Law of Duty, Causation and Damages in Claims Against Insurance

Professional Liability Alert | July 18, 2012

by: Christopher P. Leise


The nature and extent of the legal duty imposed upon insurance brokers is a matter of state law. Comparing and contrasting the duty as developed by the case law in two jurisdictions, New Jersey and New York, provides a helpful summary of the range of the obligations which are imposed upon licensed insurance producers.

While claims against New Jersey professionals who are licensed to sell insurance are often pled as a contract breach, New Jersey Appellate Courts have concluded that the claim is based in tort, not contract, law. See, Carter Lincoln-Mercury, Inc. v. EMAR Group, Inc., 135 N.J. 182, 190 (1994). New Jersey’s tort-based approach has led directly to a steady expansion, over the past twenty years, of the duties owed by brokers to clients. In EMAR, for example, the Court found that a broker’s duty extends to third parties who are not clients but who fall within the “zone of harm” foreseeably emanating from the broker’s actions. Carter Lincoln-Mercury, Inc. v. EMAR, 135 N.J. at 202. In the context of the contributory negligence defense, the Supreme Court in Aden v. Fortsh, 169 N.J. 64 (2001), described the relationship of a broker to the client in a typical insurance sales transaction as that of a “fiduciary.” Id. at 78-79.

Under the leading New Jersey case, Rider v. Lynch, 42 N.J. 465 (1964), an insurance producer has a duty to (i) have the degree of skill and knowledge requisite to its employment responsibilities; (ii) exercise good faith and reasonable skill, care and diligence in the execution of his or her employment responsibilities; (iii) possess reasonable knowledge of available policies and terms of coverage in the area in which the insured seeks protection; and (iv) either procure the coverage necessary for the client’s exposures or advise the client of his or her inability to do so.  Rider, 42 N.J. at 476-477. This summary of duty remains good law today. See, i.e., President v. Jenkins, 180 N.J. 550 (2004).

New York law imposes a much different duty upon agents and brokers. In New York, an insurance agent or broker may be held liable for neglect in failing to procure insurance under theories of breach of contract or negligence. See, Bedessee Imports, Inc. v. Cook, Hall & Hyde, Inc., 847 N.Y.S.2d 151, 153, 45 A.D.3d 792 (App. Div. 2007) (internal citations omitted); Mickey’s Rides-N-More, Inc. v. Anthony Viscuso Brokerage, Inc., 792 N.Y.S.2d 570, 17 A.D.3d 328 (App. Div. 2005). A plaintiff must prove that the broker “failed to discharge the duties imposed by the agreement to obtain insurance, either by proof that it breached the agreement or because it failed to exercise due care in the transaction.” See, Katz v. Tower Insurance Company of New York, 824 N.Y.S.2d 146, 34 A.D.3d 432 (App. Div. 2006) (internal citations omitted); Structural Building Products Corp. v. Business Insurance Agency, Inc., 281 A.D.2d 617, 620 (App. Div. 2001).

However, New York courts have interpreted the duty owed by insurance brokers in a much more restrictive manner than New Jersey. Generally, insurance agents 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.  Murphy v. Kuhn, 90 N.Y.2d 266, 682 N.E.2d 972 (1997). However, “they have no continuing duty to advise, guide or direct a client to obtain additional coverage.” Murphy, 90 N.Y.2d at 270. Nor have New York courts been willing to acknowledge that an agent-insured relationship constitutes a “special relationship” that would impose such a duty. Id.

New York’s more protective treatment of insurance brokers in the context of broker liability cases is evidenced by the decision of the New York Court of Appeals in Hoffend & Sons, Inc. v. Rose & Kiernan, Inc., 7 N.Y.3d 152, 851 N.E.2d 1149 (2006). In Hoffend, the Court affirmed the dismissal of a complaint brought by a policyholder against its insurance broker, contending that the broker did not obtain a policy that would have covered the loss involved.  Hoffend, 7 N.Y.3d 152. Citing Murphy, the Court again declined to hold that a special relationship existed between the parties. Id. at 157-158. The Court further supported its decision by pointing out that the policyholder failed to establish that it made a specific request for the coverage in question. Id. at 158. Instead, the evidence showed only that the policyholder communicated to the broker the insurance policy it had decided to purchase, which the Court found insufficient to impose liability. Id.

The New York Court of Appeals has also concluded that insurance agents and brokers are not considered professionals under CPLR 214(6), a three year statute of limitations applicable in nonmedical malpractice cases against professionals. Chase Scientific Research, Inc. v. NIA Group, Inc., 96 N.Y.2d 20, 749 N.E.2d 161 (2001). In Chase Scientific, a policyholder sued its insurance broker for failure to procure adequate insurance coverage, asserting both negligence and contract causes of action. Chase Scientific, 96 N.Y.2d at 24. Defendants moved to dismiss, arguing that the claim was a malpractice claim and was therefore barred by the three year statute of limitations set forth in CPLR 214(6). Id. 

The Court of Appeals allowed both causes of action to stand. Id. at 25. The Court initially noted that a malpractice action may be based upon both negligence and breach of contract principles. Id. The Court went on to identify the qualities typically associated with the term “professional,” such as “extensive formal learning and training, licensure and regulation indicating a qualification to practice, a code of conduct imposing standards beyond those accepted in the marketplace and a system of discipline for violation of those standards.” Id. at 29 (internal citations omitted). “Additionally, a professional relationship is one of trust and confidence, carrying with it a duty to counsel and advise clients.” Id. (internal citations omitted). After identifying the qualities associated with professionals, the Court concluded that insurance agents and brokers did not share those qualities. Id. at 30. It reasoned that agents and brokers are not required to engage in extensive specialized education and training, they are not bound by a standard of conduct for which discipline might be imposed, and they generally do not have “a continuing duty to advise, guide or direct a client based on a special relationship of trust and confidence.” Id. (internal citations omitted). 


Because the duty is tort-based, claimants must not only establish the breach of a duty but must also come forward with evidence of proximate causation and damages. In Aden v. Fortsh, supra, for example, the majority opinion of the New Jersey Supreme Court found that even though the client’s failure to read an insurance policy cannot be the basis of a comparative negligence defense, the client’s failure to read the terms and conditions of a policy can nevertheless be used as a causation defense. Perhaps to placate the dissenters in a divided opinion, the majority wrote: 

Brokers still [can] argue that failure to read the policy is relevant to the issue of proximate cause and damages.

