SDV Insights

Policyholders who find themselves in the midst of a dispute with their insurer inevitably ask the question: “Why didn’t my broker fix this when I bought the policy?” This question implies that there is something wrong with the policy, which usually is not the case. The problem most often lies with how the insurer is applying the policy to a given set of facts. Nonetheless, there are some important practical questions to ask before considering adding a broker malpractice/breach claim to an insurance coverage dispute.

First, the broker claim inevitably strengthens the insurer’s position. On the one hand, the insured argues that the policy covers the claim, yet on the other hand the insured argues that the broker erred in placing the coverage. The insured can have a valid claim against the broker only if the insurer is right. Next, the insured may be surprised to learn that the broker’s file contains notes of conversations, emails or other communications with the insured at the time coverage was bound, which clarify the issue in dispute in the insurer’s favor. These issues both significantly weaken the claim the insured had before opting to sue the broker.

Applicable state law may also limit the broker’s liability. In many states, the statute of limitations for broker malpractice runs from the time of the error, not the time the error caused damage. This can result in the broker claim being time barred long before the claim against the insurer. State law may also limit the duty the broker (or agent) owes to the insured. In many states, the broker’s obligation may be limited only to the information affirmatively provided by the insured. In many states, a sophisticated corporate insured who has been delivered a copy of the policy is charged with notice of all the policies terms, conditions, exclusions etc. These defenses and limitations can add significant cost and complexity to a case and ultimately make it very difficult to prevail against a broker.

Lastly, and fundamentally, a successful case against a broker depends on establishing that the broker had a better option than the one they selected for the client. This is very hard to prove. So many factors play into the purchase of a policy: premium, financing, collateral, business relationships, claims servicing, and, of course, coverage terms. It is very hard to look back in time and recreate the insurance market at the time a policy was purchased to show that: (1) the broker had a better option, and (2) that the client would have selected the other option. Many times, variation in coverage terms takes a back seat to financial terms. Again, the broker’s file likely has documentation of the insured’s values, assessment and decision-making.

Too many times the decision to sue a broker doesn’t look past the frustration of being embroiled in a coverage dispute. Often, there is little motivation beyond the simple idea that another defendant is one more “pot” to seek compensation from. Careful thought must be given to any proposed broker suit. In our experience, broker suits often serve only to drive up litigation costs while actually hurting the prospect of a successful recovery.