NEW JERSEY COURT DECISION HOLDS AGENTS LIABLE – BUT THERE IS A SOLUTION (see end of text)
Marc L. Dembling, a Certified Civil Trial Attorney, authored the article below. He is “of counsel” with Methfessel & Werbel in Morristown, New Jersey. He concentrates his practice in insurance litigation, malpractice litigation and products liability law. He can be reached at (732) 650-6522, or email at dembling@methwerb.com.
While this case specifically centers on a New Jersey ruling, it points out the potential for exposure in all states. Our subsequent conversation with Marc revealed a simple method of avoiding this E&O issue. See our remarks at the conclusion of this article about how to protect yourself.
In a malpractice suit against an insurance broker by its customer, insurance brokers may not rely upon a customer’s failure to read his insurance policy as the basis of a defense of comparative negligence. That is the decision of the New Jersey Supreme Court, by a four to three decision, in Aden v. Fortish, 169 N.J. 64 (2001).
Prior to this decision, there have been numerous decisional pronouncements that an insured had an obligation to read the policy provided to the insured. Indeed, the Appellate Division had upheld the right of an insurance producer to raise the issue of comparative negligence, and had held that the issue was one for the jury to decide in the context of comparing the negligence of two parties and determining proximate cause.
In Aden v. Fortish, a fire damaged a condominium owned by the plaintiff and the condominium association’s policy failed to cover the damage to the interior of the premises. Because the plaintiff’s policy of insurance only provided a $1,000 of coverage, plaintiffs were required to pay about $20,000 in repair costs for damage to the interior.
Plaintiffs filed a suit against the broker alleging that the broker negligently failed to procure adequate coverage for the risk of loss. The broker filed an Answer contending that the plaintiffs failed to read their policy and that the failure to read their own policy, that is – to determine if what they received is what they ordered and that their comparative fault was greater than the broker’s comparative fault.
The essence of the claim against the broker was that the broker did not produce a policy with adequate coverage. The broker’s defense was that, even if he did provide inadequate coverage, the plaintiffs had an obligation to read their policy. If they were not satisfied with the amount of coverage provided, the failure to read that policy would be “greater negligence” than the negligence of the broker. The Appellate Division ruled that this was an issue for jury consideration based on existing decisional law.
The Supreme Court indicated that in as much as the broker stands in a fiduciary relationship to the insured, that brokers “may not diminish their liability under the comparative negligence act when the alleged negligence of the client relates to the past for which the professional was hired. That rule is premised on the heightened responsibility of professionals in this state.
The Court based this decision on the deep-rooted principles of two previous cases – Rider v. Lynch, 42 N.J. 465 (1964) and Weinisch v. Sawyer, 123 N.J. 333 (1991). These cases held that a broker engaged to obtain insurance must exercise reasonable skill and is expected to possess reasonable knowledge of the types of policies, the different terms and coverage available to the insured. The law had held that if the policy produced by the broker was more than materially deficient or did not provide the coverage that the producer undertook to supply because of the producer’s failure to exercise skill or diligence, the producer became liable for the loss sustained. The Court contended in this case that this ruling “does not prevent brokers from contending during the trail that an insured’s failure to read the policy severed the casual connection between the broker’s fault and the insured’s harm.” The Court ruled that had Aden read his policy, he would have been entitled to assume that the $1,000 he had in dwelling coverage was sufficient, in light of the producer’s professional obligation to ensure that the condominium association policy combined with and the policy he was to procure for Aden provide adequate coverage. Simply stated, the Court indicated that there was no way of reading the policy that the insured would understand that he only had $1,000 of coverage. This was not explained to him by the producer and, in essence, appears to be the essence of the claim against the broker/producer.
The Court did set fourth some specific exceptions to this ruling. The Court noted that in some actions against an insurance company, but not involving a broker, an insured may be charged with the responsibility to read the policy.
The Court stated:
When one contracts with another, the contracting parties may have an obligation to read the contract because if they assent without doing so, they cannot later assert that their agreement was different from that expressed in writing. Even in the contract/reformation context, there are exceptions to the rule, as when an insured “in all likelihood, will not read (the policy) over again and may not fairly be expected to do so.”…In an event, what distinguishes the situation in which an insured employs the assistance of a professional insurance intermediary is that the insured then has the right to rely on the skilled broker’s presumed competence in executing the instructions given…Unlike when an insured sues an insured, in a malpractice suit a written contract is not being challenged. An insured who hires and pays a professional broker does so to reduce, if not eliminate, the risk that an inadequate policy would be procured.
The Court’s view was best expressed in the following:
“Insurance consumers who instruct their brokers to provide coverage are entitled to have those instructions followed without regard for the insured’s failure to protect he broker’s negligent conduct.”
All insurance brokers need to be aware of this decision and should be sure that their clients read and understand their policies and coverage. Failure to read the insurance policy produced by the broker may not be used as a defense of comparative negligence.
(When we received this article – thanks to IIAA’s Virtual University and to Insurance News Net – I called Marc and discussed a simple solution to this sticky problem. IF you have discussed coverage with the insured and he has agreed to a coverage amount that may be less than that required to provide full coverage, it would be wise to have him sign an agreement that he has specifically chosen this amount of insurance. Of course, this course of action will not relieve the agent’s or broker’s liability if the insured in any way assumed that the agent would provide sufficient coverage to protect the insured’s property, as was the case in the court action cited.)