This is the third and final part in my 3-part series on the current state of E&O law and how we got here. We will address the
“Duty to Read" issue, but more from the role of the courts in watering down what was once a total defense.
Recently a client, after several years of litigation, asked me “why is it taking so long" and “Can't we just tell the judge we did nothing wrong" and get the case dismissed. To their credit, they never had an E&O claim, let alone that resulted in litigation, nor were ever involved in litigation in the New York Court system. Many of you are fortunate enough to be in that status. The reality of litigation and how bad decisions are issued and increase your potential liability over time is a reality. It is also why E&O prevention as we try to impart via the seminars and guidance is so important. Not giving a court or opposing counsel any chance to make bad law is one key to the continued favorable law for brokers and agents in New York. Here is the poster child for that all too often aberration and what happens when bad facts and bad arguments made on behalf of the broker meet pro insured Judges.
As I wrote in the December E&O Report, the first in the series, the Duty to Read as an absolute bar to any “Failure to Procure" litigation goes back to a life insurance case in 1920, Metzger v. Aetna Insurance Company, 227 N.Y. 411 (1920). (“ It has often been held that when a party to a written contract accepts it as a contract he is bound by the stipulations and conditions expressed in it whether he reads them or not. Ignorance through negligence or inexcusable trustfulness will not relieve a party from his contract obligations. He who signs or accepts a written contract, in the absence of fraud or other wrongful act on the part of another contracting party, is conclusively presumed to know its contents and to assent to them, and there can be no evidence for the jury as to his understanding of its terms.") That defense applied whether or not the Insured sued the broker for Breach of Contract or Negligence, which are legally separate consepts with different basic elements the insured has to prove.
That was the law, decade after decade until Baseball Off. of Commr. v. Marsh & McLennan, 295 A.D.2d 73 (1st Dept., 2002). Major League Baseball, (“MLB"), specifically told its insurance broker to make sure that its liability policy had “defamation" coverage. The broker admitted that and that it agreed to get defamation coverage on a replacement policy. The broker failed to get a replacement policy with defamation coverage. MLB reviewed the renewal policy and noted the lack of defamation coverage. MLB then notified the broker who admitted the error and told MLB that it would fix the mistake and get the defamation coverage. Id. at 74 and 75. The broker never corrected its mistake and then an uninsured defamation suit was filed by a player. Counsel for the broker wrongly made a Duty to Read argument under these “bad" facts.
The Appellate Court sitting in New York City, rejected the Duty to Read argument ruling that the “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."
First, this was not a “Duty to Read" case since MLB read the policy when issued, saw the mistake, told the broker to fix it, which it agreed to do. The court should have simply said…. This is not a duty to read case, it is simple negligence in the failure to do what was asked and correct a mistake.
Second, this Appellate Court had no Constitutional right to overturn the 1920 Metzger decision by the Court of Appeals which is a Superior Court and the final word on anything it rules on. That did not stop them though.
Third, the rest of the decision shows how utterly clueless this particular court was as to Insurance Broker law as they kept referring to the case as on for “Malpractice". However, malpractice only applies to “professionals". Thanks to our decisions in Murphy, Hoffend and Chase Scientific, the Court of Appeals has held that Insurance Brokers and Agents are not “professionals", cannot be held to that higher standard applicable to them and cannot be sued for “malpractice". That the court did not understand this fundamental concept is the problem we face everyday in litigation.
As if Baseball was not bad enough, in American Bldg. Supply Corp. v. Petrocelli Group, Inc., 19 N.Y.3d 730 (2012) the Court of Appeals basically affirmed that the Duty to Read is now not an absolute bar for a Negligence cause of action and is merely an element of comparative fault.
As one final example as how, bad law gets more and more entrenched with each new decision is this. “Comparative Fault" is the legal principle that determines how much fault each party, typically in a personal injury lawsuit, (but ONLY in a Negligence lawsuit) bears and how that fault affects the amount of damages awarded. The classic example is someone slipping and falling on a slippery floor but they were running and ignored the yellow, plastic warning signs. A jury may find that they were 90% at fault and thus only award the Plaintiff 10% of the claimed damages. But since Baseball and ABS we have seen courts reject the Duty to Read as to Breach of Contract and Misrepresentation Claims even though (1) neither case said it applied to anything but Negligence and (2) the concept of “Comparative Fault" is simply meaningless when it comes to any other claim but Negligence.
Conclusion
Yes, this article was a little heavy the in weeds of litigating E&O cases. But it is important for you to know the context, the possible end result of all the E&O seminars, guidance and advice we give you. It is to make you and the facts that get presented to a court has favorable and bullet proof as possible to prevent them from making bad law. There is no guarantee that a pro-insured court will not do what they want anyway. We documented that above. But there is no reason to make it easier for them or give them the cover of bad facts to help.
E&O prevention is not just for “preventing" claims, but for making sure that we have the best foundation for defending you and defeating those claims when they do happen.
Submitted by:
Howard S. Kronberg, Esq.
Kaufman Dolowich, LLP