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260k in Actual Damages is Only Covered for 16k

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Coinsurance is not an easy concept to explain to people outside the insurance industry. Many do not understand it. A Florida agency wound up on the receiving end of a lawsuit because its client did not understand.

The insured leased a building in which it operated a medical center. It met with an insurance agent in August 2011 to purchase commercial property insurance coverage “in the amount of $100,000.00.” This policy was to insure the center’s property, equipment, supplies and improvements. The insured made this request after informing the agent that the equipment, supplies and furnishings were worth more than $100,000. Further, the insured told the agent that it had spent more than $100,000 on the buildouts, betterments or improvements to the building.

The agent allegedly then told the insured that his agency would obtain a policy that would “cover and protect all the (insured’s) property, equipment, furnishings and improvements.” The policy he obtained provided a $100,000 limit, a $1,000 deductible, and had a 90% coinsurance condition. After the insured paid the premium, the agent allegedly told it the policy would “cover and fully pay the amount of $100,000[.]00 that was requested.” The insured purchased a renewal policy on the same terms in August 2012.

In January 2013, the building’s sprinkler system leaked while a contractor performed maintenance on it. The released water damaged the walls, flooring and other improvements the insured had made. It also damaged the insured’s equipment, machinery and other personal property. The total amount of damage was $260,000.

The insured filed a claim under its insurance, expecting to receive $100,000. However, the insurer applied the 90% coinsurance condition and paid the insured $16,562.67.

The insured sued the property management company, which had arranged for the work on the sprinkler system, and the contractor who performed it. In response, the management company claimed its tenant had violated its lease by not carrying sufficient insurance.

Two years later, before the case went to trial, the insured amended its lawsuit to include the insurance agency. The agency asked the court to dismiss the suit on the grounds that the insured had not stated a valid basis for its suit. The trial court agreed and dismissed the case.

Five months later, the insured revised its complaint against the agency, and again the agency requested dismissal and got the same result. Four months after that, the insured filed another revised suit against the agency, this one describing the August 2011 meeting and the agent’s subsequent assurances of coverage.

The insured argued that: 

  • The agency had a duty to obtain the insurance as requested and a duty to use “reasonable care” in explaining the policy’s terms to the insured
  • The agent failed to explain the effects of the 90% coinsurance condition even though he knew or should have known that the condition would prevent the insured from receiving the promised amount of insurance 

The agency countered that it had explained the policy’s terms the way it customarily did with its other customers. It also argued that it obtained the requested coverage and the insured never asked for higher limits.

Again the trial court dismissed the suit, but the insured appealed. The appellate court, contradicting the trial court, ordered the suit to proceed.

The judges noted the disagreement between the two sides as to how much explaining the agent did. Because the facts were in dispute, they ruled that they were obliged to give the insured the benefit of the doubt, view the allegations as potentially true, and let the case proceed. They cautioned, however, that they had not concluded that the agent was at fault.

The agent in this case may have properly explained coinsurance to the insured. Memories can grow fuzzy following an underinsured loss. This case illustrates how a standard feature of insurance policies can surprise an insured and leave a coverage gap. It is a reminder that insurance professionals, who are accustomed to the concept of coinsurance, must not assume that their clients understand what it means for them. If they get burned by a policy condition they do not understand, they may well go to court.

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