In a recent New York Court of Appeals decision, American Building Supply Corp. v. Petrocelli Group, Inc., 19 N.Y.3d 730, 955 N.Y.S.2d 854 (11/19/2012), the Court was asked to determine whether an insurance broker could be held liable for failure to procure adequate insurance coverage where the insured received the policy and had the opportunity to review the policy. Holding that an insured can maintain such an action where it has specifically requested the coverage omitted from a policy, the Court of Appeals denied the insurance broker’s motion for summary judgment.
The insured in American Building Supply (“ABS”), sold building materials to contractors from a plant in Bronx, New York. The insured alleged it specifically requested general liability coverage to protect employees at the Bronx location as required by its lease agreement with DRK, LLC., and that it had told the broker no retail business was conducted at the Bronx location, so no customers entered those premises.
When an employee was injured at the Bronx premises, the liability carrier denied coverage on the grounds that a cross liability exclusion precluded coverage for injuries sustained by employees of ABS. The Declaratory Judgment action by DRK, seeking a finding that the carrier was obligated to defend and indemnify, was eventually decided in favor of the carrier with the Court holding it had no duty to defend or indemnify under the policy. See DRK, LLC v. Burlington Ins. Co., 74 A.d.3D 693 (1ST Dept. 2010) lv. den. 16 N.Y.3d 702 (2011).
ABS commenced an action against its broker for negligence and breach of contract in failing to procure sufficient insurance. Citing testimony by ABS that it had informed the broker of the need for general liability insurance coverage for employees at the Bronx location, the Trial Court denied Summary Judgment holding it created an issue of fact from which a jury could conclude a specific request for coverage was made to the defendant. The Appellate Division reversed holding plaintiff’s failure to read and understand the policy it received precluded the action and Summary Judgment should have been granted.
The Court of Appeals reversed the Appellate Division holding there were issues of fact as to whether ABS “specifically requested coverage for its employees in case of accidental injury, and defendant, being aware of such request, failed to procure the requested coverage.” The Court of Appeals went on to note that the case would have been more difficult had it not been for the fact, “Since no one but employees ever entered the premises, the coverage defendant obtained, which excluded coverage for injuries to employees, hardly made sense.”
In reaching its conclusion to reverse the Appellate Division and agree with the Trial Court’s denial of the broker’s Summary Judgment motion, the Court of Appeals addressed the division in the Courts below regarding the implications of an insured’s failure to request changes to a policy which it had received and had an opportunity to review. Citing the particular facts of the case at issue, the Court of Appeals specifically held a plaintiff’s failure to read and understand the policy “should not” be an absolute bar to recovery.
While it is certainly the better practice for an insured to read its policy, an insured should have a right to look to the expertise of its broker with respect to insurance matters. 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. (Citations omitted).
It is important to note the emphasis the Court of Appeals placed on the facts of the case, namely (1) there was alleged to be a specific request for a particular coverage; and (2) the policy as issued without the alleged requested coverage appeared to be senseless given the purpose of the location being insured.
A general request for coverage would not be sufficient under the Court’s analysis. There must be a specific request for a particular type of coverage or insurance need, and evidence of the illusory nature of the policy without the requested coverage.
In light of the decision of the N.Y. Court of Appeals, providing a general cover letter urging the insured to review the policy is no longer sufficient to bar an action against the broker. Brokers should take the precautionary measure of noting in the cover letter accompanying the policy any coverage which was requested, but unavailable under the terms of the policy.