by Jeffrey T. LaRosa

This article was published in
The Independent Voice,
the newsletter for the Independent Insurance Agents and Brokers of New Jersey (IIABNJ).
August 2004

In today's litigious society, it is not uncommon to see insurance agents and brokers named in lawsuits regardless of liability/negligence. One of the areas to ponder is whether an agent can be successfully sued for failing to obtain flood insurance for his or her client. What if the client's property is located in a mid to low level risk area for flood? IIABNJ asked one of its E&O defense attorneys for his perspective…

"There are cases in other jurisdictions where an agent was sued because the agent failed to obtain flood insurance for a client who subsequently suffered flood damage. Some jurisdictions allow those suits to proceed against the agents, while others don't. That is because the basic laws concerning agent/broker liability differ from state to state.

In some states, a plaintiff would have a hard time pursuing a claim against the agent for failing to suggest flood insurance coverage, since the burden is placed upon the insured to know what coverage their policy provides.

Unfortunately, New Jersey does not follow that trend. Instead, NJ imposes a fiduciary duty upon the agent with respect to his/her dealings with every client, regardless of the duration of that relationship and regardless of whether the agent is paid a "consulting fee" beyond normal commissions. Thus, in New Jersey, the client has the right to rely upon the skills and knowledge possessed by the agent. The agent may be held liable where the agent "neglects to procure the insurance or if the policy is void or materially deficient....."

The question is, therefore, whether coverage without flood insurance is "materially deficient." That will be a very fact-sensitive inquiry, but the agent should be able to argue that flood coverage is not "material" to a typical homeowners' policy.

In one Pennsylvania case a property owner sued its insurance broker for failing to suggest flood insurance. There, the broker inspected the property and saw that the property was located across a highway from the Susquehanna River. In that case, the Court denied the broker's motion for summary judgment and allowed the case to go to a jury. It appeared to be significant to the Court that the broker should have recognized a heightened risk of flood for that property because of its location near the river.

Unfortunately, all of this probably means that, if an agent is sued in New Jersey on such a claim, the ultimate resolution of the claim will depend upon the specific facts (including the location of the property and the foreseeability of a flood.....) and will probably come down to a "battle of experts." This means that the case against an agent may survive summary judgment and may be sent to a jury, though the plaintiff will have the burden of proving that the omitted flood coverage was "material" to the policy as a whole.

In hindsight, an agent would minimize his/her risk by offering flood insurance to all policyholders, even where the risk of flood seems very remote. Having said that, it probably would be cumbersome, if not impossible, for an agent to explain and offer every type of alternative coverage available (workers' compensation for homeowners, dog bite coverage, etc.), which would be the only way to limit exposure for these types of "omitted-coverage" claims."