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Agent Loses in Court on Replacement Cost Amount

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All insurance buyers want great coverage at a low cost. That can be a fine line for an agent to walk. A New Jersey agent found himself on the wrong side of the line.

The insureds had run a family-owned bowling alley for 40 years. Starting in 1998, they purchased property insurance on the building, personal property and business income from a local insurance agent who specialized in insuring bowling alleys.

The limits on that first policy were $2.3 million on the building, $200,000 on the contents and $400,000 for business income. After purchasing the policy, the family patriarch obtained appraisals from a company partly owned by his nephew. The report based on the appraisal stated that the replacement cost of the building was $2,160,415 and that of the contents was $1,540,000. The insured testified that he gave the agent a copy of the report, testimony the agent disputed.

The agent used different assumptions and calculated a replacement value of the building at a slightly lower number and a value of the equipment at only $960,000. He recommended that the insured increase the combined building and contents limit to $2.7 million. The insured requested that recommendation in writing but did not receive it.

Halfway through the first policy period, the insurer issued an endorsement increasing the building limit to $2.8 million and leaving the contents and business income limits unchanged.

On the third renewal, the building limit was increased to $3,425,000 but the contents and business income limits stayed the same. Because of an intercompany transfer of assets (from building owner to tenant, both owned by the family,) the insured notified the agent and asked if the contents limit should be raised, but the agent assured him that the equipment was covered as part of the building.

Ten years after the first placement, the insured spent $431,000 on renovations to the center and again asked the agent if the limits should be changed. The agent said that was unnecessary because the renovation replaced existing fixtures but did not add new one.

By the 2009 renewal, the limits of insurance on the property and business income were the same as those on the 2003 renewal. The agent later testified that he “did not believe (the insureds) ever wanted additional coverage because they were concerned about the amount of their premiums.” The insured had resisted a suggested building limit increase in 2003 because of the extra cost.

In January 2010, “individuals affiliated with a competitor” set fire to the building and destroyed it. The insurer’s post-loss appraisal concluded that the building’s replacement value was $6,395,247.32. It also found that the value of the damaged contents was much higher than the policy limit. After recovering the limits from their insurance and damages from the firms providing security and automatic sprinkler service for the building, the insureds were short by more than $1.8 million.

The insured sued the agent. The trial court ruled that the agent had been negligent in obtaining the 2009 renewal policy and awarded the insured $2 million, which included the shortfall plus prejudgment interest and other costs. The agent appealed, disputing some of the evidence that the trial judge permitted at trial.

The appellate court was not persuaded by the agent’s arguments, ruling that the trial judge had made appropriate concessions to allow the agent to review and contest the accuracy of the evidence. It also rejected the agent’s claim that the insurer should indemnify him, saying that there was nothing in the contract between the two requiring indemnification.

Much of the evidence introduced at trial was in the form of the insured’s notes on meetings with the agent. If there’s anything the agent might have done differently, he might have documented the meetings himself in the form of correspondence with the insured. If he had confirmed in letters that he recommended higher limits and the insured rejected them, he might have had a stronger case.

Balancing an insured’s desire for protection coupled with low premiums is difficult. The best defense is probably recording the insured’s decisions so they can be proven later.

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