Although the case cited in this article centers on a New Jersey ruling, it highlights the potential for exposure in all states. Our subsequent conversation revealed a simple method of avoiding this E&O issue. See our remarks at the end of this article about how to protect yourselfIn a malpractice suit against an insurance broker by its customer, the New Jersey Supreme Court decided that insurance brokers may not rely on a customer’s failure to read his insurance policy as the basis of a defense of comparative negligence. Aden v. Fortish, 169 N.J. 64 (2001)
Before this decision, there have been numerous decisional pronouncements that an insured had an obligation to read the policy provided to them. Indeed, the Appellate Division had upheld the right of an insurance producer to raise the issue of comparative negligence, and had held that the issue was one for the jury to decide in the context of comparing the negligence of two parties and determining proximate cause.
In Aden v. Fortish, a fire damaged a condominium owned by the plaintiff and the condominium association’s policy failed to cover the damage to the interior of the premises. Because the plaintiff’s policy only provided $1,000 of coverage, plaintiffs were required to pay about $20,000 in repair costs.
Plaintiffs sued the broker for allegedly neglecting to procure adequate coverage for the risk of loss. The broker filed an Answer contending that the plaintiffs failed to read their policy to determine if what they received is what they ordered, and that this failure made the plaintiff’s comparative fault greater than that of the broker.
The essence of the claim was that the broker didn’t produce a policy with adequate coverage. The broker’s defense was that, even if he did provide inadequate coverage, the plaintiffs had an obligation to read their policy. If they weren’t satisfied with the amount of coverage provided, the failure to read this policy would be 'greater negligence' than the negligence of the broker. The Appellate Division ruled that this was an issue for jury consideration based on existing decisional law.
The Supreme Court indicated that inasmuch as the broker stands in a fiduciary relationship to the insured, brokers 'may not diminish their liability under the comparative negligence act when the alleged negligence of the client relates to the past for which the professional was hired. That rule is premised on the heightened responsibility of professionals in this state.'
The court based this decision on the principles of two previous cases: Rider v. Lynch, 42 N.J. 465 (1964), and Weinisch v. Sawyer, 123 N.J. 333 (1991). These cases held that a broker engaged to obtain insurance must exercise reasonable skill and is expected to possess reasonable knowledge of the types of policies, the different terms, and coverage available to the insured. The law had held that if the policy produced by the broker was more than materially deficient or didn’t provide the coverage that the producer undertook to supply because of the producer’s failure to exercise skill or diligence, the producer became liable for the loss sustained. The court ruled in this case that this ruling 'does not prevent brokers from contending during the trail that an insured’s failure to read the policy severed the casual connection between the broker’s fault and the insured’s harm.'
The court ruled that had Aden read his policy, he would’ve been entitled to assume that the $1,000 he had in dwelling coverage was sufficient. The producer’s professional obligation was to ensure that the condominium association policy, combined with the policy he procured for Aden, provided adequate coverage. The court indicated that there was no way the insured would understand that he only had $1,000 of coverage — even if he’d read the policy. The producer failed to explain this to him.
The court did set forth some specific exceptions to this ruling — noting that in some actions against an insurance company, but not involving a broker, an insured may be charged with the responsibility to read the policy.
The court held that when two parties enter into a contract, they may have an obligation to read the contract because if they assent without doing so, they can’t assert later that their agreement was different from that expressed in writing. Even in the contract/reformation context, there are exceptions to the rule, as when an insured 'in all likelihood, will not read (the policy) over again and may not fairly be expected to do so.'
When an insured employs a professional insurance intermediary they have the right to rely on the broker’s presumed competence in executing the instructions given. An insured who hires a broker does so to reduce, if not eliminate, the risk that an inadequate policy would create.
The court’s expressed it this way: 'Insurance consumers who instruct their brokers to provide coverage are entitled to have those instructions followed without regard for the insured’s failure to protect the broker’s negligent conduct.'
All insurance brokers need to be aware of this decision and should make sure that their clients read and understand their policies and coverages. Failure to read the insurance policy produced by the broker may not be used as a defense of comparative negligence.
I called Dembling after I read this article and discussed a simple solution to this problem. If you discuss coverage with an insured and they agree to an amount that might be insufficient to provide full coverage, you’d be wise to have them sign an agreement stating that they chose the specific amount of insurance. Granted, this course of action won’t relieve the agent’s liability if the insured assumed in any way that the agent would provide sufficient coverage to protect the insured’s property, as was the case in the court action cited.