169 N.J. at 86.

When an unhappy client sues a broker alleging failure to place a specific form of coverage which is difficult or impossible to procure in the standard markets, brokers have argued that the plaintiff must come forward with evidence that the coverage was available. There is support for the view that to successfully maintain a negligence action against an insurance broker, the policyholder must prove by a preponderance of the evidence that the requested coverage was then generally available in the insurance marketplace. Bayly, Martin & Fay, Inc. v. Pete’s Satire, Inc., 739 P.2d 239 (Colo. 1987); Heller-Marke & Co. v. Kassler & Co., 544 P.2d 995 (Colo. Ct. App. 1976);  Smither v. United Ben. Life Ins. Co., 190 P.2d 183 (Kan. 1948); Stinson v. Cravens, Dargan & Co., 579 S.W.2d. 298 (Tex. Civ. App. 1979); See also, Annotation, Liability of Insurance Broker or Agent to Insured for Failure to Procure Insurance, 64 A.L.R.3d 398, 450-51 (1975).

In Bayly, Martin & Fay v. Pete’s Satire, supra, a restaurant owner brought suit against his insurance broker alleging negligent failure to procure an insurance policy containing liquor liability coverage. The trial court found in favor of the restaurant owner and the appellate court affirmed. The limited issue on appeal to the Colorado Supreme Court was whether the restaurant owner “satisfied the appropriate burden of proof with respect to the availability of liquor liability coverage.” Id. at 242.

The Colorado Supreme Court affirmed and recognized the burden of proof on causation was on the plaintiff and rejected any notion that the burden was on the defendant. Id. at 242-44. In explaining this allocation of the causation proof, the court quoted the reasoning in Heller-Mark & Co. v. Kassler & Co., which explained:

It would be insufficient under these circumstances merely to allege loss of opportunity to seek insurance coverage where the attempt might not have been successful; rather, the ultimate purpose to be effected is to allow recovery where, had the defendant acted properly, plaintiff would not only have had the opportunity to seek, but also could have successfully procured insurance ….

The law is well established that the plaintiff must show by a preponderance of the evidence that other insurance could have been obtained, which requirement arises out of the plaintiff’s obligation to prove causation and damages.

Id. at 243 (quoting 544 P.2d at 997) (emphasis added). Following the reasoning of the Colorado Appellate Court, the Colorado Supreme Court held “it is incumbent upon the plaintiff to prove by a preponderance of evidence, as an aspect of causation and damages, that such insurance was generally available in the insurance industry when the broker or agent obtained insurance coverage for the plaintiff.” Id. at 244 (emphasis added). The court continued “we hold that a plaintiff satisfies his burden of proof when he establishes that the type of insurance which he sought was generally available in the insurance industry when the broker or agent procured the plaintiff’s insurance policy.” Id. (emphasis added).

The  New Jersey Appellate Division recognized the necessity of proving causation in a broker liability claim in Cromartie v. Carteret Sav. & Loan, 277 N.J. Super. 88 (App. Div. 1994), where homeowners sued their mortgage company after a property loss was unpaid due to policy lapse. The homeowners sued their mortgage company alleging breach of a contractual duty to pay insurance premiums from escrowed funds. The trial court found that the mortgagee breached its obligation and the Appellate Division affirmed. On the issue of causation, however, Judge Brochin explained that the claimants:

had the burden of showing that, but for [the mortgage company’s] failure to pay insurance premiums in accordance with its contract or to warn them of the lapse of their policy because of its failure to pay premiums, they would have been protected against fire loss.

Cromartie, 277 N.J. Super. at 105. This holding follows long-standing law in New Jersey. As set forth in Robinson v. Janey, 105 N.J. Super. 585, 591 (App. Div. 1969), “the damages which may be recovered for breach of an agreement to furnish an insurance policy is the loss sustained by reason of the breach; the amount that would have been due under the policy provided it had been obtained.” See, Cromartie v. Carteret, 277 N.J. Super. at 98-99.

Like New Jersey, New York also requires proof of proximate causation to establish broker liability. MacDonald v. Carpenter & Pelton, Inc., 298 N.Y.S. 2d 780, 31 A.D.2d 952, 953 (N.Y. App.Div. 1969). To hold a broker liable for failure to procure insurance, “it must be demonstrated that the coverage sought could have been procured prior to the [occurrence of the event].” See, Rodriguez v. Investors Insurance Company of America, 201 A.D.2d 355, 356, 607 N.Y.S.2d 329 (App. Div. 1994). This “requires a showing by plaintiffs that the insurance they sought was available and would have been procured but for defendant’s negligence. . . .”  Polly Esther’s South, Inc. v. Setnor Boyd Bogdanoff, 807 N.Y.S.2d 799, 814 (N.Y. Gen. Term 2005) (citing MacDonald, 298 N.Y.S.2d 780) (concluding that plaintiffs, nightclubs, could not establish causation where plaintiffs presented no evidence that authorized carriers covered the nightclubs prior to the occurrence and evidence established that the nightclub industry has been historically difficult to insure). 

Expert testimony may be required to establish that the policy which allegedly should have been procured would have provided coverage for the claimed losses. In Rae Container Corp. v. Schrimmer Ins. Agency, A-5751-98T5 decided May 17, 2000, the New Jersey Appellate Division explained that in broker negligence cases involving non-standard types of insurance policies, expert testimony may be required to meet the claimant’s causation burden. In Rae Container Corp. the plaintiff-client sued its broker for negligence allegedly arising out of the placement of coverage for its business. At the close of plaintiff’s case, the trial court dismissed all claims based on the lack of expert testimony on plaintiff’s behalf.

In affirming the dismissal, the Appellate Division panel noted that where the insurance coverage at issue is not a common type of insurance, it is incumbent upon the plaintiff to present evidence, through expert testimony, that the policy would have provided coverage for the alleged losses. Rae Container Corp. at 5. This holding recognizes that, in certain errors and omissions disputes, a jury cannot understand the complex nature of the coverage without the assistance of expert testimony. Rae Container Corp. at 5.


