Can an Insured Recover from Their Insurance Broker If the Broker Fails to Obtain the Coverage Requested, or Misrepresents Coverage?

If an insurance broker fails to obtain the insurance coverage requested or misrepresents the scope or extent of coverage, does an insured have a claim against the broker when the insurance they expected to cover their loss does not as a result of the broker’s negligence?

A recent ruling by a trial court in New York once again reemphasizes that the answer to the question is yes.

In 386 3rd Ave. Partners Ltd. Partnership v. Alliance Brokerage Corp.,¹ the trial court found that an insurance broker could be subjected to liability for failing to obtain the requested flood insurance, and then misrepresenting to its client the coverage obtained.

In 386 3rd Ave. Partners, owners of multiple commercial properties went to their insurance broker (Alliance Brokerage Corp) to procure flood policies for their commercial properties. However, the Travelers policy procured by Alliance only covered the insured’s properties located outside of flood zones; the insured’s properties inside the flood zones were excluded and not covered by the Travelers insurance policy.

Roughly one year before Superstorm Sandy, the insured specifically asked that Alliance advise in writing “if any of the[ir] Brooklyn commercial properties have the flood coverage.” The insureds claimed that Alliance responded that “[a]ll of the commercial properties have … a $1 million limit for flood….”

When Superstorm Sandy hit in 2012 and damaged each of the insured properties, Travelers denied flood coverage for the properties inside the flood zones, citing a flood zone exclusion in the policy.

Following the denial of coverage, the insured sued their broker. When the broker moved for summary judgment, the trial court denied the motion, explaining that insurance brokers owe a common law duty to obtain the insurance coverage requested, or to inform their clients of the inability to do so. The court further explained that a broker may be found liable where the broker “failed to discharge the duties imposed by the agreement to obtain insurance, either by proof that it breached the agreement or because it failed to exercise due care in the transaction.” Here, the broker apparently not only failed to procure the coverage requested (flood coverage for all of the insured’s properties), but also misrepresented to the insured that the properties all had 1 million in flood coverage. Each of these acts, if true, independently trigger broker liability.

But what about the fact that the insurance policies contained the flood zone exclusion? Did the insured’s failure to read the policy, and address this issue with the broker before Superstorm Sandy impact the viability of their claim?

On this issue, the trial court noted that the insured’s failure to read the policy was “not a superseding cause” precluding the broker’s liability, explaining that, absent any showing that an insured knew of the discrepancy between the coverage it claimed to have requested and that obtained by the insurance broker, the insured had “a right to rely upon the [broker’s] presumed obedience to his or her instructions.”
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¹ 386 3rd Ave. Partners Ltd. Partnership v. Alliance Brokerage Corp., No. 500074/14, 2017 NY Slip Op 31484 (N.Y. Sup.Ct. Kings Co. July 11, 2017).