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Agency Advised Insured of Higher Coverages, Still Got Sued After Claim Shortfall

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Sometimes an insurance agency can provide high-quality professional service for its clients and still wind up in a courtroom. Documenting each step of the way can improve its chances of winning and increase sales opportunities. One agency was rescued in court by its careful documentation practices.

The insured was a New Jersey tool manufacturer that also had a plant in St. Louis. The agency had obtained coverage for the insured for eleven years, with the property insurance placed with Travelers. The policy covered three New Jersey buildings and the property in Missouri.

Like most property insurance policies, it contained an exclusion for floods, tidal waves and similar causes of loss, but it also included “broad form flood coverage,” as the court’s opinion labeled it. This coverage provided a $1,000,000 limit for flood losses. When the policy came up for renewal in the winter of 2012, the agency’s proposal listed the replacement cost of the New Jersey properties at more than $11.7 million. The proposal advised the insured’s management that higher flood limits might be available and invited them to contact the agency if they were interested in receiving quotes.

That autumn, Superstorm Sandy smashed into the northeast U.S., including New Jersey. All three of the insured’s buildings suffered flood damage. The amount of flood coverage included in the policy did not come close to fully covering the damage. The insured sued the agency, arguing that the agency had a duty to provide quotes for higher policy limits. In addition, it accused the agency of malpractice, negligence, breach of contract, not acting in good faith, and consumer fraud. The agency counter-argued that it had no such duty because the insured did not request the quotes.

The trial judge noted that flood insurance was just one of several kinds of coverage the agency obtained for the insured. If the insured’s argument was correct, he said, “assumedly (the agency) was obligated to do the same with all the various categories of insurance it provided [plaintiff].” The judge said the record showed no history of the agency ever having done this for the insured. He also said that there was no proof that Travelers would have paid more for the flood losses if only the agency had performed to the insured’s expectations. For these reasons, he ruled in the agency’s favor. The insured appealed.

The appellate court rejected all of the insured’s arguments.The insured noted that the agency had obtained insurance for it for more than a decade, would occasionally review the insurance program and make recommendations, and obtained alternative flood quotes for the Missouri location. The court found that the agency did not say anything that would give the insured reasonable cause to believe that its quotes were recommendations for adequate limits of insurance.

The court also said that the agency had the same knowledge of the flood exposure that the insured did and informed the insured that more coverage was available. The insured also argued that the federal law establishing the flood insurance program created a duty for the agency “in the public interest.” The court’s response was succinct: “An insurance broker is not an insurance consultant; if plaintiff wanted an insurance consultant, it could have retained one.”

This is a case where the insurance agency did all the right things to protect itself from an errors and omissions claim. The court’s opinion listed several occasions where agency staff made coverage suggestions in writing, such as suggestions to purchase terrorism, earthquake, and employment practices liability insurance. The opinion also noted a number of occasions where staff confirmed the insured’s decision not to purchase coverage or higher limits. This correspondence gave the agency an excellent defense against the claim.

It is always a good idea for agency staff to document its interactions with an insured. As in this case, solid documentation helps defeat E&O claims. Also, written coverage suggestions may inspire insureds to purchase more insurance, leaving the insured better protected, solidifying the agency-insured relationship, and boosting the agency’s revenues.

An agency that wants to limit its risks while providing excellent service to its clients must commit to consistent documentation practices. They protect against lawsuits and can result in increased sales.

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