EMERGING E & O ISSUES FOR INSURANCE AGENTS AND BROKERS

EMERGING E & O ISSUES FORINSURANCE AGENTS AND BROKERS PRESENTED BY: PETER J. BIGING NICOLETTI HORNIG CAMPISE SWEENEY & PAIGE One Wall Street Plaza 88 Pine Street New York, York 10005 (212) 220-3830

OVERVIEW • Basic Duties of Insurance Agents & Brokers • Additional Duties • Fiduciary Duties • When Fiduciary Duties Beyond Procuring Requested Coverage Are Deemed Owing • The Current Landscape • Specific Errors and Omissions Issues • Practical Measures to Be Taken to Avoid E&O Claims • Broker Responsibilities and the Interplay With the Attorney-Client and Work Product Privilege

I. BASIC DUTIES OF INSURANCE AGENTS & BROKERS • Exercise good faith and reasonable skill, care and diligence in procuring insurance requested in accordance with client’s instructions. • Obtain coverage which is not void. • Obtain coverage which is not materially deficient. • Obtain the coverage undertaken to be supplied at the requested limits. • Obtain requested coverage for client within a reasonable time or inform client of the inability to do so.

II. ADDITIONAL DUTIES • Investigate/inquire into the financial stability of the carrier with which the insurance is placed. • Consider the effects and potential risks of obtaining insurance from an unlicensed carrier and advise client of same. • Eg., Al’s Café, Inc., v. Sanders Ins. Agency, 820 A.2d 745 (Pa. Super. Ct. 2003) (holding that agent had duty to advise insured that by failing to use an insurer licensed in Pennsylvania, insured was forfeiting the protection, should the insurer be placed into insolvency, of up to $300,000 made available to insureds of Pennsylvania-licensed casualty insurers by the Pennsylvania Property and Casualty Insurance Guarantee Association and a defense to claims made against the insured)

III. FIDUCIARY DUTIES • Basic Rationale: • Insurance agents and brokers are not personal financial counselors and risk managers, approaching guarantor status. After procuring the requested coverage, agents/brokers have no continuing duty to advise, guide or direct a client to obtain additional coverage in the absence of a “special relationship.” • Reason: • Insureds are in a better position to know their personal assets and abilities to protect themselves more so than general insurance agents or brokers, unless the brokers are informed and asked to advise and act. • Making agents and brokers responsible for identifying possible deficiencies in coverages needed would subject agents and brokers to liability for failing to advise regarding every possible option, including that of competing companies. • If such fiduciary obligations beyond the duty to procure the requested coverage were found to apply absent a “special relationship”, insureds could choose not to purchase increased or optional coverages available, and then sue the agent/broker for failing to offer it, and end up obtaining the coverage anyway, via the agent’s/broker's E&O coverage.

IV. WHEN AGENTS/BROKERS ARE DEEMED TO BE FIDUCIARIES WITH CONTINUING OBLIGATIONS BEYOND MERELY PROCURING COVERAGE • Factors considered in determining whether a “special relationship” exists sufficient to create a greater, fiduciary duty of care: • the receipt of compensation above the customary commissions on premium paid for expert advice or additional services. • the broker’s counseling of the insured concerning a coverage issue. • the agent’s/broker’s declaration that he is a highly skilled insurance expert, coupled with the insured’s reliance upon the agent’s/broker’s expertise. • the agent’s/broker’s exercise of broad discretion in servicing the insured’s needs. • a course of dealing over an extended period of time which can be said to have put an objectively reasonable agent/broker on notice that his advice is being specially relied on.

V. THE CURRENT LANDSCAPE • A combination of factors is working to increase agent and broker E&O exposures • The continuing hard market • Insurer insolvencies • The demands of a marketplace which impel agents and brokers to promise ever greater, more specialized services and expertise • Mergers and acquisitions

The Continuing Hard Market And Insurer Insolvencies • One of the effects of a hard market is that it becomes difficult, if not impossible, to renew coverages at the same limits for comparable premiums. • Insurers can get away with demanding higher deductibles and SIRs, and dramatically increased premiums, or even refusing to offer certain coverages. • Brokers can be faced with having to market the coverage with lower rated insurers to try to keep close to expiring premium levels. • Brokers can find themselves having to obtain coverage with surplus lines insurers. • Insureds may find that they have less coverage for higher premiums with financially unstable insurers.

The Demands Of A Marketplace Which Impel Agents And Brokers To Promise Ever Greater, More Specialized Services And Expertise • With insureds able to investigate and place coverages over the internet, brokers are feeling increased pressure to market themselves as experts who provide ever greater, more specialized services • A glimpse at broker websites reveals promises to: • provide “strategic decision risk analysis” • provide “exposure identification” • “identify new and emerging exposures” • provide “risk management services” • provide “educational seminars” • “review insurer solvency” • provide “online claim reporting services” • “design comprehensive and complete programs for both insurance and risk management” • provide “performance beyond the required . . . in all we do” • “create the best products and services for your needs” • negotiate with insurers to “secure the most favorable terms for you”

Courts have taken note. • SeeBaseball Office of the Comm’r v. Marsh & McLennan, 742 N.Y.S.2d 40, 42 (N.Y. App. Div. 1st Dep’t 2002) “An insured has a right to look to the expertise of its broker with respect to insurance matters. And, it is no answer for the broker to argue, as an insurer might, that the insured has an obligation to read the policy. It is precisely to perform this service as well as others that the insured pays a commission to the broker.”

