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Agency Forced to go to Court over Incorrect Information

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Sometimes, one little detail can cause a dispute that will land an insurance agency in court.

A man in Mississippi was building a log home. He began construction in early 2015. In May 2016, he called his insurance agency about purchasing builders risk insurance on the project. The agency transferred his call to an agent at another agency that was described as their “partner.”

The agent at the partner agency interviewed him over the phone to gather information for the application. Among the questions she asked was whether the house “was almost 30 percent complete or more than 30 percent complete.” According to his testimony, he answered, “I'm much more than 30 percent complete.” In truth, the structure was 80 to 90 percent complete at the time.

The agent sent him an electronic version of the application for his signature. The insured later testified that, when he reviewed the application, he saw that it showed the project as 30 percent complete, but he did not point the error out to the agent. He testified that he did not electronically sign the application; the agency testified that he did.

The agency obtained coverage from a major provider of builders risk insurance. Two months later, a fire destroyed the property and the insured submitted a claim. The record does not say, but it is probably safe to assume that the loss was in the hundreds of thousands of dollars.

The carrier denied coverage for the loss, saying that the insured had made a material misrepresentation on the application. According to the carrier, it would not have agreed to provide coverage had it known how far along the project actually was when it received the submission.

The carrier took legal action, asking a court to declare that the carrier was justified in rescinding the policy because of the insured’s misrepresentation. The insured filed counterclaims against the carrier and both agencies. He made several allegations against the agencies, including bad faith, negligent failure to procure coverage, breach of contract, gross negligence, and others. The agencies asked the court for “summary judgment,” meaning that there was no question about the facts and that the insured was wrong on the law.

The judge dismissed all of the claims against the agency the insured originally called. He also dismissed most of the claims against the agency that obtained the policy. However, he refused to dismiss the claims against it for failure to procure, negligent misrepresentation, and gross negligence.

Both agencies had argued against the failure to procure and negligent misrepresentation claims by arguing that the insured had a duty to read the policy he purchased. The judge ruled that this argument would succeed only if there was evidence that the policy was sent to the insured, and there was none.

The insured testified that he first received a hard copy when he met with the claim adjuster. He provided a list of emails he exchanged with the second agency, but the only PDF file attached was the application. Because there was a dispute over whether the policy was sent to the insured before the loss, the judge ruled that his claim could go forward.

He also found that there was a question of fact as to whether the agent used the degree of care that could reasonably be expected when completing an application. Accordingly, he allowed the claim against the agency for gross negligence to proceed.

This case was decided in April 2018 and may have settled out of court. If so, it was a difficult outcome for the agency. The facts are in dispute. Did the insured actually say that the project was much more than 30 percent complete? If so, then the agent completed the application inaccurately. If the insured’s statement was not that clear, then the application was accurate.

There is also disagreement over whether the insured signed the application. If the agent did not do so, she should have included a cover letter with the application instructing the insured to notify her of any inaccuracies.

Clear documentation is an agent’s best friend when a client accuses her of making mistakes. All agencies should make documentation of client communications a standard practice.

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