Insurance Broker Insolvency Liability

A recent decision by a New York court demonstrates the risks of shortcutting insurance regulations  (see here).  The case, East Coast Management Ltd v. Genatt Associates, Inc, involved the renewal of a policy with Legion Insurance.  There was no dispute that the broker, Genatt, was a licensed surplus lines broker in New York, informed the client of the surplus lines nature of the transaction and filed the paperwork with the surplus lines association.  However, the broker did not obtain the admitted market declinations.

The insured sued the broker when Legion became insolvent and stopped funding the defense of a claim.  The court found that the broker failed to comply with the insurance law, and therefore “did not act with reasonable care.”  This was a breach of the broker’s duty to the insured, and the broker was liable for the insured’s costs “to the extent that the carrier would have been.”

This case may be appealed.  As noted here, there are other cases which are not consistent with this decision.

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See Unintended Consequences here for additional commentary & cases.