Mergers And Acquisitions • As the world gets smaller, and agents and brokers try to grow to stay competitive, there have been a number of agents and brokers which have used mergers and acquisitions to expand their books. • Mergers and acquisitions can increase E&O exposures by: • bringing old liabilities of the new partner/acquisition to the new combined business or the acquiring firm. • creating confusion, delay, and inconsistency in broker practices in the procurement of coverage, renewal of coverages and reporting of claims as different offices with different forms, procedures, habits and ways of doing things try to adapt to each other. • absorbing problem offices. • creating supervision, oversight, licensing and other issues with respect to far flung or difficult to staff/actively manage offices in outlying locations.

VI. SPECIFIC ERRORS AND OMMISSIONS ISSUES • Special Undertaking • Duty to Investigate / Inquire • Duty to Advise • Special Relationship • Negligence in Completing Policy Application

SPECIAL UNDERTAKING Jones v. Kennedy, 108 S.W.3d 203 (Mo. Ct. App. Southern Dist., Div. 2 2003) An injured motorist was unable to collect the full value of his personal injury claims against the driver of the car who caused his injuries because she had limited coverage. He then brought suit against his agent, alleging she had been negligent and breached fiduciary duties to him in failing to advise him as to the availability and advisability of supplemental uninsured motorist coverage, notwithstanding his request for “full coverage.” The trial court granted the agent’s motion to dismiss, and the insured appealed. On appeal, the trial court’s judgment dismissing the action was sustained, with the appellate court noting that the state in which the action had been brought – Missouri – “does not recognize a duty on the part of an insurance agent to advise customers as to their particular insurance needs or as to the availability of optional coverages.” In reaching this decision, the court noted that policy reasons for this rule include: a reluctance to remove the burden on the insured to attend to his/her own financial needs and expectations; the fact that the knowledge of each insured regarding his or her own personal assets and ability to pay far exceeds that of the agent; and making agents responsible for not advising as to optional coverages would subject insurance agents to liability for failing to advise regarding every possible option, including that of competing insurance companies, and let insureds seek coverage for losses they had chosen not to insure merely by suing the agent or broker and claiming that he/she would have purchased the necessary coverage if only it had been offered.

Stephens v. Hickey – Finn & Co., Inc., 261 A.D.2d300, 691 N.Y.S.2d 411 (N.Y. App. Div.1st Dep’t 1999) The plaintiff contacted his insurance agent, to renew his home insurance policy. The plaintiff asked for “proper and adequate” coverage and the agent used the “Home Aestimator” Computer Program, as she had in prior years, to determine the proper level of coverage. Following this estimation, a homeowner’s insurance policy was issued by Standard Fire Insurance Company. After a fire destroyed the plaintiff’s house, the plaintiff discovered that he was underinsured and sued his agent for the amount he was underinsured. The Court, in denying the agent’s motion for summary judgment, held that even if the plaintiff’s request did not create a duty for the agent to properly insure the house, “once the agent, in response to plaintiff’s request for ‘proper and adequate’ coverage, undertook to estimate the replacement value of the property to be insured, she owed plaintiff a duty to perform that estimation with a reasonable degree of care and accuracy.” And whether the agent did so was a triable fact issue for the jury.

Admiral Insurance Co. v. Cresent Hill Apartments, 328 F.3d 1310 (11th Cir. 2003) Residential apartment building owner had a commercial property insurance policy with Admiral, which it had purchased through the defendant agency. Five months after the policy had been issued, Admiral learned of a newspaper report describing the Cresent apartments as being in “deplorable” condition and issued a notice of cancellation for “underwriting reasons,” to be effective 33 days later. Cresent’s president and owner claimed not to have become aware of the notice of cancellation until more than six weeks after the coverage had been purportedly canceled, following a fire that destroyed five Cresent apartment units and Admiral’s denial of the resulting insurance claim. Cresent claimed the notice of cancellation was legally defective, and sought declaratory relief against Admiral that the loss should be covered. Cresent also sued the agency that had placed the coverage, claiming that the agency had constructive notice of the cancellation of coverage because an unearned premium had been directly deposited into the agency’s account. Cresent argued that the agency had a fiduciary duty to notify Cresent of the cancellation once it became aware of it, and obtain replacement coverage. The trial court dismissed Cresent’s claims against the agency, and the appellate court affirmed. In so doing, the Appellate court found that, absent an express or implied agreement to do so, an insurance agent has no continuing duty to acquire replacement coverage for an insured upon cancellation of coverage, nor any duty to notify the insured of cancellation of the original coverage procured.

Wolfe Air Aviation, Ltd. v. Bartling, 2003 WL 21290926 (Cal. App. 2 Dist. June 5, 2003) Wolfe Air was a business which owned a fleet of helicopters and Lear jets which it leased for various purposes. Over more than a 10 year period, the insured utilized the services of Bartling as its insurance broker to purchase all of its insurance. As an added service, the broker handled payments on all policies, which the insured financed, and Wolfe would pay monies to the broker to be held on account to make finance payments as they became due. The broker failed to make the necessary premium payments and coverage was cancelled, even though the insured had repeatedly asked the broker to address the notice of cancellation, and the broker responded that its accounts and policies were “in order.” Less than 24 hours after policy cancellation, a Wolfe helicopter crashed, killing or injuring everyone on board. Wolfe recovered against the broker on a breach of fiduciary duty claim based upon the company’s reliance upon the broker to handle all premium payments.

