Are You Special?

We all like to think we’re special. Insurance agents and brokers are no different.  

After all, they often strive to differentiate themselves by marketing their special skills and expertise. Do clients agree insurance agents and brokers are special? Viewed through the lens of broker E&O liability, it seems clear the answer often is yes. Increasingly, policyholder lawyers have argued that insurance agents and brokers should be held to a higher duty than the traditional reasonable standard of care.

Traditionally, agents and brokers are obliged to perform reasonably in carrying out the instructions received from their clients. They have no duty to advise or recommend that clients obtain additional coverage or higher policy limits, absent extraordinary circumstances that would support the existence of a “special relationship” with their client. Several recent decisions, however, suggest the courts may be more willing to find that a special relationship has been established under circumstances that don’t seem so extraordinary.

For example, Northrop Grumman claimed it relied on its broker’s alleged representations of  “full coverage” in a case arising from a perceived insurance recovery shortfall for Hurricane Katrina damage to its shipbuilding facilities. Northrop contended it relied on its long-standing relationship with its brokerage and on its marketing materials.

Under California law, these kinds of allegations can trigger the application of enhanced “special relationship” duties. At the close of discovery, the brokerage moved for summary judgment, arguing Northrop had a sophisticated risk management department and never requested coverage for storm surge damage. The court denied the motion on all counts and set the case for a jury trial. In June the brokerage reportedly paid $150 million to resolve the case.

If you think the Northrop case is unique, think again. Marsh argued before a Florida jury last year that it owed no “special relationship” to a former client, Tiara Condominium Association, which, Marsh argued, was a sophisticated insurance buyer. Tiara argued Marsh had failed to recommend the association purchase sufficient policy limits to cover the full cost of repairing its building after it suffered hurricane damage. The judge sent the “special relationship” issue to the jury, which concluded that no “special relationship” had been established between Marsh and Tiara, and the judge dismissed the case. Had the jury gone the other way, the case would have entered a phase during which the jury would have considered Marsh’s liability under an elevated standard of care.

These two cases don’t stand alone. In March the Indiana Supreme Court sent the issue of whether a special relationship (and thus a duty to advise) existed between the Laven Insurance Agency and its client to trial. The same month, a Pennsylvania federal judge refused to dismiss allegations that insurance brokerage Morgan & Associates breached its duty of care to its client, finding the brokerage had an “overmastering influence” on the client’s insurance decisions. Finally, last year a New York state appellate court found a special relationship might exist between an insurance agent or broker and a client under less than extraordinary circumstances. So what can insurance agents and brokers do to help protect themselves against this evolving legal trend? Courts that have considered the “special relationship” issue have looked closely at the documentation. This includes setting out the work that the insurance agent or broker agreed to perform for the client and marketing the agent or broker’s capabilities to its client before and during the course of the business relationship.

Clearly documenting the scope of the services your firm provides to a client (and perhaps expressly excluding those services it does not provide) in an engagement letter or client services agreement is one step to consider seriously. Similarly, consider training colleagues at your firm to document consistently the coverage options they present to clients and the decisions made by those clients regarding the types and amounts of coverage they elect to purchase.

Another consideration is for your firm to review carefully the use of certain terms in its engagement letters, RFP responses and marketing materials. For example, if your firm describes itself in these materials as a “risk advisor,” possessing special “expertise,” or providing insurance solutions that “fully address all of [a client’s] insurance risks,” your firm should be prepared to see those same materials displayed to the jury in an E&O claim. Of course, your firm will continue to market its capabilities to clients, but you should recognize those efforts increasingly might pose risks. Consciously consider your language so you are only as special as you really want to be.