One of the questions that must always be considered with regard to professional liability claims is when the claim accrues for purposes of applicable statutes of limitations. In insurance broker E&O claims involving policies that fail to provide the requested coverage, plaintiffs have often unsuccessfully argued that the claim should accrue at the time the insurance is purchased rather than when the lack of coverage is first discovered.
In the context of deciding how to rule on this issue, courts typically conclude that a policyholder should not be penalized for failing to identify a latent defect (i.e., a policy that fails to provide the promised coverage for a loss) until it is too late to do anything about it. In an interesting twist on this issue, an argument was recently made in New York State Supreme Court that the statute of limitations should not arise even after the lack of coverage was revealed through the issuance of a disclaimer.
In the case, Johnson v. Northeast Agencies, Inc., 242 A.D.3d 414 (1st Dep’t 2025), a claim under a comprehensive general liability policy was made in March 2018 following the commencement of a personal injury action against the owner of a rental property. The following month, the insurer disclaimed coverage because, among other reasons, the building was not an “insured location” under the policy. This arguably put the insured on direct notice of the broker’s negligence. However, the insurer agreed to provide a defense while a declaratory judgment action regarding the disclaimer was pending, so the insured was not immediately negatively impacted by the coverage disclaimer.
After the disclaimer was upheld, the insured brought suit against the broker for negligence in procuring the requested coverage. However, the statute of limitations for negligent failure to procure claims in New York State is three years, and the action against the broker had not been brought until June of 2023 – more than five years after the disclaimer had been issued. As a result, the court dismissed the E&O action as untimely.
On appeal to the New York Appellate Division, First Department, the insured argued that although the disclaimer was issued more than five years before the E&O action began, the insurer’s provision of a defense during the declaratory judgment action regarding the disclaimer had obscured the issue. Thus, the defense provided during that period should be considered to have tolled the statute of limitations for any claim against the broker for failing to procure the requested coverage.
In upholding the dismissal of the action against the broker, the Appellate Division concluded that the provision of a defense while the propriety of the disclaimer was being litigated did not make the disclaimer ambiguous or alter the date of accrual of any claims against the broker arising from the broker’s alleged negligence in procuring the requested coverage.
In the past, it was not uncommon for an insured to wait until a final determination had been made with regard to whether there was coverage before bringing suit against the broker for claims arising from alleged failure to procure it. More recently, it has been much more common for insureds to pursue a negligent procurement claim against the broker in the alternative at the same time the insured is suing the insurer for breach of contract and declaratory relief. With this latest decision, it is anticipated that insureds will be less likely to wait until a final court ruling has been issued regarding coverage before pursuing a claim in the alternative against the broker for negligence. At the very least, it is anticipated that insureds who prefer to wait until a ruling has been issued on their DJ action will make sure they have a tolling agreement in place with the broker to protect against loss of their negligence claim if too much time passes before such a ruling is obtained.
Read the full decision here.