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When lawyers err: brokerage sues its lawyers for malpractice after failed appeals ruling.

Because insurance is a business of utmost good faith, insurers and their agents and brokers often enter into oral agreements with regard to the collection of premiums and how the broker is entitled to commissions. The statute of frauds, in most states, makes it difficult if not impossible to enforce such an oral agreement.

The New York appellate division was asked to resolve the differences between insurance brokerage Aramarine Brokerage Inc. (Aramarine) and its lawyers for legal malpractice arising out of the law firm's successive representation of it in connection with an underlying federal action against a group of insurers (CGU insurers). In the federal action, the CGU insurers moved for summary judgment on their counterclaims for a return of insurance brokerage commissions paid in connection with premiums subsequently returned; on the ground that plaintiff's claim of an oral agreement between the parties was controlled by New York law and was unenforceable pursuant to the statute of frauds. As a result of the federal case, Aramarine was required to pay the CGU insurers more than $1.3 million. In Aramarine Brokerage Inc v. Hall, Estill, Hardwick, Gable, Golden & Nelson, EC, No. 7548 650631/11 (N.Y.App.Div. 05/03/2012), Aramarine sued its lawyers for malpractice.


The CGU insurers argued, for the first time, in reply to the Aramarine motion for summary judgment that the oral agreement also failed for lack of consideration. They applied a rule first stated by movie mogul Sam Goldwyn, who is reported to have said that "your oral contract ain't worth the paper it's printed on."

Plaintiff neither objected to the CGU insurers' raising this issue in reply nor sought to submit a sur-reply. The federal trial court granted the CGU insurers' motion, finding that the oral modification was subject to New York law and was unenforceable under New York's statute of frauds. Trying to avoid argument or a further appel the court found in the alternative that plaintiff failed to establish that any consideration was given in exchange for the alleged oral agreement. "Consideration" is a required element of every contract. It can be money or an agreement to do or not do something of value. Without an offer, an acceptance of an offer and the passing of consideration there can be no contract.

On appeal the Second Circuit vacated the finding that New York law and the statute of frauds applied to the oral modification. Neither the appellate brief nor the Second Circuit's decision addressed the district court's alternative holding that the agreement lacked consideration.

On remand, the district court held that although the trial judge could have disregarded the argument first raised in reply, the "no consideration" ruling was the law of the case, because it had not been reversed on appeal. While the Second Circuit could have responded favorably to an abuse of discretion argument, it was equally likely to have viewed with disfavor the plaintiff's failure to raise the issue before the district court and concluded that plaintiff waived any right to argue that the trial judge erred by considering the belatedly raised no consideration argument.

The district court ultimately awarded the CGU insurers more than $1.3 million on their counterclaims against plaintiff. Affirming the judgment, the Second Circuit held that by failing to object to the no consideration claim or raise the issue on the first appeal, the plaintiff waived the right to challenge the claim and the no consideration ruling became law of the case. Once a particular finding is the "law of the case" it can never be disputed by either party and must be the basis of any finding by the court.

The malpractice complaint alleged that the failure to address the "no consideration" ruling in its appellate brief in the first federal appeal resulted in plaintiff's inability to defend against the CGU insurers' counterclaims. By alleging facts from which it could reasonably be inferred that defendant's negligence caused plaintiff's loss, the complaint states a cause of action for malpractice and may go forward to trial.

Lawyers, like insurance professionals, err. Perfection in the law is more rare than a chicken with teeth. When the lawyers failed to deal with the "no consideration" ruling in the appeal, it opened them up to an action by the client for malpractice.


Insurance agents and brokers should never rely on an oral contract. When I was young a handshake was sufficient to bind moral and prudent business people. Sam Goldwyn ruined the ability of people to rely on handshake contracts. Insurance, by definition, must be a written contract. If it is not in writing it is void.

If you, as an insurance agent or broker, must enter into an initially oral agreement, be sure there is a clear and unambiguous offer that is recorded in one of your files. Then, make certain that the offer is accepted and that the acceptance is clear, unambiguous and recorded in a note to your file. Finally, before any reliance is placed on the oral agreement make sure that consideration passes between the parties and that the facts of the passing of consideration is noted in a file. Then, when all three elements of a contract exist, write a note that confirms the offer, the acceptance and the passage of consideration so that you can forward a copy of the agreement to the other party. Although not a fully executed contract the contract terms can be proved by the oral agreement as noted in the files and memoranda.

Finally, when the inevitable dispute arises, the broker must retain a competent lawyer who understands all of the issues. In this case, Aramarine's lawyers ignored the "no consideration" issue and as a result must stand trial for malpractice. Whether the broker will succeed at trial is another issue.

Of course, the litigation could have been avoided and much money saved if the parties to the agreement had both retained competent counsel to draft a written contract in clear and unambiguous language that is dated and signed by the parties to the agreement. The days when insurance business was done between gentlemen who could agree to an insurance contract written in chalk on Edward Lloyd's blackboard in the famous coffee shop are long gone. Neither insurance nor agreements between insurers, insurance brokers and insurance agents should be oral.

It is a clear example of being penny wise and pound foolish when a lawsuit results in a $1.3 million verdict because the parties tried to avoid the expense of hiring a lawyer to draft a written contract. Paying a lawyer a few thousand dollars to draft the agreement could have saved the parties thousands in litigation costs and a $1.3 million verdict. EES

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Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, claims handling, bad faith and fraud. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-book "Heads I Win, Tails You Lose: 2011" and others available at Contact him at or

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Title Annotation:Down to Cases
Author:Zalma, Barry
Publication:American Agent & Broker
Date:Jul 1, 2012
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