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When Policy Exclusions Apply, Brokers Beware

May 11, 2018

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Last week in <a href="http://blog.wcmlaw.com/wp-content/uploads/2018/05/Houston-Gas.pdf">Houston Gas Co. v. Cavan Corp. of NY, Inc.</a>, the First Department reminded insurance brokers of potential exposure should a policy they procure for an insured fail to cover a liability.  In July 2012, Cavan was retained to act as construction managers for a building project in Manhattan.  For their services, Cavan was to be paid a flat $600,000 fee.  Unfortunately for Cavan, when a subcontractor sued for an injury on the job site, they learned their commercial general liability policy contained an exclusion for losses arising out of construction management services performed for a fee.  The First Department reversed the denial of Houston Casualty Company’s motion for summary judgment, and ruled the exclusion barred coverage.
However, the First Department also denied Ducey’s—Cavan’s insurance broker—motion to dismiss, and granted Cavan’s motion to add a causes of action for negligence, breach of contract, and negligent misrepresentation against Ducey.
In a unanimous decision, the Appellate Court reiterated that individuals who are denied coverage for losses are entitled to recover damages from the insurance broker under a breach of contract theory if the policy obtained does not cover a loss for which the broker contracted to provide insurance, and the insurance company refuses to cover the loss.
In addition, an insured may sue a broker under a negligence theory should the broker fail to exercise due care in a brokerage transaction.  Last, a negligent misrepresentation cause of action may arise when a special relationship exists between the customer and the broker and the customer reasonably relies on the broker’s representations.
Here, Cavan claimed it met annually with Ducey over the course of many years to discuss insurance needs and claimed it relied on Ducey’s advice, which was a sufficient factual pleading to suppot a claim for negligent misrepresentation.  The <em>Houston Cas. Co.</em> Court cited our firm’s recent victory in <em>Dae Assocs., LLC v. AXA Art Ins. Corp.</em> in support of this last point.  In <em>Dae Assocs., LLC</em>, the insured merely alleged a longstanding relationship, which is insufficient on its own to establish a special relationship.  Cavan’s allegations rose to the level of a potential special relationship.
While these cases provide further help to insurers in asserting disclaimers of coverage based on policy exclusions, they also should serve as a warning to the potential exposure for brokers in the event of successful disclaimers.
Thanks to Nick Schaefer for his contribution to this post.  Please write to <a href="mailto: vpinto@wcmlaw.com">Tony Pinto</a> for more information.

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