Counsel representing claimant policyholders as well as defense counsel representing brokers should consider the decisions of Cromartie v. Carteret Sav. & Loan, 277 N.J. Super. 88 (App. Div. 1994) and Robinson v. Janey, 105 N.J. Super. 585 (App. Div. 1969). These decisions stand for the proposition that the damage for failure to procure a policy is measured by the amount which would have been due under the policy if it had been obtained. Cromartie, 277 N.J. Super. at 98-99. Property insurance contracts, for example, customarily contain valuation and coinsurance terms which can significantly restrict recovery for a loss. Whenever there is a dispute over the extent and/or the proper measure of a loss, counsel for a defendant broker must consider retaining building reconstruction and other valuation experts to assess the loss.

Similar to the rule in New Jersey, courts in New York have concluded that the measure of damages in a claim against an insurance broker is the liability that would have been borne by the insurer had the policy been in force. Structural Building Products Corp. v. Business Insurance Agency, Inc., 281 A.D.2d 617, 620 (App. Div. 2001) (internal citations omitted). 


New Jersey Consumer Fraud Act


New Jersey’s Consumer Fraud Act (“CFA”), codified at N.J.S.A. 56:8-1 et seq., was enacted in 1960 to permit the state Attorney General to combat what was perceived by the Legislature to be “the increasingly widespread practice of defrauding the consumer.” Cox v. Sears Roebuck & Co., 138 N.J. 2, 14 (1994). The CFA was passed in order to “protect the consumer against imposition and loss as a result of fraud and fraudulent practices by persons engaged in the sale of goods and services.”  Marascio v. Campanella, 298 N.J.Super. 491, 500 (App.Div.1997). The CFA was amended in 1971 to permit a private cause of action as well as the recovery of treble damages and attorneys fees, giving New Jersey one of the strongest consumer protection laws in the United States. 

The purpose of the CFA is threefold: (1) to compensate the victim for his or her actual loss, (2) to punish the wrongdoer through the award of treble damages, and (3) to attract competent counsel to counteract the “community scourge” of fraud by providing an incentive for an attorney to take a case involving a minor loss to the individual. Lettenmaier v. Lube Connection, Inc., 162 N.J. 134, 139 (1999).

In light of its remedial purpose as intended by the legislature, the CFA has generally been construed liberally by the courts. Justifying that approach, the Superior Court – Appellate Division has stated that “[t]he legislative concern was the victimized consumer, not the occasionally victimized seller.” Channel Companies, Inc. v. Britton, 167 N.J.Super. 417, 418 (App.Div.1979). 

The Consumer Fraud Act sets forth in detail the conduct which falls within its proscriptive sweep:

The act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation or knowing concealment, suppression or omission of any material fact with intent that others rely upon such concealment, suppression or omission in connection with the sale or advertisement of any merchandise or real estate . . . is declared to be an unlawful practice. 

N.J.S.A. 56:8-2 (emphasis added).

The Act creates three categories of unlawful practices: affirmative misrepresentations, acts of omission (the suppression, concealment or omission of any material fact) and violations of administrative regulations. Under the first category, any misrepresentation, even if done innocently, could state a viable Consumer Fraud Act claim. Under the second category, a plaintiff must establish that the act of omission was done knowingly (“the knowing concealment, suppression or omission of any material fact with intent that others rely upon such concealment, suppression or omission . . .”). See, e.g., Chattin v. Cape May Greene, Inc., 243 N.J. Super. 590, 598 (App. Div. 1990); Fenwick v. Kay Am. Jeep, Inc., 72 N.J. 372 (1977); D’Ercole Sales, Inc. v. Fruehauf Corp., 206 N.J. Super. 11 (App. Div. 1985). Under the third category, a defendant will be held liable for an unwitting regulatory violation.  Scibek v. Longette, 339 N.J. Super. 72, 80 (App. Div. 2001).

In addition to showing a violation of the Act, a plaintiff must also demonstrate that he or she has suffered an ascertainable loss and that the loss was caused by the defendant’s violation of the Act. See, Cox v. Sears Roebuck & Co., 138 N.J. 2 (1994). The mere unrelated existence of a violation of the Act and a loss suffered by the plaintiff is not enough. In order to recover under the Act, the defendant’s violation must itself give rise to the loss. Even if a plaintiff is unable to prove an ascertainable loss, he or she is nevertheless entitled to recovery of attorney’s fees if there has been proof of a consumer fraud violation. Cox, 138 N.J. at 24.

Previously, it was the policy of New Jersey to bar consumer fraud actions against businesses that belonged to an industry which was subject to extensive administrative regulation. Hampton Hosp. v. Bresan, 288 N.J. Super. 372 (App. Div.), cert. denied, 144 N.J. 588 (1996) (hospital subject to thorough regulation by the Department of Health exempt from the purview of the Consumer Fraud Act for services rendered to patients); Lemelledo v. Beneficial Management Corp., 289 N.J. Super. 489 (App. Div. 1996); Daaleman v. Elizabethtown Gas Co., 77 N.J. 267 (1978); Pierzga v. Ohio Cas. Group of Ins. Co., 208 N.J. Super. 40 (App. Div. 1986). Because insurance producers are licensed and closely regulated by the Department of Banking and Insurance, motions to dismiss Consumer Fraud Act claims against an insurance producer were a routine matter and were almost always granted by Law Division Judges.

This state of the law changed in 1997 when the New Jersey Supreme Court concluded, in an insurance “loan packing” case, that the Consumer Fraud Act’s language “is ample enough to encompass the sale of insurance policies as goods and services that are marketed to consumers.” Lemelledo v. Beneficial Management Corp., 150 N.J. 255, 265 (1997). Accord, Yourman v. People’s Sec. Life Ins. Co., 992 F. Supp. 696 (D.N.J. 1998). The Supreme Court also rejected the notion that a bright-line rule prevented the application of the Act to businesses that are also subject to parallel and extensive government regulations, including the insurance industry, instead noting that the courts must look at the particular practice at issue to see if a conflict exists, and should assume that, as a general matter, the Act applies. Lemelledo, 150 N.J. at 268.

