Alice’s Restaurant Syndrome
It’s a long-standing rule agents and brokers have with their clients: They have no duty to advise, guide or direct a client to obtain additional coverage, absent proof of a “special relationship” with their client.
Yet three recent legal cases seem to dispute that rule.
State appellate courts in Indiana and New York and a U.S. district court in Florida all appear to be relying on much lower standards to establish “special relationships.” They looked to statements in marketing and other brokerage firm materials (including self-descriptors like “risk advisor”) as establishing a client expectation on a broader scope of services. Perhaps more troubling, the courts did not believe they were confined to the terms of a fee agreement or engagement letter in making their “special relationship” findings.
Before a loss, risk managers often feel pressure to lower their premium expenses either directly or through the shaving of expenses via lower sublimits for ancillary exposures like flood. After a loss, however, the risk manager may have to defend that decision in the face of a shortfall and may blame the broker for not giving better advice. As the dissenting judge in the New York case noted, “it is natural for a client that has suffered a loss not covered by its insurance to blame its insurance agent; and if lawsuits by clients against their agents are welcomed by the courts, the consequence may be to make the agent into a kind of back-up insurer, a result neither sensible nor fair.”
The new cases may be leading us into exactly such a litigious environment (a Guthrie-like movement). This would be neither sensible nor fair but may nonetheless be our future.
So what can your firm do to minimize potential exposure? Consider documenting the services you intend to provide and expressly exclude those you don’t in an engagement-type letter. One of the core indicia of a “special relationship” in case law is the client’s fee payments to the broker. There are 39 states that require execution of a written fee agreement if you also will be collecting commissions from policies placed for a fee-paying client.
As a general matter, the essential provisions for an engagement letter between a broker and an insured are:
- Nature and Scope of Services to Be Provided
- Fee Arrangements
- Instructions to Sign and Return Letter
- Period of Engagement
- Limitation of Liability
- Applicable Law
- Entire Understanding
- Instructions to Sign and Return Letter.
In both an engagement-type letter and in marketing materials (including RFP representations), you should carefully consider terms such as “risk advisor” or “risk manager” or “risk consultant” to describe your services or expertise as they relate to your client’s business. If you are not advising on the amount of coverage or additional coverage options, consider including express disclaimer language and clarifying it is the client who must make the final decisions on coverage purchases.
During the placement process, you may want to require your producers to outline limit and coverage options, including availability of additional limits and coverage enhancements. Valuation issues are particularly thorny, especially for business interruption coverage. The client is in the best position to estimate these values, but the broker may be at risk if you don’t provide guidance and then document the basis for the client’s decision. Documenting all options and the client’s decision to accept or decline them is critical. This is especially true if you believe their decisions on limits or coverage are not prudent.
Automatically treating renewals as “routine” or “as expiring” can lead to mistakes being carried over unnoticed from year to year until there is a loss. That just leads to an unhappy client considering its legal options.
Finally, everyone in your firm needs to be trained to understand even casual conversations can potentially be interpreted as creating a “special relationship” entitling clients to a broader scope of advice. A client who says, “Here’s what I’m going to do, what do you think?” could pose a potential land mine. The client’s lawyer could characterize the conversation as your client’s serious request for advice.
For many of your clients, you may be seeking to establish “special relationships.” This should be a conscious choice, though. The best way to ensure your full understanding is to put it in writing. If not, you may unwittingly get swept up in the latest movement.