DUTY TO INVESTIGATE / INQUIRE • Al’s Café, Inc. v. Sanders Insurance Agency, 820 A.2d 745 (Pa. Super. Ct. 2003) Aman suffered severe personal injuries in an automobile accident after an employee in Al’s Café served him alcoholic beverages while he was visibly intoxicated. Al’s Café was insured against such claims under a liquor liability policy that had been procured by the Sanders Insurance Agency. Unfortunately, however, the insurer was not licensed to do business in Pennsylvania, and was in such poor financial condition that at the time of the loss it had been placed into liquidation. Because the insurer was in liquidation and was not licensed in Pennsylvania, Al’s Café had to retain private counsel to defend the claim. Ultimately, a verdict was rendered against Al’s Café in the amount of $429,635.29. Prior to the verdict, Al’s Café brought an action against the agent, alleging that Sanders had been negligent in procuring a liquor liability policy from an unlicensed and financially unstable insurer. And, in failing to advise the company that by utilizing an insurer not licensed in Pennsylvania the insured was forfeiting the protection, should the insurer be placed into insolvency, of up to $300,000 made available to insureds of Pennsylvania-licensed casualty insurers by the Pennsylvania Property and Casualty Insurance Guarantee Association and a defense to claims such as the one in question by the association. The trial court dismissed the claims against the agent, but on appeal the Pennsylvania Superior Court reinstated the claims. In so doing, the court concluded that “an insurance agent’s/broker’s recognized duty to act with reasonable care, skill and judgment extends to selection of the insurer and ascertaining whether it is reputable and financially sound and informing the insured of findings if investigation reveals evidence of financial infirmity, but the agent/broker nonetheless intends to place a policy with that insurer.“

Rapp v. Awany, 205 F. Supp. 2d 279 (D.N.J. 2002) A man and his son were killed in a motor vehicle accident. The wife of the decedent sued the freight company which owned and operated the truck involved in the accident, and received a judgment in the amount of $27,741,000. The freight company had insurance limits of just $35,000, however, which minimal limits were permitted under special New Jersey State regulations because the freight company represented on its policy application that it derived its revenue from only limited interstate commerce. However, those representations were false, and the minimum coverage should have been $750,000, the amount required for truckers engaged in interstate commence. Plaintiff sued the agent, and the insurer, alleging that the agent should have advised the freight owner/operator that it was required to purchase greater insurance coverage. The court dismissed the claim against the agent, (and the insurer), holding that “[a]bsent an inconsistency on the face of the application, the Defendants had no obligation to investigate every statement listed on G.S. Freight’s application.”

Poluk v. J.N. Manson Agency, Inc., 653 N.W.2d 905 (Wi. Ct. App. 2002) A woman who had owned a building which leased space to a bridal store had purchased insurance for the building for more than 20 years before her death, and the defendant agency was her agent. The coverage was renewed annually, with the limits increased for inflation. A policy provision excluded coverage for losses if the building was vacant for 60 days prior to the loss. After the owner died, the Estate placed the building up for sale, and the bridal store decided to close its business. Upon receipt of the notice of policy renewal, the Estate’s representative told the insurance agent the building was going to be sold, and asked if insurance could be purchased on a month to month basis. The agent suggested that the coverage simply be renewed, and the Estate would get a refund of unearned premiums when the policy was cancelled. After a fire destroyed the premises, the insurer denied coverage because the premises had been unoccupied for more than 60 days. The Estate thereupon sued the agent, claiming it had a duty to inquire as to whether the building might become vacant once alerted to the fact that it was going to be sold and the tenant was leaving, and a jury verdict was rendered finding the agent 99% responsible for the loss. On appeal, the verdict was affirmed because the court found that the advice to the broker that the insured only wanted coverage until the building was sold and the tenant was leaving “should have raised a red flag because of the existence of the vacancy clause, and [the agent] should have inquired further.” The court went on to state that “[w]hile we do not expect insurance agents to be clairvoyant, when they are presented with information suggesting an exemption clause might be triggered in a policy being renewed, the have a duty to inquire further.”

Graves v. State Farm Mutual Auto Ins. Co., 821 So.2d 769 (La. App., 3d Cir. 2002) The plaintiffs were an affluent couple who had to pay $137,200 towards the settlement of a personal injury action brought after the wife struck another car in the rear. The plaintiffs, who were long time clients of the agent who sold them their auto insurance coverage, brought suit against the agent for alleged negligence in failing to inquire as to their financial status and advise them to obtain higher coverage limits. Because nothing in the record suggested that the couple ever sought guidance as to coverage limits from the agent and “there [was] no evidence that any of the defendants held themselves out as advisor to the [couple] or that there existed a specific relationship or agreement to render insurance advise,” the court affirmed the dismissal of the action on summary judgment.

DUTY TO ADVISE • De Hayes Group v. Pretzels, Inc., 786 N.E.2d 779 (Ct. App. In. 2003) A pretzel manufacturer’s insurer brought a negligence action against the builders who had built the manufacturing facility following a fire which destroyed the facility. The complaint was subsequently amended to name the insurance broker as a defendant, alleging the broker had a duty to notify the manufacturer/insured of deficiencies in the manufacturer’s sprinkler system, which was the reason one insurer had given for its refusal to quote insurance coverage for the manufacturer. The broker moved for summary judgment on the grounds that it owed no duty to the manufacturer other than to procure the insurance coverage. The insurer, in its capacity as subrogor of the rights of the manufacturer/insured, argued that the broker had a duty to share with the insured “all material knowledge applicable to the risk being insured against.” The trial court denied the motion and certified the issue for appeal. On appeal, the decision was reversed. In granting the broker summary judgment, the Appellate Court held that the broker would have no duty to share that information absent a “special relationship” with the insured. And in this case, the broker was one of a number of brokers used by the insured to obtain quotes, the coverage was standard property and casualty insurance, the broker never represented itself as a highly skilled insurance expert, and never received any compensation in addition to the customary commissions on premium paid.