While the CFA was enacted to protect consumers from fraudulent advertising and the sale of goods and services, the statute does not apply to learned professionals. The New Jersey Supreme Court confirmed this limitation in a recent decision involving a CFA claim against physicians:

Thus, today, forty years after the CFA was enacted, our jurisprudence continues to identify learned professionals as beyond the reach of the Act so long as they are operating in their professional capacities.

Macedo v. Dello Russo, 178 N.J. 340, 345-46 (2004).

Although New Jersey Courts have specifically held that the CFA does not apply to “learned professionals” such as physicians and attorneys, until recently those holdings were not extended to licensed insurance producers. In Plemmons v. Blue Chip Insurance Services, Inc., 387 N.J. Super. 551 (App. Div. 2006), an insurance agency and a producer were sued in connection with the sale of a business insurance policy. The Plemmons complaint alleged negligence and violations of the CFA. At the close of the evidence at trial, the defendants’ motion to dismiss the consumer fraud claims on the ground that the statute does not apply to insurance producers. The court rejected the argument, and the jury returned a verdict for the plaintiff on the CFA counts.  

In a post-trial motion for judgment notwithstanding the verdict, counsel for the brokers expanded upon the argument that a licensed insurance producer is a “learned professional” under Macedo and that the CFA did not apply. In support of the motion, the brokers advanced the following cases and arguments:

  • Macedo v. Dello Russo, 178 N.J. 340 (2004), in which the Supreme Court confirmed that physicians are beyond the reach of the CFA. In doing so, the Court discussed with approval Neveroski v. Blair, 141 N.J.Super. 365 (App.Div.1976) (superseded by statute on other grounds), an Appellate Division case which declined to apply the CFA to real estate brokers. Holding that the sale of real estate is not “merchandise” for the purposes of the CFA, the Court in Neveroski stated:

[A] real estate broker is in a far different category from purveyors of products or services or other activities. He is in a semi-professional status subject to testing, licensing, regulations and penalties through other legislative provisions. See N.J.S.A. 45:15-1 [e]t seq. Although not on the same plane as other professionals such as lawyers, physicians, dentists, accountants or engineers, the nature of his activity is recognized as something beyond the ordinary commercial seller of goods or services—an activity beyond the pale of the act under consideration.

Macedo, 178 N.J. at 241 (citing Neveroski, 141 N.J.Super. at 379). Thus, in Macedo the Court recognized that absent legislative amendment, “professionals,” who are subject to testing, licensing, regulations and penalties through other legislative provisions, are “beyond the reach” of the CFA. 

  • That licensed insurance producers are considered “professionals” under New Jersey law as evidenced by the January 8, 2002 amendment to N.J.S.A. 2A:53A-26, commonly referred to as the Affidavit of Merit Statute, which as of that date included insurance producers among those professions afforded the benefit of the affidavit of merit. Physicians, attorneys, accountants and engineers, among others, are also subject to the Affidavit of Merit Statute. 
  • N.J.S.A. 11:17A-4.1 et seq., which classifies an insurance producer as “any person who solicits, negotiates or sells contracts of insurance.” The conduct of insurance producers is regulated by N.J.S.A. 11:17A-4.1 et seq., which provides, among other things, that “[n]o person shall solicit, negotiate or sell an insurance contract in New Jersey unless he or she is a licensed insurance producer.” N.J.S.A. 11:17A-4.4.
  • Aden v. Fortsh, 169 N.J. 64 (2001), a professional malpractice suit against an insurance producer for negligence in procuring a homeowners policy, in which the Supreme Court of New Jersey held that insurance producers, like physicians, are professionals acting in a professional capacity in the conduct of their insurance business. Finding that the business of insurance had become increasingly complex and that “specialized knowledge was required to understand all of its intricacies,” the Supreme Court noted that “[l]iability resulting from the negligent procurement of insurance is premised on the theory that a broker ‘ordinarily invites [clients] to rely upon his expertise in procuring insurance that best suits their requirements.’” 

Upon consideration of the post-trial motion, the trial court judge concluded that he had erred in denying the initial motion for dismissal of the CFA claims. From that order, the plaintiff appealed and argued that the Supreme Court loan packing case, Lemelledo, not Macedo, controlled to permit a CFA claim against an insurance broker. The Superior Court Appellate Division, however, agreed with the trial court, finding that licensed insurance brokers are “semi-professionals” excluded from liability under the CFA for the services they render within the scope of their professional licenses. In reaching this conclusion, the Appellate Division noted that insurance producers are regulated by other provisions of New Jersey law, including the Insurance Producer Standards of Conduct which are imposed upon the licensed brokerage community by the Department of Banking and Insurance (N.J.A.C. 11:17A-1.1 to 17D-2.8). Plemmons, 387 N.J. Super. at 564. With regard to the argument that Lemelledo, not Macedo, controlled the issue, the Appellate Division determined that the Supreme Court in Macedo had rejected that very contention. Id. 

In Cetel v. Kirwan Fin. Group, Inc., 460 F.3d 494 (3d Cir. 2006), a group of New Jersey physicians sued numerous parties, including an insurance broker, alleging fraud and negligence in conjunction with the sale to businesses of a sophisticated employee benefit plan. The plaintiffs asserted a New Jersey CFA claim, but the district court entered summary judgment in favor of the brokers, ruling that the benefit plans marketed by the insurance broker were not ordinary consumer transactions. The Third Circuit agreed. In affirming dismissal of the CFA claims, the Court found that the VEBA plans were sophisticated tax-avoidance schemes marketed to certain types of businesses. The plans were neither marketed nor available to the general public, and thus, were not ordinary consumer transactions within the purview of the Act.  Cetel, 460 F.3d at 514-515.

Pennsylvania has adopted a consumer protection statute similar to the New Jersey Consumer Fraud Act. The underlying foundation of Pennsylvania’s Consumer Protection Law is fraud prevention. Pekular v. Eich, 355 Pa.Super. 276, 286, 513 A.2d 427 (1986). The Pennsylvania Superior Court found that in passing the statute, the Legislature sought to eradicate “’unfair or deceptive’ business practices” and “’to place on more equal terms seller and consumer.’” Pekular, 355 Pa.Super. at 286 (citing Commonwealth v. Monumental Properties, Inc., 459 Pa. 450, 329 A.2d 812 (1974)). Section 201-9.2 provides a private cause of action for violations of the consumer protection law. See, 73 P.S. § 201-9.2. 

