Insurance Broker Obligated to Advise Not Force Insured to Buy Coverage
Insurance brokers transact insurance with, but not on behalf of, and insurer. They represent their client, as a prospective insured, to obtain the insurance ordered and to advise the insured of the insurance needed.
In Satec, Inc. and Satec, LLC, Inc., The Hanover Insurance Group, Inc., v. Patrick Spina, Superior Court of New Jersey, Appellate Division, 2017 WL 2458133, Docket No. A-5103-14T4 (6/7/17) Satec, Inc. and Satec, LLC (collectively, Satec), appealed from the trial court order granting summary judgment in favor of defendants Grinspec Insurance Agency, Inc. d/b/a Centric Insurance Agency and Lee Nestel (collectively, Centric) and The Hanover Insurance Group, Inc. and Citizens Insurance Company of America (collectively, Hanover). The negligence and professional malpractice action arose from damage sustained to Satec’s real and personal property as a result of Hurricane Irene.
Satec is a distributor of electricity measurement meters. In 2003, Satec acquired a warehouse and business offices in Union County, New Jersey (the property). In 2007, Satec sought the counsel and advice of Centric, an independent insurance brokerage agency, relative to its desire to insure the property. As part of Nestel’s presentation to Satec, he provided Gordillo with a letter dated April 20, 2007, which contained an insurance proposal from Hanover, the underwriter of the insurance policy. In the letter, Nestel noted that Satec should review the proposal regarding coverage limits and exclusions: “Please review the entire proposal carefully with particular attention to the property limits on the proposal and advise me if you would like to increase coverage. Please also review the [r]ecommendations section following this letter. The [r]ecommendations section lists insurance coverage NOT included in this proposal. Please advise if you would like us to pursue a quotation for insurance coverage not included in this proposal.”
Satec ultimately purchased several policies from Centric, including the Business Owners Policy (BOP), which was underwritten by Citizens, a subsidiary of Hanover. The BOP excluded “(g) Water, (1) Flood, surface water, … overflow of any body of water, or spray from any of these, all whether or not driven by wind (including storm surge); …. (4) Water under the ground surface pressing on, or flowing or seeping through: (a) Foundations, walls, floors or paved surfaces; (b) Basements, whether paved or not; or (c) Doors, windows or other openings. (5) Waterborne material carried or otherwise moved by any of the water referred to in paragraph 1., 3. or 4., or material carried or otherwise moved by mudslide or mudflow.”
Satec renewed the policy annually. Centric sent Satec written correspondence advising about the upcoming renewal and/or new policy options. On August 28, 2011, the property was flooded due to Hurricane Irene, which resulted in property damage to the building in an alleged amount of $2.3 million. Satec filed a claim seeking coverage from Hanover. Upon receipt of the claim, Hanover conducted an investigation, wherein it determined that the flooding and consequential damage was occasioned by an overflow from the Rahway River, an incident not covered, as specifically excluded, by the BOP.
Satec sued Centric, Nestel, Hanover and Citizens. Satec alleged breach of contract, negligence and professional malpractice, among other claims. Following discovery, defendants moved for summary judgment. The court granted summary judgment in favor of defendants in an eleven-page written decision.
Summary judgment should be granted only if the record demonstrates there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law. If no genuine issue of material fact exists, the inquiry then turns to whether the trial court correctly interpreted the law. In this matter, Satec claims that there were matters in dispute and sufficient evidence in the discovery record to demonstrate Centric was professionally negligent in breaching its duty to procure adequate insurance to meet its needs, namely flood insurance.
An insurance broker owes a duty to his principal to exercise diligence in obtaining coverage in the area his principal seeks to be protected. Insurance intermediaries in this State must act in a fiduciary capacity to the client because of the increasing complexity of the insurance industry and the specialized knowledge required to understand all of its intricacies. An insurance producer acts in a fiduciary capacity in the conduct of his or her insurance business. The fiduciary relationship gives rise to a duty owed by the broker to the client to exercise good faith and reasonable skill in advising insureds.
The scope of an insurance broker’s obligations to a prospective insured requires insurance brokers:
(1) to procure the insurance;
(2) to secure a policy that is neither void nor materially deficient; and
(3) to provide the coverage he or she undertook to supply. However, the duty of a broker or agent is not unlimited.
In support of its claim of malpractice, Satec retained Stanley Hladik as its expert. In furtherance of his retention, Hladik produced a written report in which he opined that, based upon deviation from accepted standards, Centric negligently failed to procure flood insurance on behalf of Satec. Centric sought to bar Hladik’s testimony by motion, which was granted. The judge held that Satec’s liability expert should be excluded as having produced a “net opinion.” Without its expert’s testimony Satec could not prove as a matter of law its negligence and malpractice claims.
If an expert cannot offer objective support for his or her opinions, but testifies only to a view about a standard that is personal, it fails because it is a mere net opinion.
The trial judge concluded concerning the expert that throughout his report, Hladik states what he believes to be the standard of care for insurance brokers in New Jersey. Hladik merely stated that in “New Jersey, the standard of care for a broker includes making sure that the client (insured) understands exactly what types of insurance they need and is available.” These statements were made without any qualifying explanations, nor were they supported by any written document, supporting case law, or other objective custom accepted by the insurance producer community. Instead, Hladik’s report offers opinions that are personal to him.
Hladik presented no authority supporting his opinion. Nowhere in Hladik’s report or testimony does he identify the source of the standard of care enunciated, including decisional law, by which to measure plaintiff’s claimed deficiencies or to determine whether there was a breach of duty owed defendant.
Satec further contends the court erred in finding that, without an expert, it could not demonstrate Nestel breached his duty to advise Satec as to the need for flood insurance. Contrary to Satec’s assertions, given the discrete factual scenario presented herein, we hold that it is not “common knowledge” whether Centric’s actions constituted a deviation from the accepted standard of care of a New Jersey insurance producer. A jury should not be allowed to speculate without the aid of expert testimony in an area where laypersons could not be expected to have sufficient knowledge or experience.
The actions of the broker were not, by application of respondiat superior, negligence of the insurer it represented.
Applying governing principles, the appellate court was not persuaded by Satec’s argument that Hanover should be held vicariously liable for the alleged negligent actions of Centric. Imputation will not apply when the broker is evaluating a client’s needs and making recommendations accordingly. Satec’s arguments are directed at Centric’s failure to advise it regarding its need for flood insurance for the property. As such the actions of Centric may not be imputed to Hanover. The judgment of the trial court was affirmed.
Insurance brokers, even when given the New Jersey statement that they are fiduciaries to the person for whom they obtain insurance, are only required to advise the insured not force the insured to buy the insurance they need. The broker advised the insured that the policy they acquired did not include flood insurance and offered to find flood insurance if the insured required it. The insured did not require or seek flood insurance. The broker was not negligent nor was the insurer negligent in denying the claim for a loss clearly excluded. © 2017 – Barry Zalma
This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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