Insurance Broker Liable for Negligence in Preparing Application

On January 25, 2019, Justice Bucaria of the Nassau County Commercial Division issued a decision in Dorchester, L.L.C. v. Herzka Ins. Agency, Inc., 2019 NY Slip Op. 30177(U), holding an insurance broker liable for negligence in preparing an insurance application, explaining:

An insurance broker may be held liable under theories of negligence or breach of contract for failing to procure insurance upon a showing by the insured that the broker failed to discharge the duties imposed by the agreement to obtain insurance, either by proof that it breached the agreement or because it failed to exercise due care in the transaction.

The broker breaches its duty of due care to the insured by negligently or intentionally misrepresenting facts in connection with obtaining insurance coverage. Thus, the broker is under a duty to review the insurance application for accuracy, or provide the insured with the opportunity to do so before submitting it to the insurer.

Dorchester has established prima facie that Herzka violated its duty of due care by failing to review the insurance application for accuracy, or providing Dorchester with the opportunity to review the application for accuracy, prior to submitting the application to Distinguished Programs, or Great American.

On a motion for summary judgment in a negligence action, plaintiff need not establish prima facie freedom from comparative fault, but must nonetheless establish prima facie that defendant was negligent and its negligence was a proximate cause of the loss. Thus, Dorchester must establish prima facie that Herzka's negligence was a proximate cause of the rescission of the policy.

Dorchester submits the affidavit of its Field Manager and former bookkeeper, Evelyn Gillespie, who was responsible for communicating with Herzka. Gillespie states that Herzka's four prior applications for primary insurance did not contain questions concerning updates to the electrical system or single room occupancy. Gillespie states that the March 2012 application for an umbrella policy was the first application for an excess liability policy that was ever submitted on behalf of Dorchester or its affiliates. Gillespie states that Dorchester was not aware of the contents of the March 2012 insurance application until August 14, 2014, after the rescission action was filed.

Based upon Gillespie's affidavit, the court concludes that Dorchester has established prima facie that Herzka's failure to verify the information in the insurance application was a proximate cause of Great American's rescission of the policy. The burden shifts to Herzka to show evidence of a triable issue as to proximate causation of the rescission.

In opposition, defendant fails to offer any evidence that Dorchester was aware of the statements in the insurance application that the electrical system has been updated within the last 25 years, or that the building did not contain single room occupancy. Therefore, Herzka has failed to offer any evidence that its negligence was a proximate cause of the rescission of the insurance policy. However, Herzka's warning to Dorchester in the August 2012 email, as well as Mott's prior experience in real estate investing, are sufficient to raise a triable issue as to whether Dorchester was guilty of comparative fault.

Accordingly, plaintiffs motion for partial summary judgment is granted to the extent of liability on its first cause of action for negligence. Plaintiffs motion to dismiss defendant's ninth defense is denied. At trial, the issues of comparative fault and damages remain open.

(Internal citations omitted).

If you have questions regarding an insurance coverage dispute, contact Schlam Stone & Dolan partner Bradley J. Nash, who heads the firm’s insurance recovery practice, at bnash@schlamstone.com.