In Pekular, supra, the Court found that an insured is permitted to bring a private cause of action against an insurer or an insurance broker under Pennsylvania’s Consumer Protection Law. Id. at 288 (“[I]t is clear that the acts of insurers and their agents fall within the purview of the CPL. . . .”). An insured asserting a private right of action under the CPL must prove justifiable reliance to establish her claim. See, Toy v. Metropolitan Life Insurance, 593 Pa. 20, 928 A.2d 186 (2007). That is, the insured must prove that she suffered an ascertainable loss as a result of the defendant’s prohibited action. 

New Jersey and Federal RICO Statutes

The gravamen of both the Federal and New Jersey RICO statutes is the involvement of a pattern of racketeering activity in the affairs of an enterprise. The Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq., imposes criminal and civil liability upon those who engage in certain “prohibited activities” defined in 18 U.S.C. § 1962.  H.J., Inc. v. Northwestern Bell Telephone Co., 109 S.Ct. 2893, 2897 (1989). Specifically, §1962 prohibits persons from: (a) using or investing income derived from a pattern of racketeering activity to acquire an interest in or to operate an enterprise engaged in interstate commerce; (b) acquiring or maintaining interest in or control of such an enterprise through a pattern of racketeering activity; (c) conducting or participating in the affairs of such an enterprise through a pattern of racketeering activity; and (d) conspiring to perform any of the aforementioned prohibited activities.  18 U.S.C. § 1962.

Similarly, the New Jersey RICO Act provides:

It shall be unlawful for any person employed by or associated with any enterprise engaged in or activities of which affect trade or commerce to conduct or participate, directly or indirectly, in the conduct of the enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.

See N.J.S.A. 2C:41-2.

RICO was established as a tool of the civil justice system to be used against those engaged in criminal activity and have gained an unfair competitive or financial advantage through criminal means associated with racketeering. The statutory offenses created by RICO were aimed at the evils of criminalracketeering by organized crime that had spread through the economy. U.S. v. Turkette, 452 U.S. 576, 589, (1981).

Civil RICO was designed to wage economic war on organized crime. Its remedies, notably forfeiture and treble damages, were intended to force corrupt businesses out of the marketplace. Its civil remedies were designed not merely to compensate, but to enlist private aid in the attack on organized crime. K&S Partnership v. Continental Bank, 127 F.R.D. 664 (D. Neb. 1989), aff’d in part, rev’d in part on other grounds, 952 F.2d 971 (8th Cir. 1991), cert. denied, 505 U.S. 1205 (1992). Thus, both the state and federal RICO statutes require the Court to treble compensatory damages to award reasonable attorney’s fees. 

Counsel representing policyholders have sought to expand the use of civil RICO in claims arising from the sale of insurance. Due to the “pattern” and “enterprise” elements discussed below, RICO claims will generally arise in the context of organized, outright fraud in the ongoing sale of complex group insurance or employee benefit plans. The marketing and sale of bogus, entirely fraudulent insurance programs have been noted by regulators in recent years. The Texas Department of Insurance, for example, has issued a bulletin cautioning consumers to the existence of numerous “unauthorized insurance plans and operators seeking to take advantage of Texas consumers in the health insurance marketplace. [Unlicensed brokers] are often assisted in marketing their bogus products to Texas consumers from licensed insurance agents.” See, Texas Department of Insurance Website, [] (last visited on September 13, 2005). One fraudulent tactic recently employed is to cast a veneer of ERISA preemption or union affiliation over an insurance employee benefit plan in an effort to avoid state law regulation.

Even in the absence of an outright fraudulent/criminal enterprise, RICO has been employed to attack brokers for the sale of insurance plans which do not meet the expectations of clients. Policyholder counsel who consider filing such a claim should be aware of the following prima facie elements of a civil RICO cause of action.

To constitute a RICO enterprise there must be (1) evidence of an ongoing organization, formal or informal, (2) evidence that the various associates functioned as a continuing unit and (3) evidence that the “enterprise” possessed an existence separate and apart from the pattern of racketeering activity in which it engages. United States v. Riccobene, 709 F.2d 214 (3rd Cir.), cert. denied, 464 U.S. 849 (1983), overruled on other grounds by Griffin v. United States, 202 U.S. 46 (1991). Understanding, let alone proving, the “separate and apart” component of a RICO enterprise is not easy. Under Federal RICO law, there are two “separate and apart” requirements: (1) the person charged with a Section 1962(c) RICO offense must be separate and apart from the enterprise, and (2) the RICO enterprise must be separate and apart from the pattern of racketeering in which it engages. United States v. Di Gilio, 667 F.Supp. 191, 194 (D.N.J. 1987). To satisfy the “separate and apart” requirement, it is not necessary to show that the enterprise has some function wholly unrelated to the racketeering activity, but it is necessary to show that the enterprise has an existence beyond that which is necessary merely to commit each of the acts charged as predicate racketeering offenses. See, United States v. Galati, 853 F.Supp. 152, 156 (E.D. Pa. 1994); citing Riccobene, 709 F.2d at 223-24. 

In DiGilio, supra, for example, eight named defendants were charged with RICO violations for engaging in a pattern of activity which violated the Taft-Hartley Act. The defendants argued that the facts alleged were insufficient to show “an enterprise the existence of which is separate and apart from the pattern of racketeering activities.” DiGilio, 667 F.Supp. at 196. Defendants contended that the only pattern of activity alleged against the enterprise consisted of payments and receipt of payments in violation of the Taft-Hartley Act, and as such the enterprise did not have a separate existence apart from the racketeering activity. Id. The District Court of New Jersey rejected this argument and found that the acts alleged in the indictment “are but a small part of the activity of the John DiGilio group.” Id. In its opinion, the District Court noted that there were a number of purposes for the DiGilio group (or enterprise), including controlling the affairs of certain labor unions, extracting illegal payments from businesses which employed persons represented by unions, etc. Id. Because the DiGilio group engaged in other activities as a group separate and apart from the activity violating the Taft-Hartley Act, there were sufficient allegations in the indictment to satisfy the separate and apart requirements necessary to be termed an “enterprise.”

