By Andrew G. Simpson

A New York excess lines insurance broker’s use of “sham declinations” to skirt the law on placing coverage with a non-admitted carrier could cost the broker a lot more than just regulatory fines, if a recent court ruling stands.

Nassau County Supreme Court has held that the broker is responsible for losses that may result from an injury suit brought against the insured motel because the broker failed to follow the requirements under the law when he placed the policy with the insurer, which later went bankrupt.

The decision in East Coast Management, Ltd. vs. Genatt Associates Inc., written on June 30 by Justice Geoffrey J. O’Connell, is believed to represent the first time that a New York court has found that a broker’s failure to comply with the law constitutes negligence and a breach of his contractual duty to the insured.

The ruling prompted the Excess Lines Association of New York to issue a bulletin pointing out that if the decision stands, a failure to comply with the insurance law could have errors and omissions implications beyond regulatory sanctions.

The ruling appears to run contrary to prior cases holding that such violations do not create a private right of action, according to ELANY. “The court opinion made no mention of the case law limiting private rights of action. Therefore, it is not known whether this will be a possible basis for appeal or whether the court ruled as it did because of the defendant’s egregious conduct in filing a false affidavit,” the bulletin stated. The case also raises questions as to whether a broker’s errors and omissions insurer would deny coverage under these circumstances, according to ELANY.

Mark Presser, chief examiner of the property bureau and assistant deputy superintendent for the New York State Insurance Department, referred to the case as one of “sham declinations,” which he called a “common” problem. He said he hoped the decision would inspire brokers to take extra care to adhere to the letter of the law.

Placed with Legion

East Coast Management alleged that the broker Genatt wrongfully placed its liability insurance for its motel in Montauk with Legion Indemnity Company, an insurance carrier not admitted in the state. The $1 million policy covered the period between May 2000 to May 2001, during which time a patron at plaintiff’s motel fell and was injured. This individual, Erik Hanson, has filed a negligence action against East Coast and is awaiting trial.

Legion hired attorneys to represent the plaintiff in the case. However, Legion filed for bankruptcy in April 2003. Based on the insolvency, the attorneys representing East Coast were permitted to withdraw, leaving East Coast no choice but to hire its own attorney.

East Coast contends that Genatt is responsible to defend it and pay expenses incurred and any potential award because Genatt was negligent in placing the policy with Legion. The plaintiff charged that Genatt committed deliberate fraud in placing coverage with Legion when it knew the insurer was not admitted and in filing of papers knowing that they were fraudulent.

State insurance law requires a broker to follow certain procedures and make certain filings when placing excess coverage. The plaintiff claims that Genatt failed to meet these requirements on several fronts. First, the broker failed to secure three declinations from licensed insurance companies for the coverage involved. Second, Genatt submitted a false affidavit to the Excess Line Association of New York in violation of the insurance regulations. Also, according to the complaint, the broker failed to give the plaintiff written notice prior to the placement of the coverage that Legion was in fact unlicensed and not admitted in New York, and that the plaintiff would not have the protection of the security laws in the event the insurer became insolvent.

East Coast contends that due to these failures, particularly Genatt’s failure to inform it of Legion’s status within New York as unlicensed, the broker is liable for the expenses related to the Hanson suit.

Declinations

Under New York Insurance Law § 2118, Genatt was required to contact three New York licensed insurance companies it believed wrote insurance policies similar to the one issued by Legion. It was to secure three declinations from these companies prior to placing the policy with a non-admitted company. State law also mandates that an excess lines broker must provide written notice to the plaintiff that the coverage was made with an unauthorized insurer and that any loss suffered in the event of insolvency by the insurer will not be covered by state’s guaranty fund.

In seeking a dismissal of the complaint against it, Genatt argued that it met all the statutory and regulatory requirements and there was no evidence that it was negligent or breached its contract with the plaintiff. Genatt argued that any failings were technical or minor.

Genatt provided evidence that its employee faxed plaintiff’s principal a form confirming to him that this coverage was placed with a non-admitted insurance carrier. This form was signed East Coast. Genatt also supplied evidence that within 45 days of procuring the excess line policy, it submitted the declaration page of the policy to ELANY for recording and stamping, as required. It offered proof that it submitted the proper statement, affirmed by the broker, that after a diligent effort, the full amount of insurance required could not be procured from an admitted insurance carrier and that the broker attempted to procure coverage from at least three admitted carriers.

While the court acknowledged that Genatt informed the plaintiff that the insurer was not licensed in New York, Justice O’Connell noted that this was undermined by the fact that defendant did not comply with the law relating to the placement with unlicensed insurance companies in the first place.

The employee at Genatt in whose name the forms were provided to the state, denied having performed a search for three carriers, and denied ever signing the form. In addition, the St. Paul Insurance Company employee identified and as having declined to issue coverage denied that she ever did so. Genatt did not dispute these two denials.

The court found that the deficiencies in the filings were not “technical” or “minor” as characterized by Genatt.

Proof of negligence

As to the claim of negligence, the plaintiff alleged that Genatt did not act with “reasonable care, skill and judgment” in selecting an insurance carrier for the client. The court found that the broker’s failure to comply with the strict provisions of the insurance law was evidence that it did not act with reasonable care.

The court also found that the defendant breached its contract with the plaintiff in failing to procure proper insurance for it.

“The admitted failure to strictly comply with the provisions of the Insurance Law § 2118, constituted a breach of Genatt’s fiduciary duty to the plaintiff,” wrote the court.

The decision further noted that an “insurance broker who breaches his duty to an insured by not obtaining proper insurance becomes liable to the extent that the carrier would have been.”

While the court held Genatt responsible for any losses Legion might incur in the injury suit, it declined to impose punitive damages.

Topics Carriers New York Agencies Legislation Excess Surplus