Risk transfer is only available if the transfer occurs before the risk becomes reality. Unfortunately for many, the recognition that there is a risk only comes after reality. Insurance brokers who deal in that risk transfer transaction are uniquely situated to bridge that gap. But exactly what can or should a broker do to ensure that a client understands the risk and purchases the proper insurance? In Satec, Inc. v. The Hanover Group, the plaintiff property owner appreciated the risk too late, but the court did not buy that its broker or insurer was to blame.

Satec, Inc. owned property with a warehouse and business offices in a New Jersey flood zone. It consulted with an independent insurance broker, who obtained a proposal for property coverage from Citizens Insurance, a subsidiary of Hanover Insurance. Along with the proposal, the broker provided a letter with a recommendation that Satec carefully review the limits and, in particular, consider additional coverage. Significantly, the optional coverage included flood and earthquake coverage that was otherwise explicitly excluded from the property coverage in the proposal. Satec accepted the proposal without any additional coverage.

Over the next four years, Satec renewed the policy annually. Before each renewal, the broker sent Satec a letter advising of the availability of flood and earthquake insurance, and Satec opted to renew the policy without this coverage.

Of course, the inevitable happened when Hurricane Irene struck New Jersey. The property flooded with a resulting $2.3 million in damages. Satec filed a claim with Hanover that was denied as explicitly excluded by the policy.

Satec then filed a complaint against Centric, Hanover, and Citizens. Satec alleged, among other things, a breach of contract, negligence, and professional malpractice. Upon the closing of discovery all defendants moved for summary judgment and, after precluding Satec’s expert’s testimony and opinion, the trial court granted the motion as to all defendants. On appeal Satec argued that (1) an insurance broker owes a fiduciary duty to advise the insured and no expert is needed to establish that the defendants breached this duty; (2) Satec’s expert opinion was valid; and (3) Hanover should be vicariously liable for the negligence of the independent broker, Centric.

The appellate court acknowledged that an insurance broker does owe a duty to his principal to exercise diligence in obtaining coverage in the area his principal seeks to be protected. However, expert opinion is generally needed to establish a breach of this duty. Satec’s expert, while he was able to articulate a broker’s duty of care, failed to site any authority or industry standards beyond his personal experience; thus, rendering his opinion inadmissible.

The court was not persuaded that the plaintiff could sustain the broker malpractice claim on the basis of common knowledge. This doctrine applies where “jurors’ common knowledge as lay persons is sufficient to enable them, using ordinary understanding and experience, to determine a defendant’s negligence without the benefit of specialized knowledge of experts.” Rather, the court found that the field of insurance brokerage is beyond the ken of the average juror, and, thus, expert testimony is necessary.

Satec also argued that the insurer should be vicariously liable for the failings of the broker based upon agency principles. Under this theory, it sought to impute any negligence of the broker in failing to properly assess and advise of its flood insurance needs. Significantly, the broker was an independent of the insurer and not an agent. New Jersey has long recognized that an independent broker’s actions are not imputed to an insurer. Basically, when an independent broker is making recommendations to a client, he is acting on behalf of that client, not the insurance companies.

Thanks to Marcus Washington for his contribution.

 For more information, contact Denise Fontana Ricci at .