New York Law Review

Tag: insurance broker

  • People v. Wells Fargo Ins. Servs., Inc., 14 N.Y.3d 164 (2010): Insurance Broker’s Duty to Disclose Incentive Programs

    People v. Wells Fargo Ins. Servs., Inc., 14 N.Y.3d 164 (2010)

    An insurance broker does not have a common-law fiduciary duty to disclose to its customers incentive arrangements that the broker has entered into with insurance companies.

    Summary

    The Attorney General sued Wells Fargo, alleging the insurance broker engaged in fraudulent acts, unjust enrichment, common-law fraud, and breach of fiduciary duties by failing to disclose “incentive” arrangements with insurance companies. Wells Fargo allegedly steered clients to insurers offering kickbacks without informing clients. The complaint didn’t allege misrepresentations or demonstrable harm to clients. The New York Court of Appeals affirmed the dismissal, holding that absent misrepresentation or actual injury, an insurance broker doesn’t have a common-law fiduciary duty to disclose incentive programs. The Court reasoned that the broker’s dual agency status complicates the traditional principal-agent fiduciary relationship, and that a newly enacted regulation was a better remedy than creating a retroactive common-law rule.

    Facts

    Wells Fargo, an insurance brokerage firm, acted as an agent for organizations seeking insurance. They obtained quotes from insurers and offered recommendations. Wells Fargo entered into “incentive” arrangements with insurers, including the “Millennium Partners Program,” where insurers paid Wells Fargo based on the volume of business they brought. These incentive payments were not disclosed to Wells Fargo’s customers. The Attorney General alleged that Wells Fargo “steered” its customers to particular insurance companies based on these incentives.

    Procedural History

    The Supreme Court dismissed the Attorney General’s complaint with leave to replead. The Attorney General declined to replead, and appealed. The Appellate Division affirmed the dismissal. The New York Court of Appeals granted leave to appeal and affirmed the Appellate Division’s order.

    Issue(s)

    Whether an insurance broker has a common-law fiduciary duty to disclose to its customers incentive arrangements that the broker has entered into with insurance companies.

    Holding

    No, because the relationship between an insurance broker and a purchaser of insurance is complex and because a prospective regulation is a better way of addressing this issue than a retroactive common-law rule.

    Court’s Reasoning

    The Court of Appeals reasoned that while insurance brokers act as agents for the insured, they also have a relationship with the insurer, often receiving compensation from them. This “dual agency status” complicates the traditional fiduciary duty analysis. The Court distinguished the case from situations involving affirmative misrepresentations or actual injury to the customer. The Court acknowledged that the non-disclosure of incentive arrangements “may be a bad practice.” However, it noted that a newly adopted regulation by the Insurance Department prohibited such non-disclosure prospectively. The court stated that “A regulation, prospective in effect, is a much better way of ending a questionable but common practice than what the Attorney General asks us to do here: in substance to outlaw the practice retroactively by creating a new common-law rule.” The court also referenced existing Appellate Division cases that held an insurance broker need not disclose contractual arrangements made with insurance companies. The court emphasized that the complaint did not allege that Wells Fargo did anything contrary to industry custom. Absent such allegations, the Court declined to impose a new common-law duty. The Court effectively deferred to the regulatory solution, finding it a more appropriate method for addressing the issue than creating a new, retroactive common-law rule.

  • Hoffend & Sons, Inc. v. Rose & Kiernan, Inc., 7 N.Y.3d 152 (2006): Duty of Insurance Broker to Obtain Specific Coverage

    7 N.Y.3d 152 (2006)

    An insurance broker has a duty to either obtain the coverage a customer specifically requests or inform the customer of the inability to do so; a general request for coverage is insufficient to trigger this duty, and a “special relationship” requires more than an ordinary broker-client relationship involving payment of premiums.

    Summary

    Hoffend & Sons sued its insurance broker, Rose & Kiernan (R&K), alleging failure to obtain a policy covering property damage to a foreign construction project. Hoffend argued they made a specific request for such coverage and had a special relationship with R&K, imposing a continuing duty to advise. The New York Court of Appeals held that Hoffend failed to demonstrate a specific request for the needed coverage or a special relationship with R&K. Thus, the broker had no duty to obtain the insurance, and the dismissal of the complaint was affirmed.

    Facts

    Hoffend, a theater stage design and construction firm, used R&K as its insurance broker. R&K provided a proposal including a Travelers builders’ risk policy for domestic projects and a Great Northern policy for foreign projects, covering general liability, auto coverage, and workers’ compensation, but not foreign property damage. R&K informed Hoffend that foreign projects required project-by-project discussion. Hoffend contracted with an Argentine firm for a project in Argentina. A Hoffend principal claimed he discussed the project with R&K and indicated it should be “covered.” The contract with the Argentine firm required Hoffend to obtain insurance for labor-related accidents. During the project, a lighting bridge collapsed, causing property damage that was not covered by either policy.

    Procedural History

    Hoffend sued R&K, alleging failure to acquire the requested coverage. The Appellate Division found factual questions regarding the specific request and special relationship but dismissed the complaint because Hoffend received the policy and was charged with knowledge of its contents. Hoffend appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether Hoffend made a specific request to R&K for insurance coverage for property damage on its foreign construction project in Argentina?

