Carter Lincoln-Mercury, Inc., Leasing Div. v. EMAR Group, Inc.

Decision Date12 April 1994
Docket NumberLINCOLN-MERCUR,INC
Citation638 A.2d 1288,135 N.J. 182
Parties, 62 USLW 2649, 42 A.L.R.5th 801 CARTER, LEASING DIVISION, Plaintiff-Respondent, v. EMAR GROUP, INC., Defendant-Appellant, and All Points, Inc., a/k/a Goldstar Express and Elliott H. Goldstein, Defendants.
CourtNew Jersey Supreme Court

Jeffrey M. Garrod, Roseland, argued the cause for appellant (Orloff, Lowenbach, Stifelman & Siegel, attorneys; Mr. Garrod and David B. Katz, of counsel and on the brief).

William G. Wright, Bellmawr, argued the cause for respondent (Farr, Lyons, Burke, Gambacorta & Wright, attorneys).

The opinion of the Court was delivered by

STEIN, J.

The question presented is whether an insurance broker engaged to obtain insurance on behalf of a prospective insured owes a duty to a loss-payee subsequently named on the acquired policy to place the insurance with a financially stable insurance carrier.

EMAR Group, Inc. ("EMAR"), an insurance broker and agent, placed a collision policy with American Lloyds Insurance Company ("American Lloyds") on behalf of EMAR's client, All Points, Inc., also known as Goldstar Express ("All Points"), a commercial trucking company. The policy provided physical-damage insurance for all vehicles operated by All Points. Carter Lincoln-Mercury, Inc. ("Carter Lincoln") was the owner-lessor of one of the vehicles insured under the policy and was named on a certificate of insurance as a loss-payee. The truck owned by Carter Lincoln was subsequently damaged in an accident. Carter Lincoln filed a claim with American Lloyds and discovered that the carrier was being liquidated and the claim would not be paid.

Carter Lincoln brought this action against EMAR, alleging that the broker had breached a duty to it by failing to exercise due care in placing the insurance policy, resulting in the selection of a financially unstable carrier that had not been authorized to issue policies in New Jersey and that subsequently became insolvent. EMAR moved for summary judgment, claiming it owed no duty to Carter Lincoln. The trial court determined that no duty existed as a matter of law and granted the motion. The Appellate Division reversed, holding that EMAR owed a duty to Carter Lincoln, as a foreseeable potential beneficiary of the policy, to "select[ ] a financially secure insurer." 261 N.J.Super. 245, 250, 618 A.2d 870 (1993).

We granted EMAR's petition for certification, 133 N.J. 443, 627 A.2d 1147 (1993), and now affirm the judgment of the Appellate Division.

I

The facts are essentially undisputed. The vehicle owned by plaintiff, Carter Lincoln, a 1985 diesel tractor, had been leased to All Points in February 1986 for a term of thirty-six months. The lease agreement required All Points to maintain collision insurance on the vehicle in an amount sufficient to protect Carter Lincoln's interest, and also obligated All Points to pay for accident-related repairs not covered by insurance. The agreement further required that the insurance be placed with a company approved by both Carter Lincoln and All Points.

All Points engaged defendant EMAR, a licensed insurance broker and agent, to obtain physical-damage insurance for its fleet of trucks. On December 16, 1988, EMAR placed a collision policy with American Lloyds of Metairie, Louisiana, through the insurance carrier's New Jersey agent, Marketing Insurance Agency, to protect All Points' vehicles for the period from December 17, 1988, to December 17, 1989. All Points' previous policy had been canceled on two occasions for nonpayment of premiums, but each time had been reinstated when payment was made. That policy was again canceled, effective December 17, 1988, "for underwriting reasons." After EMAR placed the new policy with American Lloyds, All Points directed EMAR to list as loss-payees under the policy a number of finance companies and lessors, including Carter Lincoln. In January 1989, All Points sent a follow-up letter to EMAR, along with a chart listing the lessors and finance companies that were to be designated loss-payees and the vehicles in which they had an interest.

In February 1989, EMAR sent to All Points an insurance policy issued by American Lloyds, which included an endorsement, effective December 17, 1988, listing Carter Lincoln and other interested parties as loss-payees. EMAR also forwarded to Carter Lincoln a certificate of insurance dated February 16, 1989, designating All Points as the insured party for the truck and specifying Carter Lincoln as the certificate holder and loss-payee.

On February 17, 1989, the Carter Lincoln truck was damaged in a traffic accident in New Mexico. Carter Lincoln filed a claim with American Lloyds and made repeated demands for payment, but never received compensation. Carter Lincoln paid $22,919.21 to Quality Trucks of El Paso, Texas for repairs to the truck. In June 1989, American Lloyds was determined to be insolvent by a Louisiana state court and ordered to be liquidated under the supervision of the Louisiana Commissioner of Insurance. The deputy liquidator of American Lloyds subsequently notified Carter Lincoln that no funds were available to pay its claim.

