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Insured Sues Agent Over Superstorm Sandy Claim Shortfall

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In October 2012, Superstorm Sandy severely damaged the property of a New Jersey medical practice and nutritional health business to the tune of more than $100,000. The property insurance proceeds the insured received were well short of that amount, and that spelled trouble for an insurance agency.

The practice had been insured by various insurance companies in previous years. However, the court’s opinion implies that the property insurance had been non-renewed in April 2012. After receiving the non-renewal notice, the insured contacted a local insurance agency (the opinion is unclear as to whether this agency was the incumbent) for replacement coverage. The agency did so “(a)fter a series of e-mail exchanges and other communications.”

The expiring policy provided, among other coverages, business income, extra expense, and personal property coverage. After the storm hit, the insureds learned that the replacement policy was not so comprehensive. They suffered losses because of an interruption in off-site utility service and because of damage to their inventory and business personal property. The insurance carrier denied coverage for all of these, plus it determined that some damage existed before the storm and was not covered. The agency told the insureds that, while their previous policy might have covered these damages, the new one did not.

In the end, the insureds received only $8,911.10 for their $100,000 loss.

Two and a half years after the storm, they sued the insurer and the agency. They asked the court to force the insurer to pay the full amount and sought damages from it for breach of contract. They also asked for compensatory damages from the agency for negligence and breach of contract in obtaining the insurance.

The agency, they said, failed to obtain proper insurance coverage. They also charged that the agency neglected to inform them that the business “was not adequately, properly and fully covered” for property damage and business interruption loss, including business personal property, as they had requested. The breach of contract occurred, they said, when the agency agreed to obtain replacement coverage “as comprehensive as” what they had before and then failed to do so.

New Jersey law requires a party suing an insurance agency to file an “Affidavit of Merit,” “attesting that defendants' conduct did not comport with applicable professional standards of care.” The law exists for cases where the subject matter is beyond the expertise of a typical juror. The insureds did not serve the affidavit in this case, arguing instead that their claims against the agency involved matters of “common knowledge” for which the opinion of an insurance expert was unnecessary. Once the deadline for serving the affidavit passed, the agency moved to have the case dismissed.

The trial judge agreed, writing, “Whether the standard of care required Defendants to procure insurance with different policy terms, including exclusions, based on Defendant's knowledge of Plaintiff's business is precisely the type of issue that requires an Affidavit of Merit and expert testimony.” The insureds appealed, but the appellate court upheld the verdict.

The court agreed that the question of whether one policy’s coverage was as “comprehensive” as another’s required a sophisticated assessment for which lay jurors are not equipped. It also noted that none of the emails between the insureds and the agency specifically requested comprehensive coverage, nor did the agency promise to obtain it. In fact, the insureds mentioned a desire for a less expensive policy in one email.

If the agency had written an email to the insured at the time of placement explaining the differences in coverage between the old and new policies, the court probably would have cited it in the opinion. Since there is no mention of such an email, it appears that the agency never documented the differences, leaving the insureds to be surprised after Sandy hit. A clear communication about the deficiencies might have discouraged the insureds from filing the lawsuit or might have gotten a faster dismissal.

Sometimes a client who suffers a large uninsured loss will go to court no matter what the agency has done. However, written statements about the absence of coverage can make a lawsuit less likely and protect an agency against those that happen.    

 

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