Product knowledge is an important component of insurance agents’ errors and omissions liability loss prevention. Knowing policy features and exclusions, or at least knowing how to find them, helps address a client’s loss exposures. It also steers agents away from policies that leave exposures partly or completely uncovered.
The policies provided by the National Flood Insurance Program (NFIP) are different from other types of property-casualty insurance coverage in some important ways. They use unique definitions. With narrow exceptions, they do not provide replacement cost coverage. They do not offer time element coverages even as an option. Finally, unlike almost any other property insurance policy, the NFIP General Property Form states on page 2, “Only one building, which you specifically described in the application, may be insured under this policy.”
A Minnesota insurance agency and its client were unaware of this provision. It led to their becoming adversaries in court.
The client was a corporation that purchased a motel with four buildings, located one mile from a lake. The agency had obtained an NFIP policy for the motel’s prior owner, and the new owner purchased the seller’s interest in that policy. An insurance carrier that participated in the NFIP’s “Write Your Own” program issued the policy. The new owner renewed the policy for the March 2016 to 2017 term.
In September 2016, two of the buildings suffered substantial water damage from a flood. One week later, the carrier and the agency informed the client that the flood policy covered only one of the four motel buildings. The carrier permitted the insured to select which of the two damaged buildings to which they wanted coverage to apply. In the summer of 2017, the carrier paid the insured $186,445.30 for damage to one of the buildings and $46,132.46 for damage to its contents.
The insured then sued both the carrier and the agency in federal court for the uninsured damage. The court’s opinion does not state the amount of damages the insured sought. They probably selected the more heavily damaged building for the coverage. However, if the uncovered building suffered 25% less damage than the covered one, the uninsured damage would have been around $175,000.
The insured demanded a trial by jury (as opposed to one heard only by the judge,) and the carrier opposed the demand. This dispute had to be resolved before the case could go forward.
The judge ruled that, due to federal law, the insured’s breach of contract claim against the carrier was not subject to trial by jury. However, the judge said that the remaining claims might be “procurement claims,” meaning that they related to the initial and continued renewal of the insurance policy. Federal law prohibits lawsuits pertaining to how flood claims were handled, but it does not prohibit lawsuits related to procurement of a policy. The judge said there was insufficient evidence to determine which category the claims fell into. Because of this, he said it would be inappropriate to deny a jury trial at that time.
As of late 2018, the suit against the agency was pending. It may have been settled out of court. Even if a settlement was for less than six figures, the legal expenses for defending the claim were likely substantial.
This agency sold a flood insurance policy assuming that it covered all four motel buildings. Had someone in the agency been familiar with the NFIP General Property Form, they would have known that this was not the case. Instead, the agency might have offered the insured four flood policies instead of one. The insured might not have bought them, but documentation of that decision would probably have ended the lawsuit quickly.
Because the producer was unfamiliar with the terms of an NFIP policy, the agency faced a lawsuit that its E&O insurer might have decided to settle. If it did, the agency is probably facing higher future insurance premiums. Insurance policy terms and conditions determine whether or not a loss is covered. An agent who knows those terms and conditions, or who knows enough to check them before the insured makes decisions, will either prevent E&O claims or make them easier to defend.