The Coverage Gap a Client Doesn’t Understand Is the One That May Get an Agent Sued
Policies issued under the National Flood Insurance Program protect property owners from direct damage to their properties caused by floods and mudslides. However, the policies do not cover time element losses. They do not cover loss of business income, loss of rents, extra expenses, additional living expenses, or any other losses that can be measured in terms of time.
This may not be obvious to the typical insured property owner. As the following case arising out of Hurricane Katrina illustrates, insurance agents can save themselves a lot of trouble by making it clear to their clients.
A popular New Orleans restaurant had been insured through a local agency for more than ten years. It carried commercial property insurance, including business income coverage, and flood insurance through the NFIP. The flood policy of course did not provide business income coverage, and the commercial property coverage excluded losses caused by flood.
Five days before Hurricane Katrina devastated New Orleans in 2005, the agency’s producer held his annual meeting with the restaurant’s owner to review the insurance program and make coverage recommendations for the renewal policies. He advised the owner to increase the business income limit from $400,000 to $500,000, and the owner agreed. Other recommended changes were minor. The producer ordered the renewal policies with the changes. The renewals had not been issued when the hurricane struck.
Like many New Orleans properties, the restaurant suffered substantial damage from the storm’s winds and floodwaters. It was closed for almost 18 months, resulting in large business income losses. The owner submitted claims to his insurers and was surprised to learn that he did not have business income coverage for a shutdown resulting from a flood. He filed suit against the insurance agency and its producer.
The restaurant claimed that the agency breached its legal and fiduciary duty to accurately and completely explain and disclose the insurance coverage available, including the business income coverage, and to verify that the restaurant’s coverage provided the types and amounts of insurance it sought, including flood business income coverage.
The agency argued that, in all the years it had obtained insurance for the restaurant, the policies had never provided flood business income coverage. The owner testified that the producer had never told him that he had the coverage, and he had never reviewed the policies to see if they did provide it. Further, the agency said that the owner never asked whether he had the coverage, nor did he ever ask the agency to obtain it.
The trial court initially ruled for the agency and dismissed the case. The restaurant asked for a new trial, citing additional arguments, and the court agreed. The agency appealed the decision to grant a new trial, arguing that the initial decision was the correct one.
The appellate court agreed with the agency. It noted that the insured could have read the prior years’ policies to determine whether business income coverage applied to flood damage. “An insured,” the court wrote, quoting an earlier opinion, “… who does not inquire about a particular coverage, who does not ask for the coverage, who does not ask for clarification about the coverage, and who never examines years of policies, has no right to assume that he has coverage and then sue his agent because his (the insured’s) assumption was incorrect.”
As is so often the case in coverage disputes, this was a failure of communication. Arguably, the producer should have anticipated the importance of business income flood coverage to a business in a city surrounded by water. He may have incorrectly assumed that the insured understood that a coverage gap existed. To avoid this problem, he could have specifically discussed this gap with the insured. The agency also could have given the insured a special notice about the limitations of flood coverage, such as the NFIP’s Summary of Coverage.
Even with these precautions, the insured may have filed a lawsuit anyway, but if the agency had documentation showing that it had informed the insured of the coverage gap, the suit would likely not have proceeded. Insurance policies are complex and confusing products. Agencies that thoroughly explain coverage to their clients are less likely to wind up in court.