Carter Lincoln instituted this action in May 1989 against All Points and its president, Elliot H. Goldstein, seeking recovery for damage to the truck not covered by insurance and for missed lease payments. Carter Lincoln later amended its complaint to assert a claim against All Points and Goldstein for failure to secure adequate insurance coverage and to add EMAR as a defendant. Carter Lincoln claimed that EMAR had breached a duty owed to it by failing to exercise diligence and reasonable care in selecting an insurance carrier. The complaint alleged that at the time EMAR had placed the insurance policy, American Lloyds was not authorized to conduct business in New Jersey; was not rated by A.M. Best Company or listed in Best's Insurance Reports, an industry source of information on insurance companies; and had been under the conservatorship of the Louisiana Commissioner of Insurance since August 1988.

The trial court struck All Points' and Goldstein's answers to the complaint for failure to respond to interrogatories and subsequently entered a default judgment against both parties. EMAR answered the complaint and, after discovery, moved for summary judgment on the grounds that it owed no duty to Carter Lincoln as a matter of law and that no evidence established that it had acted negligently. Carter Lincoln cross-moved for summary judgment. The trial court found that EMAR had owed no duty to Carter Lincoln, citing the lack of privity between the parties and relying on this Court's decision in Wang v. Allstate Insurance Co., 125 N.J. 2, 592 A.2d 527 (1991). The court granted EMAR's motion for summary judgment, denying Carter Lincoln's motion.

The Appellate Division reversed, relying substantially on Impex Agricultural Commodities Division v. Parness Trucking Corp., 576 F.Supp. 587 (D.N.J.1983), to support its conclusion that defendant EMAR had owed a duty to Carter Lincoln to select a financially secure insurance company when it placed the policy.

We consider two related issues: (1) does an insurance broker have a duty to select a financially secure insurer when acting on behalf of an insured, and (2) if so, to whom is that duty owed?

II
A

An insurance broker acts on behalf of a prospective insured to procure insurance coverage. The common law has long recognized that an insurance broker owes a duty to the insured to act with reasonable skill and diligence in performing the services of a broker. Rider v. Lynch, 42 N.J. 465, 476, 201 A.2d 561 (1964); Milliken v. Woodward, 64 N.J.L. 444, 448, 45 A. 796 (Sup.Ct.1900). In Rider, supra, we observed:

One who holds himself out to the public as an insurance broker is required to have the degree of skill and knowledge requisite to the calling. When engaged by a member of the public to obtain insurance, the law holds him to the exercise of good faith and reasonable skill, care and diligence in the execution of the commission. * * * If he neglects to procure the insurance or if the policy is void or materially deficient or does not provide the coverage he undertook to supply, because of his failure to exercise the requisite skill or diligence, he becomes liable to his principal for the loss sustained thereby.

42 N.J. at 476, 201 A.2d 561.

At common law both agents and brokers, when acting on behalf of an insured, owe the insured a duty of due care. Weinisch v. Sawyer, 123 N.J. 333, 340, 587 A.2d 615 (1991); Avery v. Arthur E. Armitage Agency, 242 N.J.Super. 293, 299, 576 A.2d 907 (App.Div.1990); Sobotor v. Prudential Property & Casualty Ins. Co., 200 N.J.Super. 333, 337 n. 1, 491 A.2d 737 (App.Div.1984). Courts addressing the existence and scope of the duty owed by one acting on behalf of an insured or prospective insured have determined that that duty encompasses claims alleging that the agent or broker failed: to obtain coverage after the client's policy had been canceled and that the agent failed to inform the client that coverage could not be obtained, DiMarino v. Wishkin, 195 N.J.Super. 390, 393, 479 A.2d 444 (App.Div.1984); failed to advise a client of insurance options, Weinisch, supra, 123 N.J. at 340, 587 A.2d 615, and Sobotor, supra, 200 N.J.Super. at 339, 491 A.2d 737; obtained insurance that failed to meet the insured's needs, Rider, supra, 42 N.J. at 481-82, 201 A.2d 561; failed to place the requested insurance, Eschle v. Eastern Freight Ways, Inc., 128 N.J.Super. 299, 319 A.2d 786 (Law Div.1974); misrepresented to the insurance company information supplied by the insured, Milliken, supra, 64 N.J.L. at 448-49, 45 A. 796; failed to take action after discovering during an inspection that the insured's sprinkler system was inoperative, Industrial Dev. Assocs. v. F.T.P., Inc., 248 N.J.Super. 468, 591 A.2d 682 (App.Div.), certif. denied, 127 N.J. 547...

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