Failure to Read Policy No Longer Fatal in New York

Everyone knows that insurance policies do not make for good beach reading.  Yet under long standing New York law, an insured was presumed to have read and understood the content of his or her insurance policy.  Traditionally, if an insured had not objected to the policy upon delivery, under most circumstances, the insured was barred from suing the insurance broker for procuring insufficient insurance.  Surprisingly, New York’s highest court recently declined to adopt this precedent  in American Building Supply Corp. v.  Petrocelli Group, Inc.

Plaintiff  hired the defendant, a broker, to obtain a commercial general liability policy that it was required to maintain pursuant to a lease.  According to the plaintiff, it requested insurance coverage for losses involving injuries to its employees.  Plaintiff allegedly advised the broker that only its employees used the insured building. But the policy contained an exclusion that provided: “This insurance does not apply to any actual or alleged ‘bodily injury’, ‘property damage’, ‘personal injury’ or ‘advertising injury’ to … A present, former, future or prospective partner, officer, director, stockholder or employee of any insured.”  Neither the plaintiff nor the broker read the insurance policy.

One of plaintiff’s employees was subsequently injured at the insured premises.  Plaintiff commenced an action against the insurer for coverage, but the appellate court upheld the exclusion.  Plaintiff then sued its broker for negligence and breach of contract, alleging the broker had procured insufficient insurance.  The broker moved for summary judgment, arguing that the plaintiff’s claim is barred because it accepted the policy without complaint.

The Court of Appeals rejected the broker’s argument.  The Court began by noting that it previously “left open the question of whether a plaintiff who has received an insurance policy and had an opportunity to read it and had not requested any changes is barred from recovery.”  While the Court recognized that an insured should read its policy (and the failure could lead to comparative fault), it also recognized that many insureds “look to the expertise of [their] broker[s] with respect to insurance matters.”  As such, the Court adopted the more “forgiving” rule, holding that an insured’s failure to read or comprehend an insurance policy does not bar an action for negligence against the insured’s insurance broker.

This decision will certainly have an impact on broker litigation in New York.  Thanks to Steve Kaye for his contribution to this post.  If you have any question, please wrote to Mike Bono at mbono@wcmlaw.com.