President v. Jenkins, 814 A.2d 1173 (N.J. Super. Ct. App. Div. 2003) The plaintiff was a woman who experienced undiagnosed eclampsia during labor and delivery of her child and, as a result, sustained brain damage, partial paralysis and seizure disorder. She and her husband sued, among others, her attending obstetrician (“Jenkins”). At the time of the incident giving rise to the personal injury claims, Jenkins was in the process of securing new medical malpractice insurance coverage. In changing insurers, he ended up switching from “occurrence” based coverage to “claims made” coverage. The treatment giving rise to the personal injury claims was rendered Jan.3-4, 1998. Jenkins’ malpractice insurance had been in place since 1987, and had been renewed annually, with the then current policy effective through Feb. 1, 1998. However, Jenkins repeatedly failed to make the requisite premium payments, and on Jan. 9, 1998, his insurer canceled Jenkins’ coverage retroactive to Oct. 26, 1997. On the day the coverage was canceled, Jenkins went to C&R Insurance Agency and obtained a claims made errors and omissions policy issued in April 1998, but retroactive to Feb. 1, 1998. Per the policy language, the coverage was retroactive to Feb. 1, 1998, only as to claims made during the policy period “arising out of a medical incident which occurred on or after the retroactive date . . .” Accordingly, Jenkins purchased insurance that provided him with no coverage for incidents giving rise to malpractice claims during the period Oct. 27, 1997, through Jan. 31, 1998. Because of the gap in coverage for Jenkins, President (the injured patient) added Jenkins’ broker, C&R, as a defendant, and Jenkins cross-claimed against C&R as well. On summary judgment, the court granted C&R’s motion to dismiss all of the claims against it. Jenkins appealed, arguing that C&R should be found professionally negligent in breaching its duty to procure insurance adequate to meet his needs; namely, retroactive coverage to bridge the gap between the cancellation of Jenkins “occurrence” based coverage (on Oct. 26, 1997) and the inception of his “claims made” coverage on Feb. 1, 1998. In a decision issued in February of this year, the New Jersey Superior Court, Appellate Division, affirmed the dismissal of the claims. The Court found that C&R could not be found to have breached any duty to Jenkins because there was no evidence to indicate that C&R had misled Jenkins regarding his coverage, incorrectly explained the policy, or knew that Jenkins misunderstood the coverage requested and provided or failed to procure insurance in accordance with his needs after being informed about them. Significantly, the court found that from the time of Jenkins’ first contact with C&R (going all the way back to August of 1997), through Jan. 9, 1998, when he signed the application for insurance under the replacement “claims made” policy, Jenkins consistently advised that his coverage with his original insurer would not lapse until Feb. 1, 1998, and that he therefore did not require insurance from his new carrier prior to that date. He never advised C&R of the original insurer’s notices of pending cancellation of his “occurrence” based policy or the eventual termination of that coverage, and affirmatively represented in his application for insurance under the replacement coverage that the prior coverage was effective through Feb. 1, 1998. “Under these circumstances,” the court stated, “we hold that a broker breaches no duty to an insured to affirmatively ascertain the existence of any gaps in the insured's coverage and to advise him accordingly.”

Nast v. State Farm Fire and Cas. Co., 82 S.W.3d 114 (Ct. App. Texas, S.A. 2002) Insureds who had been serviced by insurance agent for 18 years requested flood insurance after neighbor’s home was flooded. The agent advised that the insured was not in a designated flood zone, and thus was ineligible for flood insurance offered through FEMA for $400 a year. In response to plaintiffs’ question about neighbors paying about $400 a year for flood insurance, the agent responded that he had heard about some shyster selling such insurance a few years back, but good luck to anyone who tried to collect on a claim. The agent then advised against purchasing flood insurance through State Farm for $2,500 / year, as too costly. After the insureds’ home was flooded, the insureds learned that, in fact, their home was eligible for FEMA flood insurance, and sued the agent for violation of the Deceptive Trade Practices Act, fraud, and negligent misrepresentation. The trial court dismissed the claim against the agent on summary judgment and the plaintiffs appealed. Reversing the decision as to the agent, the court noted with respect to the negligent misrepresentation claim that his 18 years of service as their agent coupled with his comments about the “shyster” were sufficient to create a special reliance on him sufficient to form the basis of a negligent misrepresentation claim.

State Insurance Fund v. Richard Anderson Trucking, Inc., 722 N.Y.S.2d 816 (N.Y. App. Div. 3rd Dep’t 2001) Trucking business had been conducted as a proprietorship, but later incorporated. Five years after incorporation, the State Insurance Fund realized it had been continuing to charge the business for worker’s compensation insurance as a proprietorship, and so had significantly undercharged it for the premiums due. When the trucking business refused to pay the back premiums due, the State Fund cancelled the policy and sued the company to collect the unpaid premiums. The defendant trucking company then commenced a third party action against its insurance agent for indemnification/contribution, claiming that the agent had been relied upon in this specialized area of insurance to explain the rate structure and, upon being informed that the business was being incorporated, had a duty to advise it about the effect this would have on its worker’s compensation insurance premiums. The court dismissed all of the claims against the agent on appeal, holding that there was no evidence of a special relationship of trust and confidence between the company and the agent regarding the effect of its business decisions upon its insurance rates.

