Broker Liability For Insureds’ COVID-19 Losses Likely Limited
As a result of closures mandated by state governments across America, businesses of all types have sustained unprecedented disruptions in their operations resulting in the loss of much, if not all, of their business income. Consequently, many of those businesses have turned to the business interruption coverage in their property insurance policies seeking to recover some or all of those losses.
However, as widely reported, absent some government intervention requiring insurers to honor claims not contemplated by the business interruption coverage, there are few instances where business interruption claims should succeed in the face of policy language excluding loss due to viruses.
Under those circumstances, given the extent of the losses due to business disruption, will insureds seek to recover their losses from another source — their insurance broker — for the broker’s failure to locate and/or secure coverage that may have been available to cover a pandemic like the coronavirus?
According to industry reporters, the largest insurers of independent brokers and agents anticipate a large number of errors and omissions Thomas Maeglin claims arising from the COVID-19 crisis. Not surprisingly, one early suit for business interruption coverage includes claims against an agency for its role in denying the plaintiff’s business interruption claim.
What basis does an insured have for an errors and omissions claim against a broker? State law controls the legal standard that applies to a claim for a broker’s liability, which sometimes depends upon whether a special relationship exists between the policyholder and the broker. For example, the New York Court of Appeals established the common law standard of liability for brokers in Murphy v. Kuhn.
There, the court held that “insurance agents have a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage,” and that “Insurance agents or brokers are not personal financial counselors and risk managers, approaching guarantor status.”
In lawsuits, policyholders sometimes assert other theories of liability, such as breach of alleged fiduciary duties running from the broker to the broker’s client. However, most states limit such claims. New York courts have held that “absent a special relationship, a claim for breach of fiduciary duty does not lie.”
At least 25 actions seeking coverage have been filed in federal courts across the country. In many of the complaints, the plaintiffs seek class action status, attempting to establish a class of similarly situated plaintiffs who were similarly denied insurance coverage for their business interruption claims.
What’s more, attorneys have sought to have many of these actions consolidated for pretrial discovery and motions under a single judge in a multidistrict litigation, either in
Pennsylvania, Florida or Illinois. More federal actions are sure to follow. In addition to these federal court actions, close to a dozen similar actions have been filed in state courts in California, other states and the District of Columbia.
The complaints in these actions have a lot in common, often borrowing from each other a similar set of facts and legal claims. One such legal claim is based in alleged business interruption coverage for actions of governmental agencies, or acts under civil authority. The plaintiffs claim that the defendants’ policies provide coverage for business interruption losses incurred when orders and directives from state and local authorities forced them to stop doing business. They contend, generally, that the existence of possible virus contamination constitutes property damage; and that virus or other similar exclusions in the policy do not apply.
Court decisions in these business interruption cases will affect a broker’s exposure to liability. Clearly, if courts find that insurers correctly denied business interruption claims by their insureds, brokers may face a wave of litigation with allegations that they failed to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so.
Courts may find that the virus exclusions in policies issued precoronavirus apply, barring coverage. A broker’s liability may very well hinge on whether it was possible to obtain a policy that did not contain the typical policy excluding such coverage; or whether, if the coverage was available, the policyholder had an option to eliminate the exclusion for the cost of an additional premium.
If it turns out that coverage was indeed available, or insureds had an option to buy back the coverage but had not been advised of that fact uninsured businesses could have valid claims against their brokers. The disposition of these claims rest on a resolution of factual questions such as what the client requested from the broker, what was offered, and how the broker advised the client.
While the business owner’s package, or BOP, policy automatically includes business interruption and extra expense coverage, the other widely available commercial property insurance policy, the commercial package policy, or CPP, must have it added for an additional premium. Since not all commercial risks are BOP eligible, brokers have an added responsibility to consult with their clients to explain the availability of that and other coverages to cover claims in the event of business disruption.
Thus, when a client is not eligible for a BOP and a CPP is appropriate, brokers customarily recommend business interruption and extra expense coverage, as well as coverage for loss of rents, if appropriate. Best practices would dictate that, if the client indicates that he or she does not want the coverage, the client be required to sign a statement to that effect.
There is little doubt that all areas of the insurance industry will be on trial in both the court of public opinion and courts of law as the economic damage to businesses caused by the coronavirus pandemic mount. However, absent the failure of a broker to advise a client of the availability coverage for damage caused by viruses or a pandemic, insurance broker liability should be limited.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 See “Broker E&O underwriters bracing for wave of Covid-19 claims”, The Insurer, April
17, 2020, https://www.theinsurer.com/news/broker-eando-underwriters-bracing-for-waveof-covid-19-claims/8089.article.
 Murphy v. Kuhn, 660 N.Y.S.2d 371 (N.Y. 1997).
 Id. at 373.
 Id. at 375.
 Bruckmann, Rosser, Sherrill & Co, L.P. v. Marsh USA, Inc., 885 N.Y.S.2d 276, 278 (N.Y.
App. Div. 2009).