Similarly, the New Jersey RICO statute requires proof of an “enterprise,” an element which has been defined by the New Jersey Supreme Court as follows:

[B]ecause the enterprise is distinct from the incidents constituting the pattern of activity, it must have an “organization.” The organization of an enterprise need not feature an ascertainable structure or a structure with a particular configuration. The hallmark of an enterprise’s organization consists rather in those kinds of interactions that become necessary when a group, to accomplish its goal, divides among its members the tasks that are necessary to achieve a common purpose.

See, State v. Ball, 141 N.J. 142, 160-61 (1995).

The criminal or “predicate” act of a RICO claim against a broker under Federal RICO law will most likely be mail and/or wire fraud (18 U.S.C. §1341 and §1343) and common law fraud under New Jersey RICO.

To prove mail or wire fraud, the evidence must establish a defendant’s knowing and willful participation in a scheme or artifice to defraud, the use of the mails or interstate wire communications in furtherance of the scheme, and that each defendant participated with that specific fraudulent intent. See, U.S. v. Antico, 275 F.3d 245, 260 (3d Cir. 2001); U.S. v. Picciotti, 40 F.Supp. 2d 242, 245 (D.N.J. 1999); Genty v. Resolution Trust Corp., 937 F.2d 899, 908 (3d Cir. 1991). 

Misconduct without deception of a plaintiff or without a direct false statement to the plaintiff is not mail or wire fraud upon which a civil RICO claim can be based.  See, Central Distributor of Beer, Inc., v. Conn., 5 F.3d 181, 184 (6th Cir. 1993); Appletree Square Ltd. v. W.R. Grace & Co., 29 F.3d 1283, 1287 (8th Cir. 1994).

Where a cause of action for fraud would be dismissed because of an inadequacy in the fraud claim, this will deprive the plaintiff of the predicate of fraud for a RICO claim. See, Ideal Dairy Farms, Inc. v. John Labatt, Ltd., 90 F.3d 737, 746-47 (3d Cir. 1996) (holding that plaintiff cannot make out a claim under federal and New Jersey RICO based on mail and wire fraud where there is no cause of action for fraud). See also, Compania Sud-Americana de Vapores, S.A. v. IBJ Schroder Bank & Trust Co., 785 F. Supp. 411, 424 (S.D.N.Y. 1992); Long Island Lighting Co. v. Transamerica Delaval, Inc., 646 F. Supp. 1442, 1453 (S.D.N.Y. 1986) (“The scheme need not involve affirmative misrepresentation, but the statutory term ‘defraud’ usually signifies the deprivation of something of value by trick, deceit, chicane and overreaching”). 

A recurring issue in the RICO context is the difference between a representation of fact and a statement of opinion.  In Alexander v. CIGNA Corp., 991 F.Supp. 427 (D.N.J. 1998), the District Court noted that “[s]tatements as to future or contingent events, to expectations or probabilities, or as to what will or will not be done in the future, do not constitute misrepresentations, even though they may turn out to be wrong.” Id. at 435. In order to constitute a “fact” susceptible to an actionable claim of fraud or misrepresentation, the statement’s content must be susceptible of “exact knowledge” at the time it is made. Id. In Alexander,  the Court noted that statements relating to “predictions of the future, which were believed when made, cannot serve as a basis for a fraud claim just because they subsequently turn out not to be true.” Id. See also Chatlos Systems, Inc., supra, (where the court rejected the fraud claim concerning an inoperable computer system and noted that the defendant was merely optimistic and, further, that fraudulent intent was disproven by the diligent attempts undertaken by the defendant’s employees who worked alongside the plaintiff’s employees to try to make the computer system work).      

Moreover, it is settled that statements of opinion cannot ordinarily constitute fraud. See Rodio v. Smith, 123 N.J. 345, 352-53 (1991); Alexander, supra, 991 F.Supp. at 435 (“statements that can be categorized as ‘puffery’ or ‘vague and ill-defined opinions’ are not assurances of fact and thus do not constitute misrepresentations”). See also Joseph J. Murphy Realty, Inc. v. Shervan, 159 N.J. Super. 546 (App. Div. 1978). cert. denied, 79 N.J. 487 (1979) (where court held that real estate broker’s statements concerning the ease of selling a home which turned out later not to be true were not fraudulent statements because they were not presently existing statements of fact). The case law establishing that an opinion cannot constitute fraud can be an important defense to a claim against a broker based upon alleged misrepresentations about the benefits the client should expect from an insurance policy or an insurance plan.

There are also numerous cases interpreting the mail and wire fraud statutes which stand for the proposition that under the appropriate circumstances, the defendant is entitled to a “good faith” instruction which generally provides:

The good faith of a defendant is a complete defense to the charge of mail fraud because good faith is simply inconsistent with the intent to obtain money or property by means of false or fraudulent pretenses, representations or promises alleged. A person who acts or causes another person to act, on a belief or an opinion honestly held, is not punishable under the mail fraud statute merely because the belief or opinion turns out to be inaccurate, incorrect or wrong. An honest mistake in judgment or error in management does not arise to the level of intent to defraud.

U.S. v. Migliaccio, 34 F.3d 1517, 1524 (10th Cir. 1994); See also, U.S. v. Cain, 128 F.3d 1249, 1252 (8th Cir. 1997).

The majority of the federal Circuit Courts hold that reliance and proximate cause are essential elements of any civil RICO claim seeking damages based on mail or wire fraud.  See, Metromedia Co. v. Fugazy, 983 F.2d 350, 368 (2nd Cir. 1992); Chisolm v. TranSouth Finan. Corp., 95 F.3d 331, 337 (4th Cir. 1996); Summit Properties, Inc. v. Hoechst Celanese Corp., 214 F.3d 556, 559 (5th Cir. 2000); VanDenBroeck v. Common Point Mortgage Co., 210 F.3d 696 (6th Cir. 2000); Central Distributors of Beer, Inc. v. Connecticut, 5 F.3d 181, 184 (6th Cir. 1993); Sikes v. Teleline, Inc., 281 F.3d 1350 (11th Cir. 2002); Pelletier v. Zweifel, 921 F.2d 1465, 1499-1500 (11th Cir.), cert. denied, 502 U.S. 855 (1991); Curatola v. Ruvolo, 949 F. Supp. 223, 225 (S.D.N.Y. 1997).

