A Delaware independent insurance agency sold a client a policy that was not what the client asked for. The result was tens of thousands of dollars in uninsured damage and a lawsuit.
The client had a homeowners policy insuring his Wilmington, Delaware home for several years from Nationwide. However, in September 2018 Nationwide non-renewed the policy, and the client contacted an independent agency for a replacement. According to the court’s opinion, the client instructed the producer “to obtain new coverage for the Insured Premises on equivalent terms as the Nationwide Policy.” Among other things, the Nationwide policy provided $50,000 coverage for “water damage” (by which the judge presumably meant “backup of sewers and drains” coverage.)
The agency obtained replacement coverage, ironically from Scottsdale Insurance Co., which at the time was the brand for Nationwide’s non-admitted carrier. For reasons unstated in the court’s opinion, the client did not receive a copy of the policy.
In August 2020, Tropical Storm Isaias impacted the Wilmington area, spawning tornadoes. The storms knocked out power to the client’s home, rendering its sump pump inoperable. Consequently, one foot of water inundated two fully-furnished living areas in the lower level of the house. The cost of restoring the areas to their original condition was more than $100,000.
The client submitted a claim to Scottsdale, only to be told that his policy provided $5,000 coverage for water damage, rather than the $50,000 provided by the expired Nationwide policy. It was then, two years after purchasing the first Scottsdale policy, that the client requested and received a copy of the policy.
He reviewed it and promptly sued the agency for negligence in obtaining the policy, fraudulently inducing him to buy it, and fraudulently misrepresenting the coverage it provided. The agency filed a motion to dismiss the suit.
In an early November 2022 decision, the judge refused to dismiss the suit. The agency had argued that that the suit should be dismissed because the client never claimed that the agency was a fiduciary (one who has a legal duty to act in a way that benefits someone else.) The judge rejected this argument. The evidence showed, he said, that the client gave the producer explicit instructions. The agent had a duty to follow them, and therefore no fiduciary relationship was required.
In addition, the judge denied the agency’s argument that the client’s charge of fraudulently misrepresenting the coverage was vague. Since the client gave the instructions between the time he received the Nationwide non-renewal notice and the date that the agency obtained the Scottsdale policy, the judge found the claim to be specific.
Lastly, the judge found that the client would have a valid claim even if there were no contract between him and the agency, thus dismissing the agency’s argument that there was no breach of contract.
As the case was decided only a few weeks ago, there is no record of an appeal. However, a settlement between the client and the agency’s errors and omissions liability insurance carrier seems likely.
There are a few possible explanations as to what went wrong here:
- The agent did not notice the difference in water backup limits between the old and new policies, or
- The agent knew about the difference but did not inform the client.
Either explanation is problematic. Very often, the focus during the quoting process is on the premium, not the coverage, and that can lead to situations where an agent is unaware of coverage differences. Conversely, if the agent knew, a simple letter or email informing the client of the lesser coverage, along with a statement that the agency could not find another policy with better terms, might have kept this case from ever going before a judge.
In addition, a client should receive a copy of the policy as soon as possible after purchase. Most states place at least some duty on insureds to read their policies. The agency might have had a better defense if the client had received a copy two years before the loss.
Agency knowledge and communications were the keys to preventing this suit. Agencies must know what they are proposing and clearly communicate any coverage shortfalls.