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Agency Sued for Lack of Coverage & Misinformation

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Flooding is involved in 90% of all natural disasters occurring in the United States, according to the National Flood Insurance Program (NFIP). It is the most common and costly cause of loss. Because of this, insurance agents must provide accurate information to their clients about their flood coverage, or more often the lack of it. Relaying incorrect information can mean big trouble for the client and the agent.

A New Jersey couple built an elevated home in 2010. They knew an insurance agent socially, and this agent obtained homeowners and flood insurance on the home. The homeowners later claimed that, after construction was completed, they discussed with the agent their plans to enclosed the ground floor area of the home. At the time, this area was open. Before work commenced, the agent allegedly told them that their flood insurance policy would cover damage to the enclosure and any contents within it.

Based on this, the couple proceeded with the work and enclosed the area for storage and recreation. Less than a year later, Hurricane Irene caused flood damage to some of the contents of the newly enclosed space. The couple contacted the agent, who told them the flood insurance coverage applied to the loss but that the amount of the loss was less than the policy’s deductible. The couple decided not to submit a claim.

During the winter of 2012, the Federal Emergency Management Agency, which administers the NFIP, sent the couple a pamphlet stating that they could obtain flood insurance on their home’s contents. The couple asked the agent about this, and she supposedly told them that they already had contents coverage, including for the property on the ground floor.

Eight months later, Superstorm Sandy hit the east coast, causing additional flood damage to the home. The couple texted the agent and were told that they had $100,000 contents coverage, including for the ground floor contents. They took photos, inventoried the damaged property, and rented a dumpster. The court opinion did not state the loss amount, but it was likely in the tens of thousands of dollars.

A week later, another agent within the same insurance agency informed them that they had no coverage for contents on the ground floor and that these contents were uninsurable. The couple’s agent emailed the Write Your Own insurance carrier that had issued the flood policies. It was then that she learned for the first time that the couple’s flood policies had never provided contents coverage. She had assumed for two years that the policies covered contents.

A year after the storm, the couple sued the carrier, the agency and the individual agent. The defendants moved to have the case dismissed, arguing that flood coverage on ground floor contents was never available and the couple should have read their policy and known what it provided. Further, they argued that the couple had failed to file a form required in New Jersey for suits alleging professional negligence. The trial court judge agreed that the form was required and dismissed the case. The couple appealed, arguing that the form was not required.

The appeals court overruled the lower court and ordered a trial for damages to proceed. Noting that the couple relied on the agent’s representations about the insurance coverage, the court stated that the defendants had not cited any prior court cases “holding that reliance on the representation of an insurance agent as to coverage available under an insurance policy is ... unreasonable and unjustified.”

This appeal was decided in the spring of 2018. The parties may be negotiating an out-of-court settlement to avoid a trial.

Rather than reviewing the flood insurance policy’s declarations, terms and conditions, this agent made uninformed assumptions about the coverage. On multiple occasions, she gave her clients information about their flood coverage that was wrong. One of those occasions followed a flood loss. To answer a client’s question following a loss without consulting the policy was simply careless.

Insurance policies are legally binding contracts. Agents should never answer hypothetical questions about their terms without reviewing them first or checking with the carrier providing coverage. As this agent found out, making assumptions without checking can be a very expensive mistake.

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