In New Jersey Carpenters Health Fund v. Philip Morris, Inc., 17 F.Supp.2d 324 (D.N.J. 1998), the District Court held that proximate cause is a requirement for any civil RICO claim, but acknowledged:

* * * there is a split between various courts as to whether reliance is a necessary ingredient of proximate cause when a RICO violation is predicated on mail or wire fraud, and the Third Circuit has not yet definitively spoken. 

Id. at 339 n. 19. The District Court acknowledged that “[t]he majority of courts, however, require reliance, a requirement that seems eminently sensible.” Id. at 339, fn. 19, citing Chisolm.

In Ideal Dairy Farms, Inc. v. John Labatt, Ltd., 90 F.3d 737 (3rd Cir. 1996), the Third Circuit affirmed the dismissal of federal and state RICO claims because the plaintiff could not demonstrate he relied upon any alleged misrepresentation made by the defendant. This ruling by the Third Circuit is in accord with the majority of U.S. Courts of Appeals. Merely showing a violation is not sufficient for liability under Section 1962 – there must be a connection between the alleged violation and the damages to the business, hence the requirement for reliance and proximate cause. See, Rosenstein v. CPC International, 1991 WL 1783 (E.D. Pa. 1991); New Jersey Carpenters Health Fund, supra; Kevin F. O’Malley, et al., Federal Jury Practice And Instructions Civil (5th Ed.), Part VII, Chapter 161, page 8, “A private plaintiff’s right to sue under civil RICO’s treble damages provision requires a showing that the defendant’s violation was both the factual and the proximate cause of the plaintiff’s injury.”   

In Allen Neurological Associates, Inc. v. Lehigh Valley Health Network, 2001 WL 41143 (E.D. Pa. 2001), the District Court recognized that reliance is not an element of mail fraud under 18 U.S.C. § 1341 (the criminal statute), but stated that “most courts now agree that reliance must be shown when mail fraud is a predicate act in a civil RICO case.” See id. at 4, citing Summit Properties, Inc., the District Court stated:

[t]his additional requirement derives from the proximate cause requirement of civil RICO, which limits recovery in civil RICO cases to ‘[a]ny person injured in his business or property by reason of a violation of [the criminal provisions]. 

See Id., citing 18 U.S.C. § 1964(c) (italics in original).  Accord, Cullen v. Whitman Medical Corp., 188 F.R.D. 226, 233 (E.D. Pa. 1999).

There can be significant differences between the substantive elements of Federal RICO and New Jersey RICO. Under Federal RICO, for example, various Circuit Courts of Appeals have zeroed-in on the injury-in-fact element set forth in 18 U.S.C. §1964(c). 

Civil RICO allows for a treble-damages remedy, but only for parties injured by the alleged violation 18 U.S.C. §1964(c). Claimant must suffer an injury “in fact.” See, Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1100 (2d Cir. 1988), cert. denied, 490 U.S. 1007 (1989). Thus an alleged RICO “injury” is abated pro tanto by recoveries, including settlements, before any consideration of trebling. Scholastic Decisions v. DiDomenico, 995 F.2d 1158, 1166, (2d. Cir.) cert. denied, 510 U.S. 945 (1993). The Second Circuit in Commercial Union Assurance Co. v. Milken, 17 F.3d 608 (2d. Cir.) cert. denied, 513 U.S. 873 (1994) reasoned that recoverable damages under RICO must place the claimants in the position they would have been in but for the alleged illegal scheme. Because the claimant-investors had already been placed by co-defendants in that position because of the settlements, the Second Circuit held that plaintiffs had no provable damages and dismissed their RICO claims in their entirety.  17 F.3d at 612.

Other Courts, upon considering settlement payments by RICO co-defendants, have applied a pro tanto reduction to settlement payments. While certain earlier decisions apply the pro tanto reduction after trebling, these cases are distinguishable because they do not involve return of debt or investment monies to the plaintiffs. As the Court recognized in Scholastic Decisions, Inc. v. DiDomenico, 995 F.2d 1158, (2d. Cir. 1993) cert. denied, 510 U.S. 9 (1993), to the extent of a successful collection, the RICO claim is abated pro tanto prior to the calculation of any alleged actual loss. Id

In a claim brought in Federal Court for violation of Federal RICO, the Court will follow Federal Appellate decisions as preempting the provisions of the New Jersey Comparative Negligence Act. At the very least, defendants in a Federal RICO claim are entitled to a pro tanto reduction for any dollars received in settlement notwithstanding whether a settling co-defendant has been “held in.” At worst, if the settlements exceed actual damages, some courts find no injury “in fact” and thus no RICO claim. See, Commercial Union v. Milken, supra.

Common Law Fraud/Punitive Damages

A cause of action for common law fraud has five elements: “(1) a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon by the other person; and (5) resulting damages.”  Gennari v. Weichert Co. Realtors, 148 N.J. 582, 610 (1977).

Fraud is never presumed and each element must be established by clear and convincing evidence. Albright v. Burns, 206 N.J. Super. 625, 636 (App. Div. 1986). Common law fraud in New Jersey requires a showing that the defendant had a specific, deliberate intent to mislead, defraud, or deceive plaintiffs. Fleming Companies, Inc. v. Thriftway Medford Lakes, Inc., 913 F. Supp. 837 (D.NJ 1995).

Fraud also requires knowledge or belief by the defendant of its falsity. Gennari v. Weichert Co. Realtors, supra. While common law fraud does not entitle a claimant to treble damages or attorney’s fees, it can be the basis for a claim against the broker for punitive damages.

Claims for punitive damages in this state are governed by the Punitive Damages Act (“PDA”), N.J.S.A. 2A:15-5.9 et seq. The PDA states in pertinent part:

[p]unitive damages may be awarded to the plaintiff only if the plaintiff proves, by clear and convincing evidence, that the harm suffered was the result of the defendant’s acts or omissions, and such acts or omissions were actuated by actual malice or accompanied by a wanton and willful disregard of persons who foreseeably might be harmed by those acts or omissions. This burden of proof may not be satisfied by proof of any degree of negligence including gross negligence.

