Climate scientists have predicted that future hurricanes will be less frequent but more intense. The 2017 hurricane season seemed to provide evidence supporting this prediction. If this turns out to be true, flood insurance is going to become increasingly important to property owners, even those who do not believe they are in flood zones.
Unfortunately, a relatively small proportion of property owners carry flood insurance. Only one-fifth of the victims of 2017’s Hurricane Harvey had the coverage. Some property owners who suffer uninsured flood losses can be expected to sue their insurance agents.
This happened to a New York insurance agent following 2011’s Hurricane Irene. The client was a wholesale distributor of fabrics and textiles. The agency had obtained insurance for them for six years. At the beginning of August 2011, the client moved some of their inventory into a warehouse in New Jersey, not far from New York City. They notified the agency of the new location, and the agency asked the carrier to endorse the insured’s policy to provide coverage.
On August 27, Hurricane Irene hit the mid-Atlantic states. The insured’s inventory in the New Jersey warehouse suffered water damage amounting to tens of thousands of dollars. The insured submitted a claim under their property insurance policy, and the carrier denied coverage, citing the water exclusion. This exclusion applied to all direct and indirect loss caused by “(f)lood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not …”
Two years later, the insured sued the carrier, the agency, and the owner of the warehouse. In particular, they accused the agency of negligence and breach of fiduciary duty. According to the insured, the agency:
- Obtained an insurance policy that had so many exclusions that it left the client effectively uninsured
- Failed to tell the insured about the exclusions
- Failed to warn the insured that their new location was in a flood zone
- Failed to tell the insured that their insurance did not cover flood damage
- Failed to obtain flood coverage for the insured or advise them to purchase it elsewhere
- Failed to “diligently and competently” represent the insured’s interests.
The insured noted that the agency marketed itself as “a flood insurance agent,” thus establishing itself as an authority on whose expertise the insured could rely. In addition, the insured said that their many years of working with the agency created an advisor-advisee relationship, rather than merely a transactional one.
The agency asked the court to dismiss the suit, and the court agreed. The judge noted that the insured acknowledged the agency principal’s deposition testimony. He had testified that the agency had no means to determine whether a specific property was located in a flood zone. Without the this ability, the judge said, the agency was not in a position to evaluate the insured’s need for flood coverage.
In addition, the judge also was unpersuaded by the argument about the long relationship between the insured and the agency. Explaining that the insured bore the burden of proving that they had anything other than “a longstanding business relationship,” he ruled that they failed to meet that burden.
Lastly, the judge rejected the idea that the agency owed the insured a fiduciary duty. He cited the same reasons for which he rejected the other arguments.
This agency might have been able to avoid litigation by offering flood insurance to its insureds as a matter of routine. Storms are growing more extreme; properties that were once considered low flood risks may not be anymore. It is prudent for agents to broach the subject of flood coverage with all their insureds. This forces the insured to consider the purchase, however briefly.
Agents should document any rejections of flood coverage by insureds, via an ACORD form, an email, or some other form. That documentation may defeat a negligence claim before it begins.
Property owners are facing evolving loss exposures. Insurance agents’ approaches to treating those exposures must evolve with them. They must be prepared to suggest coverages that might not have seemed necessary before. Flood, cyber liability, environmental liability – these and other coverages are becoming increasingly important. Agents can protect themselves by offering them to their clients.