Second Department Finds Exceptional Circumstances Sufficient To Support Fraud Claim Against Insurer

• Posted on: Nov 9 2020

Disputes between an insured and insurer occur all the time. These disputes often concern whether the policy covers a certain event. Sometimes, as in AB Oil Servs., Ltd. v. TCE Ins. Servs., Inc., 2020 N.Y. Slip Op. 06232 (2d Dept. Nov. 4, 2020) (here), the dispute concerns the alleged failure to satisfy a specific request for coverage not already provided in one’s policy. Other times, the dispute concerns alleged fraud and negligent misrepresentation (i.e., breach of a duty to advise), as alleged in AB Oil. And, still other times, as in AB Oil, breach of contract and fraud are alleged.

In this latter scenario, where breach of contract and fraud are alleged, the duplication of claims doctrine becomes relevant. However, as in AB Oil, where there is duty to advise, courts have held that such a duty is collateral to, or independent of, coverage obligations under the policy.  

As a general principle, insurance brokers “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.” American Bldg. Supply Corp. v. Petrocelli Group, Inc., 19 N.Y.3d 730, 735 (2012) (internal quotation marks and citation omitted). Thus, where a client “can establish that it made a particular request to the broker [for coverage] and the requested coverage was not procured”, will the broker be held liable to the client. Voss v. Netherlands Ins. Co., 22 N.Y.3d 728, 734 (2014).

Where a special relationship develops between the broker and client, the Court of Appeals has held that the broker may be liable, even in the absence of a specific request, for failing to advise or direct the client to obtain additional coverage. See Hoffend & Sons, Inc. v. Rose & Kiernan, Inc., 7 N.Y.3d 152, 158 (2006); Murphy v. Kuhn, 90 N.Y.2d 266, 272-273 (1997). In Murphy, the Court recognized that “particularized situations may arise in which insurance agents, through their conduct or by express or implied contract with customers and clients, may assume or acquire duties in addition to those fixed at common law” and that the question of whether such additional responsibilities should be “given legal effect is governed by the particular relationship between the parties and is best determined on a case-by-case basis.” Murphy, 90 N.Y.2d at 272. The Court identified three exceptional situations that may give rise to a special relationship, thereby creating an additional duty of advisement: “(1) the agent receives compensation for consultation apart from payment of the premiums; (2) there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent; or (3) there is a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on.” Id. (citations omitted).

Where damages for breach of contract against an insurance broker are sought, “‘a plaintiff must establish that a specific request was made to the broker for the coverage that was not provided in the policy.’” Brannigan Christie Overhead v. Door, 149 A.D.3d 892, 893-894 (2d Dept. 2017) (quoting Joseph v. Interboro Ins. Co., 144 A.D.3d 1105, 1108 (2d Dept. 2016) (internal quotation marks omitted)). However, as in any contract action, “actual damages are not an essential element” of the claim. Perry v. McMahan, 164 A.D.3d 1488, 1489 (2d Dept. 2018). A plaintiff may recover nominal damages. Kronos, Inc. v. AVX Corp., 81 N.Y.2d 90, 95 (1993).

AB Oil Servs., Ltd. v. TCE Ins. Servs., Inc.

Background

AB Oil involved an insurance policy procured through Defendant, TCE Insurance Services, Inc., and its principal, Defendant, Anthony DeFede (collectively, “defendants”). Plaintiffs alleged that defendants failed to obtain insurance they were asked to procure and failed to inform plaintiffs that they did not do so. The subject coverage was for gas main repair work plaintiffs performed for Consolidated Edison (“Con Ed”) during the period July 1, 2015, through June 30, 2016.

Plaintiffs alleged that in September 2015, they became interested in performing gas main repair work for Con Ed. The proposed agreement with Con Ed required plaintiffs to maintain insurance. As a result, plaintiffs asked defendants for a quote, providing defendants with a description of the job, a copy of the draft agreement, and the insurance requirements. In October 2015, defendants informed plaintiffs that their existing insurance policy already covered the proposed gas main repair work. Defendants provided a certificate of insurance naming Con Ed as an additional insured under that existing policy. Plaintiffs thereafter entered into the agreement, as proposed, with Con Ed on October 13, 2015.

