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In E&O Lawsuits Filed Against Brokers Post-Sandy, the State Could Determine Who Wins

Source: BestWeek - Meg Green

Posted on 07 Feb 2013 by Neilson

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Insurance agency E&OBrokers may be caught in a wave of lawsuits and errors and omissions claims in the wake of Hurricane Sandy, but that won't mean they would prevail in court, attorneys said.

"The question isn't whether there will be lawsuits against brokers, the question is whether they will be successful or not," said attorney Franklin Ciaccio, a partner with Carter Ledyard & Milburn.

Still, cases will face different standards depending on what state they are filed in highlighted by a New York appellate case that could muddy the waters for brokers sued there.

Three months after Sandy devastated the Northeast, insurance claims are still being settled. Policyholders who are unhappy with the amount they received from their insurers are beginning to file lawsuits against their insurer or broker, or both.

"When people have large losses, they will look for ways to recover them," said Laurie Kamaiko, an attorney with Edwards Wildman Palmer LLP. "People may be angry, but it doesn't necessarily mean anyone did anything wrong," she said.

Potential claims include disputes over whether or not the broker delivered adequate flood insurance.

Catastrophe-modeling firm RMS estimates total insured losses from the October storm could reach as high as $25 billion.

In one of the first Sandy lawsuits, Cardolite Corp., a manufacturer in Newark, sued its broker, Willis of New Jersey, for failing to "ask or advise Cardolite to purchase flood insurance" for a facility that is located on a river. That facility had $2 million in damage from the storm, but the insurer, National Union, denied coverage because the policy stated that flood insurance was excluded from areas in flood zones, according to court documents filed in the Essex County, N.J. Superior Court.

Other potential post-Sandy claims include whether damage caused by the storm was due to wind or flood usually an excluded peril or if the event should be considered one insured loss or two.

Any type of major catastrophe will trigger lawsuits against agents, said Mark J. LaLonde, president and chief executive officer of PIA Management Services Inc., the umbrella corporation that manages the Glenmont, N.Y.-based Professional Insurance Agents associations of New York State, New Jersey, Connecticut and New Hampshire.

But the association, which also sells E&O policies to agents, said it hasn't seen an influx of E&O claims emerge yet.

One of the carriers the PIA represents has close to 200 policyholders in New Jersey, and has only received four claims so far, LaLonde said.

Even if brokers prevail in a court case, defending the case can be costly for insurers, he said. "It's not a highly profitable line," LaLonde said of the broker E&O business. "It's a limited marketplace."

Attorneys are already on the prowl for clients. The PIA has filed a formal complaint against the law firm Jacoby & Meyers over its advertisement: "If your business lost business due to the storm, your insurance policy should cover it. If it doesn't, your agent made an error. We'll work to correct it."

"The approach is if you haven't been paid, your agent did something wrong, which is not necessarily the case," LaLonde said.

Under old case law in New York, when the insured received his insurance policy, he was presumed to have read it and brokers couldn't be held responsible if something was missing from the policy.

"It was fairly well accepted that a failure to read a policy by an insured would bar recovery from a broker for failing to obtain or advise a client if there was no flood insurance," Ciaccio said, adding that "looking at an insurance policy can make your eyes glaze over."

In the Nov. 19, 2012, decision in the American Building Supply Corp. vs. Petrocelli Group Inc. case, the New York Court of Appeals found, "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 court wrote. "The failure to read the policy..should not bar altogether an action against a broker."

"It will absolutely encourage more lawsuits in the wake of Sandy," Ciaccio said.

In the Northeast, just 14% of people surveyed by the Insurance Information Institute had purchased flood insurance in 2012.

"Most policies don't have flood insurance. That's black and white. If flood insurance is not there, the question becomes: Did people ask for it? Then it becomes 'he said-she said'," Ciaccio said.

One potential silver lining in the aftermath of Sandy is there could be a boost in sales of flood insurance going forward. Flood insurance sales rose 5% from 2011 to 2012 in the Northeast after the wake of severe flooding from Hurricane Irene in 2011, the III said.

"People may become more aware of the value of insurance," said Kamaiko. "Sometimes the premium you didn't want to pay before an event occurs becomes well worth it after an event."


Ngunyi-Kenya Feb 19 2013 6:43PM Report Abuse
Hi . This is interesting read. In kenya,we follow the fortunes of English law.Its still a "buyer beware" business.However brokers are compelled to have a professional liability cover of about $120,000.There are hardly any suits. Clients here and even lawyers are intimidated by policy wording and the court are asleep regarding insurance law.They always sue the insurer-"the deep pocket". Agents here are deemed to be acting for the insurer. But I tend to believe the lawyers whom we call here -"ambulance chasers"are a cog in the works. Since insurance contracts are legal issues then why should the lazy policy holder not be accountable ?
Dale Swanson Feb 18 2013 10:17AM Report Abuse
What will have to happen of course if that agents or brokers will require clients to sign statements they have rejected additional Flood Coverage. Basic Flood policy only covers up to 250k of the Dwelling. Personal Property coverage is separate and on an ACV basis instead of replacement cost. Plus, there is different deductibles for both.
Nick Feb 18 2013 7:21AM Report Abuse
Xmarks, based on the 5 mis-spelled words in your extremely long run-on sentence, it sounds like english is a language that confuses you. As an agent, if we tried to explain every detail of a policy, the clients either wouldn't listen, or forget everything after they leave our office. The reason that insurance policies tend to be confusing is because straight forward language leads to lawyers finding loopholes for insureds to get coverage for things that were never supposed to be covered in the first place. READ YOUR POLICY, then contact your agent for clarification!
DAVID ROSEN Feb 18 2013 6:49AM Report Abuse
it should be remembered by the courts that insurance policies are written by attorneys and sold by brokers errors and omissions do happen but a great deal of fault can be credited to the same profession suing suing brokers
Cam Feb 18 2013 5:51AM Report Abuse
Okay, I'm going to lay out the hard line on this one and let everyone squirm and complain that it isn't reasonable. It is so much easier to blame the lawyers for the state of the world, or the evil insurance companies just out to make a profit (how can any company assert such an evil business model?!). Folks, read your policy. Take half an hour to skim through it, and ask questions. Time to take the big pill and swallow, the coverage you purchase is your responsibility. Got a business on a river? Maybe look for flood coverage. Live in Tornado Alley, maybe have a look for Tornado coverage. Sorry, asserting that this isn't a customers responsibility to look for, and the agent is to blame, is nonsense. And to the person who said policies are written to "confuse the customer", give it a rest. Such an assertion serves to only show your lack of common sense. It is written in the way required to be legally complete and binding. If the policy is too confusing, have a lawyer review it. And while their can be confusion in how they are written and interpreted, the wording can still be understood. If you read "flood" and "no coverage" in the same description then you might want to scratch your head and ask what this means. The question comes down to what it always does, personal responsibility and those that assume and assert that they will have none of it. I burned myself on hot coffee because the cup didn't read that it was hot, that's not my fault! I bought the cheapest policy I could find, refused to read it when it arrived, and because my broker didn't articulate every scenario known in the realm of possibility where I wouldn't be covered then it is their fault. Sure, I didn't make any effort to read my coverage or ask any questions outside of "is this the cheapest I can get?", but no one had better dare say this is my responsibility. If people could look in the mirror and take responsibility, we'd be able to lay off 95% of lawyers.
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