Sadler v. Loomis Co., 776 A.2d 25 (Md. Ct. Spec. App. 2001) Elderly insured was involved in a car accident causing a motorcyclist to have his leg amputated. When a large personal injury award was rendered in favor of the injured motorcyclist, well beyond her policy limits, the insured sued her broker for negligent failure to provide information regarding the need for or cost of additional automobile liability coverage. Dismissing the claim, the court held that while it may be a common occurrence that a person will not comprehend the immensity of modern verdicts, that does not mean that the agent or broker has a duty to find the uninformed customers and advise them about the possibility of large awards. The court reasoned that many customers want to decide about coverage themselves, believing that brokers are overly aggressive and typically attempt to sell them unnecessary coverage. • Storybrook Farms v. Ruchman Associates, Inc., 726 N.Y.S.2d 867 (N.Y. App. Div. 2nd Dep’t 2001) Plaintiff sued its brokers for negligence in failing to increase coverage on its renovated cottage after it suffered storm damage and the cost of repair exceeded the available coverage. Dismissing the claim, the court held that the brokers had a duty to procure the requested coverage in a reasonable time, but “had no continuing duty to advise, guide or direct [the] client to obtain additional coverage.”

Tappan Wire & Cable, Inc. v. County of Rockland, N.Y. Slip Op. 14530, 2003 WL 21221703 (N.Y. App. Div. 2nd Dep’t May 27, 2003) After plaintiff cable and wire manufacturer sustained flood damages, plaintiff was unable to recover under its property policy, which excluded losses arising from flood loss. Plaintiff sued its insurance agent for negligence in failing to procure flood insurance for the property. The court dismissed the claims, finding that plaintiff had failed to establish a special relationship giving rise to a duty to do anything more than obtain the requested coverage. • Coventry Coating Corp. v. Verlan Fire Ins. Co., 756 N.Y.S.2d 185 (N.Y. App. Div. 1st Dep’t 2003) Agent and insurer found not to have special duty to recommend flood insurance despite insured's claimed reliance upon the insurer’s underwriting report and recommendations, “since the report and insurance policy clearly stated that such inspections and reports were for underwriting purposes only and were not to be relied upon by plaintiff or anyone else.”

The Island House Inn, Inc. v. State Auto Insurance Companies, 782 N.E.2d 156 (Ct. App. Ohio, 6th Dist. 2002) After boiler failed and Inn was closed until repairs to the heating system were completed, insured made claim for business interruption loss under its property policy. The claim was denied because there was no separate boiler coverage endorsement. Although the insured claimed the agent should have advised that there would be no coverage for loss arising from a boiler breakdown in the absence of this endorsement, the court held that the insured’s substantial experience in business and awareness of boiler problems at the Inn placed the responsibility upon the Inn’s owner to read his policy to make sure he had the coverage he needed. • Pitts v. Jackson National Life Ins. Co., 574 S.E.2d 502 (Ct. App. S.C. 2002) In affirmance of dismissal of class action alleging fraud and unfair trade practices in connection with the sale of life insurance policies, the court held that absent an undertaking to obtain the “best policy”, the agent is not required to disclose all possible product differences between available products.

Evvtex Co., Inc. v. Hartley Cooper Assocs. Ltd., 102 F.3d 1327 (2nd Cir. 1996) Plaintiff operated a wholesale diamond business, and obtained a jeweler’s block policy of insurance covering the theft of goods with Lloyd’s. The plaintiff placed the coverage through a New York licensed excess lines broker (Finch) who, in turn, placed the coverage with Lloyd’s through Hartley Cooper. After plaintiff suffered a $735,000 loss by theft of goods, the Lloyd’s underwriters made payment to Hartley Cooper, which at plaintiff’s direction then wired the money to Finch, who stole the money. Plaintiff sued Hartley Cooper to recover the stolen loss proceeds, claiming that Hartley Cooper had been aware of Finch’s “general financial instability” because of the broker’s difficulties collecting premiums from Finch, which had Hartley Cooper so concerned that it had hired a management consulting firm to investigate Finch’s cash flow problems. The Court held that Hartley Cooper had a fiduciary duty to share its concerns about Finch’s financial situation with plaintiff, which plaintiff claimed would have led plaintiff not to direct payment of the settlement proceeds to Finch.

SPECIAL RELATIONSHIP • AAS – DMP Management L.P. Liquidating Trust v. Acordia Northwest Inc., 630 P.3d 860 (Wash. App. Div. 1, 2003) One of the largest crabbing entities in the world (AAS-DMP) suffered fire damage to its crab processor ship, leaving it inoperable for a month while the damage was repaired. AAS-DMP notified its broker of the loss, but did not immediately submit a claim for lost profits. Nineteen months later, AAS-DMP presented the broker with a lost profits claim; but with instructions to wait for further instructions before submitting the claim to the underwriter. At a meeting with the broker shortly afterwards, an AAS-DMP employee asked the broker if there were any deadlines or time limits within which it had to submit its lost profits claim, and the broker advised there were none. This was technically correct, but there was a two-year limitations period within which to bring suit against the insured with respect to claims, which ran from the date of the loss. Subsequently, more than two years after the loss, AAS-DMP asked the broker to formally submit its lost profits claim to the insurance underwriters, and the underwriters advised that they anticipated denying the claim because AAS-DMP had not filed the claim within the two-year policy limitations period. After negotiations with the underwriters, AAS-DMP compromised its loss by settling with the underwriters for a fraction of its original loss estimate. The company then brought suit against the broker claiming the broker had breached its duty of care by failing to inform it of the two-year limit on suits contained in the policy. The broker moved for summary judgment dismissing the action, on the grounds that its only duty to the insured was to exercise good faith and carry out the insured’s instructions – which it did in not submitting the lost profits claim until after more than two years had elapsed following the loss. On appeal to the Washington Court of Appeals, the decision was reversed. The court found the broker had a “special relationship” with AAS-DMP, creating a duty of care requiring the broker to advise AAS-DMP that, in light of the two-year suit limitation provision, a prolonged delay in submitting a proof of loss on its lost profits claim could result in a loss of coverage. In finding that there was a Special relationship creating a duty of care beyond merely procuring the requested coverage, the court noted, the broker was AAS-DMP’s exclusive maritime insurance broker, and had been placing insurance for an antecedent of the company since the early 1980s. The broker’s principal contact spoke with AAS-DMP nearly every day about coverage issues and, in addition to his commission, received a fee from the underwriters to service the policy. Further, the policy involved was so large and complex that the broker had prepared an 80-page policy summary, and the broker had traveled to London to negotiate the policy with an underwriting syndicate. Based upon this relationship, the court stated: “We hold that the nature of the relationship between AAS-DMP and its broker established an affirmative duty for the broker to competently advise the insured. More specifically, we hold that if a broker gives advice, he must provide carefully considered and responsive advice. We agree with other jurisdictions that have considered the issue and conclude “if an insurance broker has a duty to volunteer advice to a client, he has a duty to render correct advice.”

