Insurance wins one: Court dismisses Superstorm Sandy-related claims against broker

Commercial buildings underwater during Superstorm Sandy. (AP Photo/Charles Krupa) Commercial buildings underwater during Superstorm Sandy. (AP Photo/Charles Krupa)

A federal district court in New York has granted an insurance broker’s motion to dismiss breach of contract, negligence, and consumer protection law claims by a commercial property owner that alleged that its property had been damaged by Superstorm Sandy.

The Case

Prior to Oct. 1, 2012, Long Beach Road Holdings, LLC, sought to obtain a first mortgage from Westchester Bank on commercial property it owned in Island Park, New York. The loan originally was scheduled to close on Oct. 25, 2012.

 

In an Oct. 1, 2012 letter to Long Beach Road Holdings, Westchester Bank notified Long Beach Road Holdings that it was required to purchase flood insurance because the Island Park property had been recategorized as in a flood zone under the National Flood Insurance Program (NFIP).

After receiving the letter, Long Beach Road Holdings alleged that it retained Fairmont Insurance Brokers, LTD, to procure flood insurance for Long Beach Road Holdings. Fairmont, Long Beach Road Holdings alleged, had a “long relationship with [Long Beach Road Holdings] … in consulting” related to “commercial property coverage, assessment of risk, adequacy of coverage and the handling of claims.”

On Oct. 25, 2012, Foremost Insurance Company issued a standard flood insurance policy (SFIP) to Long Beach Road Holdings providing for $450,000 in flood coverage. On the same day, Long Beach Road Holdings sent a check to Foremost for $2,192 for the SFIP. In addition, Foremost sent Long Beach Road Holdings a document titled, “Flood Policy Declarations” that defined the policy period as Oct. 25, 2012 to Oct. 25, 2013. The document further stated, “These Declarations are effective as of: 10/25/2012 at 12:01 am” and that, “This Declaration Page, in conjunction with the policy, constitutes your Flood Insurance Policy.”

Also on Oct. 25, 2012, Fairmont issued to Long Beach Road Holdings a certificate of insurance that indicated that the policy became effective on Oct. 25, 2012.

On Oct. 29, 2012, Long Beach Road Holdings’ property was damaged as a result of flooding caused by Superstorm Sandy.

Long Beach Road Holdings’ mortgage transaction was delayed for unspecified reasons and closed on Nov. 2, 2012. On Nov. 2, 2012, Foremost sent Long Beach Road Holdings a document entitled, “Revised Declarations,” that listed the revised policy period as “11/02/2012 [t]o 11/02/2013.”

On Dec. 3, 2012, Foremost sent Long Beach Road Holdings a check in the amount of $40,000 under the SFIP for damages caused to Long Beach Road Holdings’ property by Superstorm Sandy.

On Jan. 15, 2013, Long Beach Road Holdings submitted to Foremost a form titled, “Proof of Loss,” claiming a “net amount” of $262,205.78 in damages to the property.

In a March 25, 2013, letter to Long Beach Road Holdings, Carl Swafford, a lead claims examiner for Foremost, denied Long Beach Road Holdings’ claim for two reasons. First, he denied coverage because “[t]he adjuster’s final report and documents received indicates a loan closing did not occur on or prior to the Date of Loss.” The letter further noted that, “We do not insure a loss directly or indirectly caused by a flood that is already in progress at the time and date … [t]he policy term begins; or … coverage is added at your request.”

Second, the letter stated that even if the loan had closed on Oct. 25, 2012, Long Beach Road Holdings still would not have qualified for coverage because, under the NFIP, new policies were subject to a 30 day waiting period before becoming effective.

Finally, the letter requested that Long Beach Road Holdings return to Foremost the $40,000 that it previously had issued to Long Beach Road Holdings.

FEMA forms

Long Beach Road Holdings appealed the decision to the Federal Emergency Management Agency (FEMA), asserting that the flood policy had become effective on Oct. 25, 2012, not Nov. 2, 2012, and that Fairmont had “never disclosed … that there was a waiting period…. There was a total reliance by all parties that there was no waiting period.”

In an Oct. 4, 2013 letter to Long Beach Road Holdings, FEMA denied Long Beach Road Holdings’ appeal of Foremost’s decision to deny Long Beach Road Holdings coverage under the SFIP. The letter noted that the NFIP manual stated, “Flood insurance that is initially purchased in connection with the making, increasing, extending, or renewal of a loan shall be effective at the time of loan closing, provided that the policy is applied for at or before closing.”

The letter also stated that although Foremost had issued a policy to Long Beach Road Holdings “with an effective date of Oct. 25, 2012,” “additional documentation provided indicates that the loan transaction actually took place on Nov. 2, 2012.” As such, the letter said, even if the 30-day waiting period were waived, “the earliest the policy can be effective is Nov. 2, 2012,” which was several days after [Long Beach Road Holdings] had suffered the “covered loss.” Accordingly, the letter “concurred” with Foremost’s final decision to deny Long Beach Road Holdings coverage under the SFIP.

Long Beach Road Holdings sued Foremost and Fairmont, asserting:

  1. breach of contract claims against both defendants;
  2. a claim against Fairmont under Section 349 of the New York General Business Law (NYGBL) for allegedly deceptive and misleading consumer practices; and
  3. a negligence claim against Fairmont.

Fairmont moved to dismiss.

