TELS Prevails in Case Alleging Agent Failed to Advise Clients of Insufficient Insurance Coverage

May 8, 2007

HAWTHORNE, New York -- TRAUB EGLIN LIEBERMAN STRAUS LLP (TELS) is pleased to announce that Jonathan Harwood of TELS prevailed in the appeal of a lower court decision that found an insurance agent was not liable for failing to advise a client that its commercial property was not adequately insured.

In Fremont Realty, Inc. v. P & N Iron Works, the Plaintiff was a corporation that owned a three-story apartment building in Peekskill, New York. The Plaintiff had originally purchased insurance to cover the building against “losses due to fire, liability coverage and other coverage incidental to the ownership, operation and control of the aforesaid Premises.” The Plaintiff’s principal testified that he requested that the broker obtain coverage in an amount that was sufficient to cover the property. The insurance broker obtained coverage that remained in place, although with some changes in insurers, through November of 2003. 

In the early years, the coverage purchased included a feature called "inflation guard," designed to increase the amount of coverage by a set percentage every year.  After several years, that provision ceased to be part of the policy and, the insured claimed, it was never notified of that change.  The coverage amount ultimately remained static at $1,000,000 for seven years. 

On November 25, 2003, the building was significantly damaged as a result of a fire.  The Plaintiff claimed that the insurance policy in effect at the time was insufficient to cover the damages caused by the fire, estimated to be $2 million. According to Plaintiff, the building should have been insured for $2,000,000 and, as a result of the broker’s negligence, it had suffered a $1,000,000 loss. The Plaintiff subsequently sued the broker, claiming that the broker was aware that the building was under insured, and that it acted negligently when it failed to advise Plaintiff of this fact and recommend that the Plaintiff obtain increased insurance. In support of its claim, the Plaintiff pointed to an email that the broker received stating that the insurer believed the building was under insured, and recommending that the coverage be increased above $1,000,000 at the next renewal.  No such increase was ever effectuated.

Jonathan Harwood of TELS represented the broker in this case and argued that the broker had never provided Plaintiff with specific assurances as to the amount of coverage that would be in place, or provided any recommendations in this regard.  In addition, the Plaintiff never made a request for a specific amount or type of coverage, and had no reasonable basis to believe that the coverage in place was any different than what the policies indicated.

The Plaintiff, in fact, admitted that it received copies of the insurance policies for every year that it owned the building, and that each of the policies it received accurately identified the coverage provided.  The Plaintiff's principal admitted to the Court that he never read the policies, and acknowledged that the broker did not provide any services to the Plaintiff beyond obtaining insurance coverage.

A key part of Mr. Harwood's defense hinged on the Plaintiff's relationship with the broker. The Plaintiff stated that all of its interactions with the broker were in the broker’s limited capacity as Plaintiff's agent. The Plaintiff did not engage in frequent, regular meetings with the broker that could be construed as evidence of any relationship beyond the standard broker/client relationship. Under New York law, insurance agents are not obligated to recommend or suggest insurance to their clients.  They are only obligated to obtain the insurance requested or advise that the coverage sought is not available.  There is an exception, however, where the agent and the insured have a special relationship. Such a relationship can exist where the agent provides services beyond assisting the applicant in purchasing insurance. 

At the outset of the relationship, the agent had provided an informal appraisal of the building. The Plaintiff claimed that this conduct was sufficient to create a special relationship, thus requiring the broker to advise Plaintiff on its insurance needs.  Mr. Harwood filed a motion for summary judgment, arguing that no special relationship existed. The trial court agreed and granted TELS' motion. The Court also noted, as argued by the broker, that Plaintiff had received every policy and, by law, it was presumed to have read and understood the terms of them.  As such, the Plaintiff could hot have reasonably expected that its coverage exceeded $1,000,000.

The Plaintiff appealed the lower court's ruling to the Supreme Court of the State of New York, Appellate Division, Second Department. On appeal, Mr. Harwood argued that the trial court’s ruling was correct, as the broker's appraisal services were not sufficient to establish a special relationship that created a fiduciary duty.  The appellate court also agreed with Mr. Harwood’s argument, finding that the Plaintiff’s request that it be “fully covered” did not constitute a specific request for a certain type or amount of coverage. Without such a request, the appellate court held, the broker was not obligated to provide or recommend coverage beyond what had been provided. As a result, the agent no longer faces a potential liability of up to $1,000,000.

The case was Fremont Realty, Inc. v. P & N Iron Works, et al. (trial court index number 04526/04, appellate division docket number 2006-01079).

TELS congratulates Mr. Harwood on his victory. For more information on Mr. Harwood and his C.V., please visit:

www.tels.com/profiles/jonathanharwood/