Wanner Metal Worx, Inc. v. Hylant – Maclean, Inc., No. 02CAE10046, 2003 WL 1826558 (Ohio App. 5 Dist. April 7, 2003), appealdenied, 792 N.E.2d 201 (Ohio 2003) (Table) Insured (“Wanner”) was a client of Hylant Maclean, Inc. (“Hylant”), which had procured its commercial insurance coverages for five years before a fire damaged Wanner’s plant in October 1999. As a result of the fire, Wanner suffered business losses in the amount of $1,136,364. However, the property insurance policy Hylant had procured from CNA had a coinsurance clause, resulting in CNA paying only $750,000 against the claim. Wanner sued Hylant for the difference, alleging that: Hylant negligently failed to obtain an agreed value endorsement negating the coinsurance provision; Hylant negligently failed to advise Wanner that an agreed value endorsement should have been obtained; and Hylant failed to properly advise Wanner of the impact of the coinsurance clause without an agreed value endorsement. Hylant argued that Wanner’s problem was that its executives had failed to read the policy, and that Hylant should not have been held responsible for this. The principal broker on the account for Hylant testified that he did not advise commercial customers as to whether coverages were adequate or inadequate for their businesses. Rather, it was his standard practice to advise the client as to what coverages were available, and then let the client decide what amounts and what coverage he/she wanted. Moving for summary judgment after discovery was taken, Hylant argued that: (1) Wanner’s executives had acknowledged not reading the policy prior to the fire; (2) the insurance policy contained a 100% coinsurance provision and explained the application of the provision in the event of loss, providing examples of how it would affect coverage; and (3) the insurance policy stated an agreed value endorsement could be obtained if the insured completed a business income worksheet, and Hylant had sent Wanner a business income worksheet for the renewal coverage in issue, but it was never returned. Agreeing that the uninsured loss Wanner sustained was a result of its failure to read and understand the policy, the trial court granted Hylant’s motion. On appeal, however, the decision was reversed. In reversing the decision, the court stated that it did not disagree that an insured has a duty to examine the coverage provided and may be charged with the knowledge of the contents of his insurance policies. However, failure to review the policy would not absolutely negate the insured’s claim, because Ohio is a “comparative negligence” state, not a “contributory negligence” state. Additionally, the appellate court found that the broker handling the account at Hylant for Wanner may have assumed a fiduciary duty to Wanner. Although, as noted above, he testified that it was his policy to simply advise his clients what coverages were available and let the clients choose the amounts and types, he also testified that in one instance he convinced Wanner not to reduce its then level of business income loss coverage. The court held that the broker, having admitted this, “cannot be heard to say it was appropriate to encourage his client to increase coverage in one circumstance and then state he never became involved in a business’ decision.” The court found that this created a material issue of fact regarding the issue of whether a fiduciary relationship existed. The court also found that a material issue of fact existed as to what coverage Wanner thought it actually had. This was because Hylant had provided Wanner with a coverage summary page stating that Wanner had $1.9 Million in coverage for the “actual loss sustained”, and Wanner’s executives testified they were confused about the effect of the coinsurance provision, and believed - - based upon the summary page description provided - - that Wanner had up to $1.9 Million in business income loss coverage for the full value of the “actual loss sustained.”

NEGLIGENCE IN COMPLETING POLICY APPLICATION • Ficarra v. Security Mutual Ins. Co., 757 N.Y.S.2d 59 (N.Y. App. Div. 2nd Dep’t 2003) After insured suffered fire loss, insurer disclaimed based upon misrepresentations made in the policy application. The insured contended that he had signed a blank application form and given correct information to the broker orally, who had then proceeded to fill out the application inaccurately. The insured sought recovery from the broker for his loss on a negligence theory, and the trial court denied the broker’s motion for a directed verdict. On appeal, the court upheld the trial court’s ruling. • Hebrink v.Farm Bureau Life Ins. Co., 664 N.W.2d 414 (Minn. Ct. App. 2003) The insured was denied coverage under his disability policy after he suffered a back injury requiring surgery. Several reasons were provided for the disclaimer, one of which was the insured’s failure on his application to make note of the fact that he had been treated by a chiropractor for back problems seven months prior to his applying for his policy with Farm Bureau Life. In the context of a coverage suit against the insurer, Hebrink also brought a claim against the insurance agent, alleging the agent filled out the application for him, was informed about the prior chiropractic back care, and told him that this information was not sought in the application. Even though the insured signed the application, and there was no allegation that he was blind, infirm or mentally incompetent, the court found that he had stated a “colorable” claim for negligence against the broker, and reversed the lower court’s dismissal of the claim on summary judgment.

