Insurance Broker Liability For COVID-19 Losses

Many smart business owners rely heavily on their insurance brokers to make sure they have the right types of property insurance to protect them against loss.  These coverages include common types of perils such as fire, rarer but still destructive perils of flood and windstorm, and unusual perils, whether specific to their type of business or more widespread.  Property policies should also include time element coverages such as business interruption and extra expense to protect against the financial losses resulting from property damage.  One of the time element coverages frequently provided is loss caused by order of civil authority.  This coverage protects against losses caused when access to a business is prohibited by a governmental order even when the business itself is not physically damaged.

The COVID-19 pandemic has ravaged the economy, sparing few. Now that the unforeseen “rainy day” has arrived (in the form of a 100-year contagion), holders of business interruption insurance coverage are turning to their insurers for relief.  Many are disappointed to learn that their insurers claim that the policies they bought do not cover the losses associated with COVID-19.  They rely on virus exclusions and other policy defenses.  Under certain circumstances, the insurance broker may be responsible for the lack of coverage.  Here’s what you need to know:

The law in most states requires Insurance brokers to use reasonable diligence in their efforts on behalf of a customer.  If this sounds familiar, it should – the same standards generally apply to other service providing professionals.  Before a court will impose liability on an insurance broker, the customer must demonstrate three things: (1) the broker had an obligation to obtain coverage; (2) the broker failed to obtain appropriate coverage or failed to tell the customer; and (3) the customer suffered damages because of broker’s actions.

Showing that the customer properly retained the broker is a necessary first step. Not all customers seeking property and time element coverage will enter into a written contract with their broker.  The relationship is governed by oral discussions or email chains.  Some customer-broker relationships are governed by written contracts that spell out the broker’s obligations to the customer.  The absence of a written contract is not fatal to a claim but may make it more difficult.  The broker will always have some duty to the customer, but proving the scope of that duty is more difficult without a written contract and frequently requires testimony to prove exactly what the broker agreed to do.

Establishing a failure to get the appropriate coverage, or the requested coverage, is essential in a successful broker claim.  The broker must use reasonable care in procuring the insurance needed and requested by the customer.  The broker will be judged against industry standards.  Where the broker falls short, he or she may be liable to the customer.  Moreover, a broker must timely notify the customer if unable to obtain the necessary requested insurance.  The failure to do so could also lead to liability.  The customer must prove that he either asked for a specific coverage or that the broker misrepresented the scope of the recommended coverage.  The customer can also try to prove that a “special relationship” existed.  That type of relationship exists when the broker agrees to do more than just buy insurance as requested by the customer; the broker agrees to be a consultant and provide advice about the types of coverage to buy.  The broker’s duties increase when there is a special relationship and the broker can be liable for failing to properly explain the coverage or failing to recommend certain types of coverage.

A valid insurance broker claim also requires proof of damages.  In the case of COVID-19, customer damages could be substantial.  While some damages limitations may apply, claims against a broker are especially valuable since brokers themselves carry malpractice insurance policies to cover judgments obtained.

If you think you may have a claim, here’s what you can do about it:

First, review your insurance policy and be prepared to file claim with the carrier.  Even where it seems like the claim will be unsuccessful, making a timely claim and having it denied may be a prerequisite to pursuing your broker.  Before making the claim, consider consulting a lawyer experienced in both insurance coverage and broker liability.

Second, carefully review the language of any written contract with the broker.  Not surprisingly, brokers frequently provide contracts that are favorable to them that purport to limit their exposure.  While the language will take many different forms, brokers will seek to avoid a fiduciary relationship and push responsibility back on the policyholder to ensure the policy language provides the coverage sought.  Such contracts may help shield brokers from responsibility for obtaining inadequate coverage that falls short of expectations.

Finally, and most importantly, consult a qualified attorney so both the insurance claim and the broker liability claim can be presented in the best light possible.  Here at Offit Kurman, we have the experience and skill to assist with this kind of case.  Please feel free to contact us to discuss.