In Prime Alliance Group Ltd v Affiliated FM Insurance Company, the insured, was the owner of a mixed use condominium and retail property in Manhattan.  The Property suffered significant flood damage during Superstorm Sandy in October 2012, and a claim (for upwards of $30M) was made to Affiliated.  Following Affiliated disclaimer of coverage for the property damage (the bulk of the claim), Prime Alliance sued alleging claims of breach of contract, bad faith and estoppel as against Affiliated, and claims of negligence and breach of contract against their retail insurance broker, Praxis, and claims of negligence against HUB, the wholesale insurance broker.  The claims asserted against HUB and Praxis were premised on the brokers’ alleged failure to procure adequate and requested insurance coverage.

Praxis and HUB moved to dismiss on the basis that a settlement reached between Prime Alliance and Affiliated mooted the separate claims against the broker defendants.  The lower court granted the motion since the insurer that settled with the Plaintiff and was no longer a party to the action, “and Affiliated is the only party which could (or would) raise a defense that the contract did not provide the flood coverage at issue, there can be no finding in this case contrary to plaintiff’s claim that the disputed coverage did in fact exist.  Thus, there can be no finding that Praxis [or HUB] was responsible for a lack of coverage.”

The Appellate Court disagreed, finding that Affiliated’s settlement with plaintiff left the question of the validity of its disclaimer entirely undecided, and provided no basis for the motions to dismiss and for summary judgment filed by the broker defendants.  Putting a fine point on the matter, the Appellate Division specifically stated that the decisions granting both the Praxis and HUB motions were based “on the incorrect premise that the plaintiffs’ settlement with Affiliated precluded the plaintiffs from pursuing their causes of action to recover damages for failure to procure insurance.”

The matter was to be reinstated in the New York Supreme Court for adjudication.  In the short term, this decision provides a sound argument to rebut an argument that a plaintiff’s settlement with their insurer effectively moots any claims for negligence asserted against brokers.

Thanks to Vivian Turetsky for her contribution to this post.