N.J.S.A. 2A:15‑5.12. “Clear and convincing” evidence means that standard of evidence which leaves no serious or substantial doubt about the correctness drawn from the evidence.  N.J.S.A. 2A:15‑5.10. 

Thus, plaintiffs seeking punitive damages must produce evidence sufficient to meet the heavy burden of either actual malice or wanton and willful disregard. Actual malice is defined as “an intentional wrongdoing in the sense of an evil‑minded act.”  N.J.S.A. 2A:15‑5.10. Proof of wanton and willful disregard requires a deliberate act or omission with knowledge of a high degree of probability of harm to another and reckless indifference to the consequences of such act or omission. Di Giovanni v. Pessel, 55 N.J. 188, 191 (1970). It is “[s]omething more than the mere commission of a tort . . . There must be circumstances of aggravation or outrage, such as spite or malice, or fraudulent or evil motive on the part of the defendant, or such a conscious and deliberate disregard of the interest of others that his conduct may be called willful or wanton.” Id. at 190. Thus, plaintiffs must show conduct that is “exceptional or outrageous” or “especially egregious.” Maiorino v. Schering‑Plough Corp., 302 N.J. Super. 323, 353 (App. Div. 1997), cert. denied, 152 N.J. 189 (1997).

Additionally, a plaintiff can only obtain an award of punitive damages if the jury awards compensatory, not nominal, damages to the plaintiff.  N.J.S.A. 2A:15‑5.13(c). As the Supreme Court stated in Smith v. Whitaker, 160 N.J. 221, 240 (1999), “[i]n 1995 the Legislature amended the Punitive Damages Act to require an award of compensatory damages as a statutory predicate for an award of punitive damages and disallowing nominal damages as a basis for a punitive damages claim.”

The PDA also includes the following important procedural and substantive provisions: (1)  punitive damages must be demanded in the complaint (N.J.S.A. 2A:15-5.11);  (2)  a defendant is entitled to a separate trial on punitive damages (N.J.S.A.15-5.13(a));  (3)  all elements of the claim must be proven by clear and convincing evidence (N.J.S.A. 2A:15-5.12(a)); and  (4)  the amount of punitive damages is capped at five times the compensatory damage award or $350,000, whichever is greater.  (N.J.S.A. 2A:15:5.14(b)).


New Jersey has accepted, as do most other courts, the premise of the American Rule that ordinarily society is best served when the parties to litigation each bear their own legal expenses. Community Realty Management, Inc. v. Harris, 155 N.J. 212 (1989). The policy of this State is that litigants bear their own expenses for attorneys’ fees and costs, except where specifically authorized by statute, rule, or agreement. Buccinna v. Micheletti, 311 N.J. Super. 557, 564 (App. Div. 1998).

The New Jersey Court Rules delineate with particularity those causes of action which are susceptible to an award of attorneys’ fees. N.J. Ct. R. 4:42‑9. The Court Rules specifically state: “No fee for legal services shall be allowed in the taxed costs or otherwise, except (1) In a family action . . . . (2) out of a fund in court . . . .(3) In a probate action . . . . (4) In an action for the foreclosure of a mortgage . . . . (5) In an action for foreclose a tax certificate . . . . (6) In an action upon a liability or indemnity policy of insurance in favor of a successful claimant . . . . (7) As expressly provided by these rules with respect to any action.” Id.

A suit based upon fraud and/or negligent misrepresentation does not fall into any of the foregoing seven (7) categories of actions for which a fee award is allowed. See, Jugan v. Friedman, 275 N.J. Super. 556, 573 (App. Div. 1994), cert. denied, 138 N.J. 271 (1994) (after finding that the defendant judgment debtor was liable to the plaintiff judgment creditor for fraudulent interference with the judgment creditor’s efforts to collect on judgment, the court held that plaintiff was not entitled to attorney’s fees expended to establish that judgment creditor’s transfers were fraudulent).

Similarly, New Jersey law does not permit recovery of the attorney’s fees incurred in litigating a professional liability claim against an insurance broker.[1] In Regino v. Aetna Cas. & Sur. Co., 200 N.J. Super. 94 (App. Div. 1985), the Appellate Division discussed a claim for attorney’s fees in a suit against an insurance agent.  Regino had an Aetna policy which covered scheduled construction equipment. When he acquired a new front-end loader, Regino called his insurance broker, an Aetna agent, who orally bound the coverage with Aetna, but failed to follow up by making a written request to Aetna to add the machine to the policy. When it was stolen, Aetna declined to pay on the ground that it was not a covered piece of equipment.

Regino sued Aetna and the agent, who asserted cross-claims against each other. Regino moved for summary judgment against both defendants. Summary judgment was granted against the agent on the issue of liability. It was denied as to Aetna. Subsequently, the agent was granted summary judgment for indemnity against Aetna.

While the focus of the Regino opinion is the indemnification issue between Aetna and Adams, the Appellate Division also ruled on plaintiff’s claim for attorney’s fees against Adams. The Appellate Division carefully considered the request of both Adams and plaintiff for counsel fees and found there was no authority for awarding fees in either instance. Id. at 100.

As discussed in In re Niles, 176 N.J. 282, 298-99 (2003), the Supreme Court has created exceptions to the American Rule when the interests of equity have demanded it. In Saffer v. Willoughby, 143 N.J. 256 (1996), for example, the Supreme Court held that a client may recover reasonable expenses and attorney’s fees as consequential damages for an attorney’s malpractice. 

Counsel representing policyholders will undoubtedly attempt to expand the Saffer rule. However, it is reasonable to read the holding in Saffer as arising from the Supreme Court’s rule-making authority, and lower courts are therefore not authorized to expand the holding in that case. See, In re Farnkopf, 363 N.J. Super. 382 (N.J. Super. 2003) (holding that the N.J. Office on Aging was not liable to pay attorney’s fees as custodian providing protective services to safeguard assets of allegedly vulnerable adult on ground that only the New Jersey Supreme Court possesses necessary constitutional rule-making authority to expand fee-shifting principles).

For more information regarding this alert, please contact Chris Leise at 856.317.3646 or

[1] Attorneys’ fees can be recovered as an element of compensatory damages when a broker negligently fails to procure a liability policy and the client incurs legal expense defending a third-party claim. 

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.


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