policy and Ms. Cohen believes that she reviewed the definition of Insured Services in the Policy briefly. No one at Aon ever brought to S&C's attention that the definition of Insured Services in the Quotation and the Policy did not match the description of S&C's business in the renewal application.^[5]

Here, not only did S&C have access to the application and the policy, but it signed the application and had the policy in its possession. This negates justifiable reliance as a matter of law and should have resulted in dismissal of the claim against the broker.

THE OTHER INSURANCE CASE

On October 5, 2021, the United States Court of Appeals for the Second Circuit^[6], issued an important decision on insurance policy interpretation.^[7]  In this case, the court had before it a dispute between two insurance companies seeking a declaratory judgment as to their respective rights and obligations regarding priority of coverage in connection with their liabilities to pay into a settlement resolving an underlying personal injury action.

The minutia of the case aside, the issue was a thorny one concerning two competing contracts and their interplay. It is a conundrum that has plagued insureds and insurance brokers for years. How does priority of coverage get resolved when the insurance policies at issue say one thing about priority, but the construction (or other) contracts involved say something to the contrary? (A primary versus excess issue or how co-primary or co-excess polices share in providing coverage).

Here is the basic scenario that was involved in the case. An owner had a contract with its GC that said that the GC must procure liability coverage for the job, that the owner must be an additional insured on the policy, and that such policy is primary to the owner's own CGL policy. So, the owner is covered by 2 policies in this situation. But the other insurance provisions in the two policies state that the owner's policy provides coverage first making the additional insured policy excess.

The accepted opinion, and the well-reasoned cases, on the issue hold that because the insurers are not parties to the construction contracts, (which is 100% correct), they cannot be bound by priority terms and conditions that are contained in the construction agreements. (When an insured claims that a broker must defend and indemnify them when the carrier disclaims, we successfully make this same argument that since a broker/agent is not a party to the CGL policy, it cannot be forced to perform its terms.)

We read this new court decision as turning that doctrine on its head. According to this Federal Court, the insurer is bound by the priority provision in the construction contracts and not merely the other Insurance provisions in the policy.

CONCLUSION

While there are all sorts of wise and erudite quotes on the benefits of knowledge, as a child of the TV boom, the one that sticks in my head is from the Syms Clothing Store commercials: “An Educated Consumer Is Our Best Customer." Applying this concept to insurance agents and brokers, we like to say that an educated insurance agent or broker is our best client, because they understand the issues and pitfalls that may exist and can act accordingly to help protect both themselves and their clients.

Submitted by:
Howard S. Kronberg, Esq.                
Keidel, Weldon & Cunningham, LLP        

[1] Shedler & Cohen, LLP v. AON/Albert G. Ruben Ins. Servs., Inc., 2021 N.Y. App. Div. LEXIS 5857 (1^st Dept., 2021).

[2] See, Trimasa Rest. Partners, LLC v Global Coverage, Inc., 191 A.D.3d 490 (1^st Dept., 2021).

[3] See, Mandarin Trading Ltd. v. Wildenstein 16 N.Y.3d 173 (2011).

[4] See, Grumman Allied Indus., Inc. v. Rohr Indus. Inc., 748 F.2d 729 (2d Cir. 1984).

[5] Shedler & Cohen, LLP v. AON/Albert G. Ruben Ins. Servs., Inc., Index #: 651404/2018, (NY County, 7/16/20).

[6] The United States Court of Appeals for the Second Circuit is located in New York City and exercises federal appellate jurisdiction over the federal district courts in New York, Connecticut and Vermont.

[7] Century Surety Company v. Metropolitan Transit Authority (20-1474-cv).