Insurance Agency Sued After Obtaining Limits Insured Requested
- March 03, 2020
Many errors and omissions lawsuits by clients against their insurance agents boil down to the client saying, “Never mind what I asked for; you should have known what I needed.” If an agency has done the right things, that argument will not get too far, as one agency was pleased to learn.
The insured was a family-owned motel in Pennsylvania. After 13 years in business, they switched insurance agents. For six years, the new agency sent the insured renewal applications. The insured admitted in testimony that these applications "would serve as the basis of the insurance."
The applications for the 2016-17 renewal of the property insurance policy were no different. The insured returned them to the agency with requested property insurance limits of $2,250,000 on the building, $123,750 on business personal property, and $221,550 for business income. The agency presented several alternative quotes to the insured with “varying policy limits,” but the insured chose the quote with the limits shown on the application plus $5,000 personal property coverage.
The motel suffered a fire in May 2016 that burned it to the ground, and the insurer hired “various third-parties” to estimate the repair costs. The insurer eventually paid $1,583,819 for damage to the building and $4,160 for the damaged office contents. The insured, however, hired contractors to repair the building for amounts greater than the policy’s building limit. The court’s opinion said that the exact amount the insured spent was unknown, but both parties agreed that it was more than the insurer paid.
The insured sued both the carrier and the agency, accusing the agency of failing to obtain proper and adequate insurance coverage.
The judge was not persuaded by the insured’s arguments. She pointed to prior Pennsylvania court rulings that agents have no obligation to advise insureds on the types or amounts of available coverage, to obtain full coverage, or even to explain a policy’s terms and conditions to an insured.
She also wrote that the insured did not make much of a case. They had cited the agent’s duties of care, good faith and loyalty. “But even as to those duties,” she wrote, “Plaintiff offers no reason—much less citation to the record in support of—why (the agency) breached these duties. Nor has Plaintiff pointed to any evidence of record that would support a conclusion that (the agency) had an obligation as a broker to ensure that Plaintiff had the coverage limits that it wanted or needed.”
Finally, she rejected the insured’s claim that the policy was “materially defective,” agreeing with the agency that “‘at worst’ … the Policy ‘covered nearly the entire cost of replacing a building that was `completely destroyed.’” That, in her opinion, was not a materially defective policy. She granted the agency’s motion to have the case dismissed as a matter of law.
The agency won this case easily because:
● They obtained signed applications for each policy period
● They offered alternatives and followed the insured’s instructions as to which policy to obtain
● They were careful not to hold themselves out as anything other than an insurance agency - not a consultant or advisor.
The agency was sued, and its errors and omissions liability insurance carrier incurred defense costs, but they acted entirely appropriately. They took the exact steps that any E&O carrier would want. Agencies that obtain the requested coverage and document the reasons for its actions will similarly be able to defeat E&O claims like this one. Good documentation and professional conduct will always help beat lawsuits - and also make for an effective insurance agency.