Since the July E&O report, I have had the same BIG I Hotline call from several members. It goes like this. Their insured gets a letter from a Plaintiff's lawyer about a potential claim. The Insured contacts the broker only to learn that particular occurrence/claim is not covered. As expected, the Insured says “WHY NOT?" Usually followed by statements like “But you have been my broker for 10 years…. you handle all my insurance. I rely on you for advice… How come I did not have that coverage?"

Sometime thereafter I have a conversation with a worried Broker who brings up the fear of being subjected to a lawsuit based on a Special Relationship. And they are correct to think that the lawyer for the Insured will assert a Special Relationship if that lawsuit.

What the Broker should not be worried about is any traction based on the assertion of a Special Relationship as most brokers and Plaintiff's lawyers, even including a good amount of defense lawyers do not understand it…at all.

To allay your concerns this article will explain it and its limited application to what you do.

Under New York Law an Insurance Agent/Broker is NOT a professional. (Do not be offended… that is a good thing.) Professionals have higher and more duties to their clients than Non-Professionals. Most relevant is the DUTY TO SPEAK…meaning the Duty to Affirmative tell the client something even when NOT ASKED.

Consider this. You walk into your orthopedist for your carpal tunnel wrist issues. He notices a big black spot on your face. He thinks it could be a melanoma so he AFFIRMATIVELY tells you to see an oncologist. He had a Duty to do that. Because an element of a Professional Relationship is a Special Relationship.

But there is no such duty…no such Special Relationship…between a Broker[1] and the Insured…absent exceptional circumstances and ONLY then, as to something specific and limited to one kind of cause of action.

Like the Doctor's example, consider this. You have a client with a big house on the water. You are there to discuss a HO policy. The insured tells you the coverages they want. Even though you see the dock and the Jet Skis, you have NO duty to Affirmatively bring up the need for Watercraft coverage. If you were a Professional, like in New Jersey, you would….but not in New York. Unless there was a Special Relationship.

But what is a Special Relationship? That is a tough question for most judges. But here is the law….based on what is NOT a Special Relationship.

In the case that first brought the concept to light, Murphy v. Kuhn, 90 N.Y.2d 266 (1997) the Insured claimed that the Broker had a Duty to Affirmatively suggest higher auto limits. It said there was a Special Relationship that required that DUTY TO SPEAK…to recommend even though such higher limits were never asked for by the Insured. The factual argument was that there was a 34 year.... yes  34 year relationship between, not only the parties to the litigation but as to all of the Corporate Plaintiff's and its owners business and personal insurance needs. What judges and Plaintiff's lawyers often forget when citing Murphy for a claim of Special Relationship is that the Court REJECTED IT saying this:

In Hoffend & Sons, Inc. v. Rose & Kiernan, Inc., 19 A.D.3d 1056 (2005) the Court noted that the Broker (i) reviewed its insured's operations, (ii) provided advice regarding insurance, bonding, banking, contracts and product development, (iii) aided in creating its insured's business plan and (iv) corporate information statement. Despite those acts by the broker, the Court of Appeals found that all of those elements did not even come close to creating a “Special Relationship" to the broker's insured.

And….a Special Relationship is not a panacea…a catchall ..although that is how it is most often used. Insureds always BACK INTO the coverage it claimed should have been suggested after the claim is denied and it is always exactly the same thing as the denial. Imagine that. A Special Relationship STILL has to be about something specific. Remember the Murphy case said brokers are not Guarantors of coverage.

Correctly understood a “Special Relationship" is fact specific and limited, and must, as a matter of law, be related to the exact thing at issue in the litigation. Holborn Corp. v. Sawgrass Mutual Insurance Co., 2018 WL 485975 (S.D.N.Y. 2018) (“In this case, Sawgrass has failed to allege sufficient facts to demonstrate that a special relationship was created between itself and Holborn that would require Holborn to recommend Top and Drop reinsurance."

Another excellent example is Abetta Boiler & Welding Service, Inc. v. American International Specialty Lines Insurance Co., 76 A.D.3d 412 (1st Dept. 2010), a “Special Relationship" case involving late notice. The broker got notice of an accident but never made sure it got to the carrier who denied coverage thereon. The broker correctly argued that under the insurance policy the obligation to provide notice to the carrier was a contract term solely the responsibility of the policyholder and that the broker had no duty to provide notice. The court found that for many prior claims for that insured, the broker accepted notices of accidents and forwarded them to the carrier. Thus, the court ruled that the broker had assumed the duty based on that course of conduct on the exact thing at issue and could not now argue it had not accepted that duty. Sadly, rather than just cleanly rule in tort or contract, the court used the term “Special Relationship."

But it does make the point. The course of conduct was on the exact thing as was at issue in the litigation. Abetta would have turned out differently if there was a “Special Relationship" on providing notice of an accident, but the case was about the broker not getting enough liability limits. Just because there was “Special Relationship" for one specific thing, does not mean that there is a “Special Relationship" for everything.

Finally, there is this…and it is technical but important for you to know. When Brokers are sued the Plaintiffs sue for Breach of Contract, Negligence and often Negligent Misrepresentation.

A “Special Relationship" is ONLY RELEVANT TO Negligent Misrepresentation claim. It has no business being treated as part of a Negligence Duty or Contract Duty.

Causes of Action are made up of certain defined elements called Prima Facie Elements. They are the foundational building blocks of the claim. You need ALL of them to assert a cause of action. Case law lists them. A unicycle has 1 wheel; a bicycle has 2  and a tricycle has 3. You would not call a 2 wheeled version a Unicycle no more than you would discuss Replacement Cost in the context of an EPLI policy. They simply have nothing to do with each other.

Same with causes of action. A Special Relationship is ONLY an element of the cause of action for Negligent Misrepresentation. It is not listed as an element of a Contract or Negligence claim. And while it may seem odd, a Failure to Advise is a subset of a Misrepresentation cause of action according to the same court again in Murphy. In fact the very first sentence of the decision states that Murphy was partly about a negligent misrepresentation claim. (“The question for this case is whether an insurance agent should be liable to a former customer for tortious misrepresentation….." and “The alleged wrongdoing is a failure of the defendant insurance agent to advise plaintiff Thomas Murphy as to possible additional insurance coverage needs. The theory of the lawsuit and the asserted duty is a special relationship and special level of advisory responsibility." Id. at 268.)

What is advantageous about this limitation is that ANOTHER element if a Misrepresentation claim is called “justifiable reliance". The law says that IF…IF the Insured had access to the correct information, then it could not have “justifiably relied" on the what the broker did not suggest. So, if a CGL policy had NO EPLI coverage added, or the Insured did not have a standalone EPLI policy and sues the broker for not having such coverage for such a claim, “justifiable reliance" would be negated by showing that the Insured had access to its CGL policy that did not have the coverage and/or that it knew it never got or paid the premium on a stand-alone policy.

A Special Relationship is not the boogeyman hiding under the bed that most people think. And it is certainly NOT the nuclear option that Plaintiffs lawyer assume it is when they deploy it. Actually, it provides some of the best defenses to Failure to Procure claims.