According to plaintiffs, the agreement with Con Ed was, in essence, a pilot program having three consecutive one-year terms, with the option to renew vested solely with Con Ed. In June 2016, plaintiffs decided to bid for a permanent three-year contract to perform the same work. That same month, defendants presented plaintiffs with a quote for renewal of the existing insurance policy for the period July 2016 through June 2017. The new quote increased the annual premium from $380,951.70 to $397,377. At some later point in June 2016, plaintiffs submitted an irrevocable bid for the new contract with Con Ed. Plaintiffs alleged that they priced their bid, in part, based on the increased rate that defendants had quoted for the renewal of the existing insurance policy.

Plaintiffs also alleged that they decided to shop for a lower insurance rate, but while doing so they discovered that the insurer had never been informed about the gas main repair work that plaintiffs were performing. The insurer subsequently disclaimed both coverage for that work under the existing policy as well as the $397,377 renewal quote. Plaintiffs alleged that they obtained substitute coverage for one quarter from a different insurer at an annual rate of $691,595, and thereafter obtained more permanent coverage “with reduced protection” for an annual rate of approximately $650,000.

Defendants moved to dismiss the complaint, which the motion court granted in an amended order in December 2017. Plaintiffs moved for leave to reargue their opposition to defendants’ motion or, in the alternative, for leave to amend the complaint. In an order dated May 25, 2018, the motion court adhered to its prior determination. The motion court also denied plaintiffs’ motion for leave to amend the complaint. Plaintiffs appealed.

The Court’s Decision

The Court held that plaintiffs’ contract and fraud claims should have been sustained.

Regarding the breach of contract claim, the motion court dismissed the claim because plaintiffs did not allege actual damages. The Court found this to be error. Slip Op. at *3 (citing Perry, 164 A.D.3d at 1489). 

Regarding the fraud and negligent misrepresentation claim, the Court held that plaintiffs “sufficiently alleged the existence of a special relationship.” Slip Op. at *4. The Court explained that “plaintiffs’ allegations concerning the specific request they made to the defendants to procure coverage for gas main repair work that the plaintiffs intended to perform for Con Ed beginning in the fall of 2015 [was] sufficient to state a viable claim under the second of the exceptional circumstances identified by the Court of Appeals” – e.g., there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent. Id. In that regard, the Court found that plaintiffs alleged “an interaction regarding a question of coverage and that the plaintiffs supplied the defendants with a description of the job, a copy of the draft agreement, and the insurance requirements, which would have put the defendants on notice that their advice was being sought and specially relied on.” Id.  To underscore the finding, the Court noted that the “question of coverage reemerged in June 2016 when the defendants produced a quote to renew the plaintiffs’ existing insurance policy, allegedly with the knowledge of the plaintiffs’ existing commitment to perform gas repair work for Con Ed through at least October 2016.” Id. 

The Court rejected defendants’ contention that the claim was correctly dismissed because plaintiffs failed to plead damages. Id. The Court found that “at a minimum, [plaintiffs’] claim to have suffered damages when they, on two occasions, made bids for long-term contracts to perform gas main repair work for Con Ed that were priced, in part, based on the defendants’ alleged misrepresentations as to the price of insurance coverage for that work.” Id. 

Finally, the Court rejected defendants’ contention that the fraud claim should have been dismissed because it was duplicative of the contract claim. The Court noted that the fraud and negligent misrepresentation claim concerned matters that were collateral to defendants’ coverage obligations under the alleged contract: “the former [i.e., the fraud and negligent misrepresentation cause of action], concerns a duty of advisement extending above and beyond the parties’ contractual relationship.” Id. (citing Kimmell, 89 N.Y.2d at 260-266). And, with regard to defendant Anthony DeFede, the Court noted that plaintiffs sought to hold him liable for participating in the commission of a tort, not for breaching the terms of the alleged contract. Id. (citations omitted). 

Takeaway

AB Oil involved the issue of duties; in particular, whether an insurance agent acquires duties in addition to those fixed at common law and whether such additional responsibilities should be given legal effect.  As discussed above, the Court answered both inquiries in the affirmative. 

AB Oil also involved the duplication of claims doctrine. And, as discussed, where the claims involve independent duties, contract claims and fraud claims can stand side-by-side.