    2. Whether Hoffend had a special relationship with R&K that created a continuing duty for R&K to advise and procure additional insurance coverage for Hoffend?

    Holding

    1. No, because Hoffend’s recollection of events was vague and did not establish a specific request for coverage of the particular risk involved.

    2. No, because the services provided by R&K did not rise to the level of a special relationship; Hoffend did not compensate R&K for insurance advice apart from premiums, nor did it delegate insurance decision-making.

    Court’s Reasoning

    The Court of Appeals stated that an insurance broker has a common-law duty either to obtain the coverage that a customer specifically requests or to inform the customer of an inability to do so. Citing Murphy v Kuhn, 90 NY2d 266 (1997), the court emphasized that a general request for coverage will not satisfy the requirement of a specific request for a certain type of coverage. Donald Hoffend’s vague recollection that “we are covered” was insufficient to impose liability on R&K. Ruth Abate’s letter stating the relevant policy would “cover [Hoffend’s] U.S. projects only” and foreign coverage remained open for discussion undermined Hoffend’s claim. The court found no special relationship existed, emphasizing Hoffend was a sophisticated commercial entity, and did not compensate R&K for advice beyond premiums. The court distinguished a special relationship from an ordinary broker-client relationship: “Hoffend told R & K in general what insurance Hoffend had decided to purchase. It did not ask R & K what that insurance should be.” The court found that because there was neither a specific request nor special relationship it did not need to determine whether Hoffend’s receipt and opportunity to read the policy barred recovery. The order of the Appellate Division was affirmed.

  • Chase Scientific Research, Inc. v. NIA Group, Inc., 96 N.Y.2d 20 (2001): Defining ‘Professional’ for Malpractice Statute of Limitations

    Chase Scientific Research, Inc. v. NIA Group, Inc., 96 N.Y.2d 20 (2001)

    For the purpose of CPLR 214(6), which sets a three-year statute of limitations for nonmedical malpractice actions, a ‘professional’ is defined by extensive formal learning and training, licensure indicating qualification, a code of conduct exceeding marketplace standards, and a system for disciplining violations of those standards; insurance agents and brokers do not meet this definition.

    Summary

    This case clarifies the definition of “professional” within the meaning of CPLR 214(6), New York’s statute of limitations for non-medical malpractice claims. Chase Scientific Research sued its insurance brokers, NIA Group, alleging failure to secure adequate insurance coverage. The central issue was whether the three-year statute of limitations for malpractice applied, barring the suit. The Court of Appeals held that insurance brokers do not qualify as “professionals” under the statute because they lack the extensive training, rigorous standards of conduct, and disciplinary systems associated with learned professions like law and medicine. Therefore, the longer statutes of limitations for negligence and breach of contract applied.

    Facts

    Chase Scientific Research engaged NIA Group, insurance brokers, to procure property insurance in May 1995. NIA Group secured a policy for Chase. In January 1996, a storm damaged Chase’s warehouse, leading to an insurance claim. The carriers offered a fraction of the policy limit, resulting in Chase settling with them for $275,000. Chase sued NIA Group in January 1999, alleging negligence and breach of contract for failing to obtain adequate coverage.

    Procedural History

    The Supreme Court dismissed Chase’s complaint, finding it time-barred under CPLR 214(6). The Appellate Division affirmed. The New York Court of Appeals then heard the case.

    Issue(s)

    1. Whether insurance agents and brokers are considered “professionals” for the purposes of CPLR 214(6), the three-year statute of limitations for nonmedical malpractice actions.

    Holding

    1. No, because insurance agents and brokers do not possess the characteristics of a “professional” as contemplated by CPLR 214(6), namely extensive formal learning and training, licensure and regulation indicating a qualification to practice, a code of conduct imposing standards beyond those accepted in the marketplace, and a system of discipline for violation of those standards.

    Court’s Reasoning

    The Court of Appeals analyzed the legislative history and purpose of CPLR 214(6). It noted that while the term “malpractice” has existed in statutes for over a century, its application to non-medical professions has been inconsistent. The court emphasized that the 1996 amendment to CPLR 214(6) was intended to create symmetry in the limitations period for all professionals, but it did not define who qualified as a “professional.”

    The Court defined “professional” by identifying qualities shared by learned professions such as law and medicine: “extensive formal learning and training, licensure and regulation indicating a qualification to practice, a code of conduct imposing standards beyond those accepted in the marketplace and a system of discipline for violation of those standards.” The court found that insurance agents and brokers did not meet this definition, highlighting the relatively less rigorous education and training requirements and the absence of a disciplinary system comparable to those governing lawyers, doctors, and accountants. The Court also cited Murphy v. Kuhn, emphasizing that insurance agents generally do not have a continuing duty to advise clients based on a special relationship of trust. Thus, the Court concluded that the six-year statute of limitations for breach of contract and the three-year statute of limitations for negligence applied, reversing the lower courts’ decisions. As the court noted, “[T]hese criteria are simply not as rigorous as those embraced by what we conclude are the professionals within CPLR 214 (6).”