Cooper v. Berkshire Life Ins. Co., 810 A.2d 1045 (Ct. of Sp. App. Md 2002). Plaintiff was an individual who purchased two life insurance policies upon the representation by his life insurance agents that the policies would provide death benefits of $1 million and $1.5 million, respectively, with annual premiums payable at $10,700 and $16,000 each, which premiums would “disappear” after 9 years as a result of dividends to be expected to be earned on investment of the premiums. When plaintiff was provided with the actual policy for the $1.5 million policy, the cover page advised the policyholder to “READ THIS POLICY CAREFULLY,” and the policy contained an illustration of projected premium payments for ten years which noted that it was not complete without the accompanying . . . Supplemental Footnote Page,” which was attached to the illustration. That document provided that: This illustration is not a contract. It is a projection of values based on a combination of guaranteed values and contingent value s such as dividends. Dividends and dividend purchases are neither estimated or guaranteed but are based on current company experience . . . The current dividend scale is which means significant changes in interest rates may affect future dividends. The $1 million policy was delivered to the Charity beneficiary, and plaintiff never saw it. 6 years after the policies were purchased, the agents disclosed to plaintiff that premiums would have to be paid for a number of years longer than originally represented. The plaintiff then brought suit against the insurer and the agents to recover for fraud, negligent misrepresentation and breach of contract in connection with the sale of the policies. The insurer and agents moved for and were granted summary judgment dismissing the claims. On appeal, however, the court reversed as to the agents. Although the policy delivered to the insured urged the plaintiff to read the terms carefully, and the illustration of premium payments to be made disclosed that it was not guaranteed that the premiums would be completely paid within the time frame indicated in the illustration, the court noted that when the policies were first discussed, the originally provided illustration did not include the “Supplemental Footnote Page” and the disclaimers contained therein. That fact, plus plaintiff’s allegation that the agents had “cultivated a relationship of trust and confidence in the [plaintiff] through their self-proclaimed expertise” and “held themselves out as highly-skilled insurance experts, possessing the special knowledge and expertise needed to interpret and understand the complex and sophisticated funding methods and mechanics of the disappearing premium policies” was enough, in the appellate court’s view, to create an issue of fact as to whether plaintiff reasonably expected the insurance agents to notify him if the delivered policy was somehow different from the discussed policy.

VII. PRACTICAL MEASURES TO AVOID E&O CLAIMS • Do the basics well: carefully and as comprehensively as possible make yourself aware of the insured’s coverage needs and desires, and articulate these needs and desires to the prospective insurer. • Confirm that the coverage obtained meets the insured’s requests and, to the extent you can’t obtain specific requested coverages, provide prompt notice of your inability to do so. • On renewals, confirm in writing the coverages offered and the coverages actually accepted. • Keep organized files. • Avoid conduct which can be interpreted as rendering advice to the insured as to the specific types or amount of coverages to have in place. • Confirm the insured’s review of and agreement with the material completeness and accuracy of the policy application, and where you fill out the application get the insured to sign a form attesting to his review and confirmation of the accuracy of same.

PRACTICAL MEASURES TO AVOID E&O CLAIMS –CONT’D • Advise the insured who has chosen to obtain coverage with an insurer with a lower than “A” Best’s rating in writing of the insurer’s Best’s rating, your recommendations regarding the Best rating, and the insured’s agreement to accept coverage from the insurer notwithstanding. • When preparing coverage summaries, take care to ensure that they are not misleading or confusing, and specifically refer the insured to the relevant policy provisions; take the same care in responding to coverage questions presented by your insureds. • Put systems in place to ensure that coverages are comprehensively reviewed with the insured annually. • Make sure your brokers are actually reading and printing out hard copies of their emails

PRACTICAL MEASURES TO AVOID E&O CLAIMS –CONT’D • Put procedures in place to ensure that everyone who is involved in servicing the account is aware of all relevant and material information with respect to the account, and has the relevant material information readily available to him. • Put systems and procedures in place which enable you to provide documentary evidence of your appropriate conduct, such as mailing and faxing all notices of claims, and time and date stamping forms generated on your computer. • Put systems and procedures in place to alert you to receipt by accounting of returned unearned premiums relative to specific accounts. • Be willing to cut loose problem clients who, for example, are habitually late in paying premiums and reporting claims. • Understand and accept the burden of being prepared to demonstrate that you “did the right thing” and the responsibilities that come with your efforts to meet this burden.

VIII. BROKER RESPONSIBILITIES AND THE INTERPLAY WITH THE ATTORNEY-CLIENT AND WORK PRODUCT PRIVILEGES • Attorney – Client Privilege • Purposes: The purpose of the attorney client privilege is to encourage free flowing communications between the attorney and his/her client. However, because it prevents disclosure of what is likely to be highly relevant material, it is very narrowly defined. • Definition: A basic working definition is that privileged attorney-client communications are communications between the attorney and his client (or employee), which are intended to be kept and are, in fact, kept confidential, and which are made in order to assist in providing legal advice or services to the client. • What does not fall within the ambit of privileged attorney-client communications: • Communications solely of facts, which are not rendered in the course of providing or seeking the rendering of legal advice. • Communications where the lawyer is wearing his businessman’s hat. • E.g., when the General counsel and Corporate Vice President, in the course of negotiating a contract, discusses with the CEO purely business issues concerning the proposed deal. • Communications not intended to be kept or not kept confidential. • E.g., communications between a corporate officer and another Corporate officer and the general counsel, with copies sent to outside third parties.

