A building owner suffered a coinsurance penalty after a property damage loss and sued its independent insurance agency. The insurance carrier refused to indemnify the agency for the lawsuit, and the agency sued the carrier.
The carrier appointed the agency in 2014. The agency had written the insurance for a commercial real estate owner since 2010. Upon getting the new carrier appointment, the agency moved the real estate coverage to the carrier. The policy covered warehouse buildings in North Carolina. Following the initial 2014 placement, the carrier renewed the policy annually through 2017.
A windstorm damaged some of the properties in September 2017 and the insured submitted claims. The carrier determined that some of the buildings were underinsured. Commercial property insurance policies typically contain a coinsurance condition. This condition requires the insured to purchase a limit of insurance on the property equal to a stated percentage of its value at the time of the loss (80% is typical.) If the carrier determines that the property was underinsured, it will reduce the amount of its payment for the loss using a formula stated in the policy. This is known as a coinsurance penalty.
The calculated value of the damaged buildings was $13.9 million. The court’s opinion did not provide the exact amount of the penalty, but stated it was “an amount in excess of $1,000,000.00 …”
The insured and the carrier reached a confidential out of court settlement. The insured then sued the agency for allegedly failing to determine the buildings’ values at renewal, thus causing the coinsurance penalty. The agency forwarded the suit to the insurance carrier, expecting the carrier to cover its defense costs and any awarded damages. Under the agency-carrier contract, the carrier promised to hold the agency harmless from any costs resulting from the carrier’s errors or omissions.
The carrier interpreted the wording of the hold harmless agreement to apply only once a court had held the agency liable for damages. The agency argued the opposite, that the carrier had a duty to defend it. When the carrier refused to provide a defense, the agency sued it for breach of contract.
Although the properties and the agency were located in North Carolina, the contract stated that Massachusetts law governed any disputes. The court looked to that state’s laws and ruled in the carrier’s favor. The contract said that the carrier would cover the agency’s costs related to “civil liability.” However, because the insured’s lawsuit against the agency was still pending, there was as yet no civil liability for the costs to relate to. “… (T)he provision only applies once a judgment has been entered in the underlying case or other final, legally obligating action has been taken,” the judge wrote. “It is undisputed that neither is true in regard to the (insured’s) suit.”
She also ruled that the alleged source of the insured’s loss was an error by the agency, not by the carrier. The insured alleged that the agency did not “independently inquire or investigate as to the replacement costs of the properties …” Consequently, the hold harmless agreement did not apply because it applied only to losses arising from the carrier’s errors.
The judge found that any errors by the agency and carrier were independent of each other and therefore the carrier had no obligation to defend the agency. This is obviously not what most agencies expect when they contract with a carrier to act as its agent. The lesson here is that agencies should look to their own errors and omissions liability insurance in situations like this. The E&O carrier can then attempt to subrogate against the other carrier if it feels it has a case. As this case shows, relying on a carrier’s hold harmless agreement may be a risky proposition.
