Insurance buyers may assume that their agents know what they think they want, even if that is never explicitly said. What a client thinks he wanted may change after a loss occurs.
A Pennsylvania agency was tasked with obtaining builders risk coverage by the owner of a construction project. The policy the agency obtained included a Soft Cost Endorsement that provided a limit of $3,764,385. The endorsement contained a schedule for listing covered locations; the only scheduled location was the site of the construction project.
The endorsement promised that the insurer would pay for “soft costs” or extra expenses arising out of a delay “resulting from direct physical loss or damage to a building or structure described on the (schedule) that is caused by a covered peril.” A soft cost is an expense or loss incurred as a result of a project’s delay, such as lost rent, additional interest paid on loans, lost sales, and similar expenses.
The project owner contracted with a manufacturer of custom concrete panels to supply 600 concrete panels for the new building’s exterior. Five months after the contract was awarded, however, the manufacturer’s facility suffered a fire. The 55 panels that had been made at that point were damaged, delaying the construction project. The court’s opinion does not state the size of the resulting losses. However, a loss equal to only 10% of the Soft Costs limit would have been around $400,000, so the extra expenses were likely significant.
The insurer denied the project owner’s builders risk claim, saying that the expenses incurred did not fall within the scope of the soft costs coverage. The project owner sued the insurer, but the trial court found that the soft costs coverage did not apply because there was no direct loss to the building located at the construction site.
The owner then sued the agency for failing to obtain proper coverage for the project. The agency moved to have the suit dismissed, the trial court agreed with the agency, and the project owner appealed.
The appellate court noted that the schedules of locations in the policy Declarations and the soft cost endorsement permitted the insured to list only “jobsites.” The policy defined “jobsite” as “any location, project, or work site where `you’ are in the process of constructing, erecting, or fabricating a building or structure.” Since the insured was not erecting a building at the concrete panel manufacturer’s site, the court ruled that the site was not a jobsite. The court agreed with the trial court that the agency could not have obtained soft cost coverage for losses arising out of damage to a subcontractor’s production facility.
The court also rejected the project owner’s argument that the agency failed “to exercise the skill and knowledge normally possessed by insurance agents. It agreed with the trial court’s ruling that the lack of expert witness testimony on this question prevented the owner from being successful on this claim.
Lastly, the court ruled that there was no special relationship between the project owner and the agency that would have placed the agency in a legal position of trust with the owner. Thus, the agency won on all of the allegations.
It appears that the agency acted properly in this case. There does not appear to be any way in which the agency could have obtained soft cost coverage that would apply to a manufacturer’s location. It is possible that endorsements providing business income and extra expense coverage for so-called dependent properties was available. Dependent properties are typically key customers, suppliers, or properties that attract traffic to the insured’s location. Had such an endorsement been available for this project, the concrete panel manufacturer’s location could have been insured as a supplier location. That assumes two things:
- The project owner told the agency of the existence of these dependent properties and information about them
- An insurer was willing to offer the coverage in relation to this project.
Courts do not expect insurance agents to read their clients’ minds. This case affirms again the importance of documenting discussions with clients about the coverage they’re seeking. What a client thinks he wants may not be possible. Good records will prove that.