BROKER RESPONSIBILITIES AND THE INTERPLAY WITH THE ATTORNEY-CLIENT AND WORK PRODUCT PRIVILEGES – CONT’D • When third-parties participating in attorney-client communications can do so without vitiating the privilege. • Where the third-party participating in the communication is doing so in his/her role as the attorney’s agent to facilitate the communication. • E.g., participation by: interpreter; expert engaged by lawyer • Where the third-party’s role was as the functional equivalent of a corporate employee. • E.g. where non-party acted as representative of corporation in negotiations for failed business deal which subsequently resulted in litigation (In re Beiter Co., 16 F.3d 929, 937 (8th Cir. 1994)) • Where the third-party shares a common legal interest. This is known as the “common interest” privilege. KEY: to have a common interest which protects against waiver of the attorney-client privilege, the key consideration is that the nature of the interest be identical, not similar, and be legal, not solely commercial. • Sharing a desire to succeed in an action does not create a common legal interest. • A business strategy which happens to include a concern about litigation is not a ground for invoking the common interest rule.

BROKER RESPONSIBILITIES AND THE INTERPLAY WITH THE ATTORNEY-CLIENT AND WORK PRODUCT PRIVILEGES – CONT’D • Work Product Privilege • Purpose: To protect parties from having the mental thought processes and litigation strategies of their attorneys and work product in the course of preparing for litigation opened to their adversary. The concept is that factual information and evidentiary materials should be freely discoverable by everyone, but one side should not be able to simply do nothing and then ask to look at the work done by the other side. • When it applies: To merit work product protection under the Federal Rules of Civil Procedure, material must: (1) be a document or other tangible thing; (2) be prepared in anticipation of litigation; and (3) be prepared by or for a party. There may be some variations from state to state, but this is generally the rule applicable under State law. • The fact that a document is prepared in anticipation of litigation and also for a business purpose will not void the privilege. • The privilege has been extended to cover verbal communications between a lawyer and a witness, but that coverage is viewed in a more limited fashion, so that the portions of the communications revealing facts may be deemed discoverable, and only discovery designed specifically to reveal attorney thought processes and strategy are protected. - e.g., the court might permit a witness to testify about what facts were revealed to an attorney about an incident, while not permitting discovery into the specific questions asked by the lawyer of the witness in eliciting this information.

THE WORLD TRADE CENTER DECISIONS • SR International Business Insurance Co. Ltd. V. World Trade Center Properties LLC, No. 01 Civ. 9291 (JSM), 2002 WL 1334821 (S.D.N.Y. June 19, 2002) Following the attack on and collapse of the World Trade Center towers, there was a dispute between the lessee of the properties (“Silverstein”) and the insurers of the complex as to whether the loss should be treated as a single occurrence or 2 occurrences. The resolution of the issue would determine if approximately $3.5 billion or $7 billion in insurance was recoverable for the loss. Because the language of the various policies involved had not all been completed at the time of the loss, the parties were litigating, among other things, the issue of intent and the parties’ understanding regarding the coverage afforded. In connection with depositions of the lessee’s brokers, the insurers sought to compel testimony by the brokers regarding post 9/11 communications between attorneys for the lessees and employees of the broker, Willis, and between the lessees’ attorneys and Willis witnesses during preparation for the Willis employees’ depositions. Ruling: The court held that the attorney-client privilege did not protect communications between the lessee’s attorneys and Willis employees. Reasoning: • The Willis employees could not have viewed the lessee’s attorneys as their attorneys or that such communications would be held confidential. • There was no common interest protection because Willis did not have an identical legal interest to that of the lessee. The court held, as well, that, while any documents prepared by the lessee’s attorneys regarding communications with the Willis employees would be protected by the work product privilege, the Willis employees would have to testify as to what they were questioned about and told the Silverstein lawyers in meetings prior to preparation for depositions and what they told the Silverstein lawyers in meetings in preparation for depositions.

SR International Business Insurance Co. Ltd. v. World Trade Center Properties llc, No. 01 Civ. 9291 (JSM), 2002 WL 1455346 (S.D.N.Y. July 2, 2002 Prior to the attacks on the World Trade Center, GMAC Commercial Mortgage Corp. (“GMAC”) had loaned Silverstein Properties (“Silverstein”), the lessee of the World Trade Center Complex, $563 Million to finance the WTC leasehold, and “securitized” the loan through the issuance of mortgage backed securities to a number of institutional investors. In connection with this transaction, GMAC retained the Harbor Group as its insurance advisor to assist in determining the amount of insurance coverage that GMAC would require Silverstein to obtain for the WTC. After 9/11, GMAC and Harbor Group employees gathered information, participated in numerous meetings and had a number of communications - - between and among themselves, and with others, including Silverstein employees and the Silverstein attorneys - - regarding the insurance aspects of the WTC investment. In the context of the WTC coverage litigation, the insurers sought to obtain an order compelling the production of documents generated in the course of these discussions, and testimony from the relevant GMAC and Harbor Group employees about the discussions. GMAC tried to prevent this disclosure, arguing that all such post 9/11 communications were undertaken at the direction and supervision of GMAC’s in-house counsel, and that the Harbor Group employees were functioning as litigation consultants to GMAC counsel. Interestingly, in an effort to create a basis for protecting communications between the GMAC attorneys and employees of the Harbor Group from disclosure, GMAC retained them as “litigation consultants” via a retainer agreement executed on October 5, 2001, retroactive to September 11, 2001. Ruling: The creation of this retainer agreement notwithstanding, the court held that the communications (verbal and documentary) between GMAC’s attorneys and the Harbor Group employees were not privileged, nor were the documents prepared in connection with their efforts to gather information regarding insurance issues, as such activity was part of work GMAC would have performed in the normal course as a servicer of a loan. PLUS CONF.

EMERGING E & O ISSUES FOR INSURANCE AGENTS AND BROKERS