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Agency Sued for Going by the Book & Not Reducing Replacement Cost



Insurance agents cannot be blamed for sometimes thinking that they can’t win. If a client does not buy a particular coverage and later has an uninsured loss, the agent can be sued. If they buy limits of insurance that later prove to not fully cover a loss, the agent can be sued. And, as a California agent learned, a lawsuit can follow when a client thinks they bought too much insurance. In this case, the insured actually sued a third party, and that third party sued the agent.

A California couple, who had put their home in a personal trust, carried homeowners insurance with the same carrier for many years. In 2016, their grandson, representing his grandmother and acting as trustee of the trust, requested a copy of the trust’s file from their insurance agent. He suspected that his grandparents’ home was “grossly over-insured.” (This was in California, where two-thirds of homeowners reported being under-insured following the 2017 North Bay wildfires.) He concluded that the home had been over-insured for several years. Consequently, he believed that the trust had paid excessive premiums for insurance limits that it would never be able to collect.

Two years later, he sued the insurance company and the appraisal company the insurer used to determine the replacement costs of homes. He alleged that the two had engaged in “a scheme to overcharge customers of homeowners' insurance by intentionally overestimating the replacement costs of homes.” A judge dismissed the suit based on a flaw in the grandson’s petition and gave him time to fix it. Fix it he did, and the judge declined to dismiss the amended lawsuit.

The appraisal company then sued the couple’s insurance agency. They charged the agency with failing to perform “the basic duties of an insurance broker” by not identifying the “inflated” coverage, recommending a change in carriers, and avoiding the overpayment of premiums. The court opinion did not reveal the amount of damages sought, but they must have been in five figures to justify the cost of a lawsuit. The agency asked the court to dismiss the suit.

The court granted the agency’s motion. The judge said that the appraisal company had a valid claim only if the agency had a particular duty of care to the trust and had not met that duty. Prior decisions by California courts had found that agents do not have a duty to recommend changes in insurance coverages to clients, unless the agents misrepresent “the nature, extent or scope of the coverage being … provided.” The appraisal company argued that this agency had misrepresented the coverage by managing the renewals without identifying the fact that the trust was over-insured.

The judge ruled otherwise. “Overland fails to describe with any specificity the alleged misrepresentations that trigged (sic) MDI's special duty to the Parduccis. … (T)he bare-bone allegations it pleads are not enough.”

There does not appear to be much this agency could have done to prevent this lawsuit. They sold and renewed a series of homeowners policies. The insureds were a couple with enough wealth that forming a personal trust for financial planning purposes made sense.The home was located in a state that has historically suffered severe wildfire seasons. During each of those seasons, stories appear in the press about homeowners who lacked sufficient limits. The agency had no reason to worry about excessive limits.

This was a case of a business being sued and looking for someone else to blame. There will always be people and organizations who choose to do that, and there is little agencies can do to stop them.


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