Brokers may be caught in a wave of lawsuits and "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."