Insurance coverage form with check boxes, yes, noThe court’s decision

The court granted Fairmont’s motion.

In its decision, the court acknowledged that an insurance broker can be held liable for failure to procure adequate insurance coverage under a breach of contract theory. In this case, the court continued, Long Beach Road Holdings had not been denied coverage because Fairmont had procured the wrong type of coverage; rather, Foremost and FEMA had denied Long Beach Road Holdings coverage because, allegedly, Long Beach Road Holdings’ policy had not become effective until Nov. 2, 2012, several days after Long Beach Road Holdings had suffered flood-related damages due to Superstorm Sandy.

The court found that the denial of coverage appeared to be attributable to the actions of Long Beach Road Holdings and Westchester Bank because they “had control over the issue of when the loan transaction closed; not Fairmont.” The court ruled that to the extent that Long Beach Road Holdings disagreed with the decision of Foremost to deny it coverage, then that claim was “properly addressed to Foremost, the insurance carrier, not to Fairmont, the insurance broker.”

In the court’s view, Fairmont had been retained to procure flood insurance for Long Beach Road Holdings, and it had done so. Accordingly, the court ruled that Long Beach Road Holdings had failed to plausibly allege that Fairmont had breached its agreement to procure flood insurance for Long Beach Road Holdings and it dismissed Long Beach Road Holdings’ causes of action for breach of contract as against Fairmont.

The court reached the same result with respect to Long Beach Road Holdings’ negligence claim against Fairmont, in which Long Beach Road Holdings argued that Fairmont had a duty to inform Long Beach Road Holdings that the SFIP would not go into effect until after Long Beach Road Holdings closed its mortgage transaction with Westchester Bank.

As the court explained, generally, under New York law, insurance brokers have a “common law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so.” New York courts, however, have been “especially reluctant to impose additional duties on insurance brokers, such as the duties of trust and confidence imposed on professionals like lawyers or engineers.” The court explained:

Generally, the law is reasonably settled on initial principles that insurance agents [in New York] have a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage. Notably, no New York court has applied [a] “special relationship” analysis to add such continuing duties to the agent-insured relationship.

Woman judge banging large gavel

The court noted that in Voss v. Netherlands Ins. Co. [22 N.Y.3d 728 (2014)], New York’s highest court, the New York Court of Appeals, identified “three exceptional circumstances” “that may give rise to a special relationship, thereby creating an additional duty of advisement”:

  1. The agent receives compensation for consultation apart from payment of the premiums;
  2. There was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent; or
  3. There is a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on[.]

The court found that Long Beach Road Holdings had not made any allegations that warranted a finding that Long Beach Road Holdings and Foremost had the kind of “special relationship” that courts have required to impose duties beyond the common law duty to procure the requested insurance. For example, the court noted, there were no allegations by Long Beach Road Holdings that Fairmont “repeatedly pledged that [it] would review coverage annually and recommend adjustments as her businesses grew,” as had been alleged in Voss. The court stated that, other than a “conclusory allegation” that Long Beach Road Holdings had a “long term relationship” with Fairmont, there were no allegations that suggested that Long Beach Road Holdings enjoyed anything other than an ordinary consumer-agent insurance relationship with Fairmont.

The court next rejected Long Beach Road Holdings’ contention that Fairmont had a duty to warn Long Beach Road Holdings that the certificate of insurance provided by Fairmont to Long Beach Road Holdings, which listed the effective date of the insurance policy as Oct. 25, 2012, was incorrect. The court noted that the certificate of insurance provided by Fairmont to Long Beach Road Holdings made clear that Long Beach Road Holdings could not rely on it:

THIS EVIDENCE OF COMMERCIAL PROPERTY INSURANCE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS …. THIS EVIDENCE OF INSURANCE DOES NOT CONSTITUTE A CONTRACT BETWEEN THE ISSUING INSURER(S), AUTHORIZED REPRESENTATIVE OR PRODUCER, AND THE ADDITIONAL INTEREST.

Thus, the court concluded, this document did not give rise to a special duty of disclosure on the part of the broker Fairmont to correct the effective date on its certificate of insurance, especially when Long Beach Road Holdings had not alleged that it had asked Fairmont for information about when its policy became effective.

The court added that, even assuming that there was a duty on the part of Foremost to inform Long Beach Road Holdings of the provision in the NFIP Manual impacting the effective date of the SFIP, Fairmont’s purported breach of that duty “did not cause Foremost and FEMA to deny coverage to [Long Beach Road Holdings].” The court pointed out that, pursuant to the NFIP Manual, Long Beach Road Holdings’ flood insurance policy could only become effective after Long Beach Road Holdings closed its mortgage with Westchester Bank on the Island Park property. “Fairmont, as a flood insurance broker, had no control over when Long Beach Road Holdings’ loan with the Westchester Bank would close. Thus, the delay in coverage which resulted in Foremost denying Long Beach Road Holdings’ claim cannot plausibly be attributed to any act of Fairmont.”

Accordingly, the court held that Long Beach Road Holdings had failed to state a negligence claim against Fairmont.

Finally, the court rejected Long Beach Road Holdings’ claim under NYGBL § 349, explaining that Long Beach Road Holdings had not provided any allegations that “could plausibly establish” the first element of a NYGBL § 349 claim: consumer-oriented conduct.

Feb 26, 2015 | By Steven A. Meyerowitz

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