The premium tends to be the one item in an insurance quote that insureds and agents alike focus on. However, lawsuits can ensue when the premium is right but the coverage the policy provides is not correct.
The owners of an Oregon sawmill obtained commercial property coverage through a local insurance agency. During the renewal process in 2015, the agency told the owners they could lower their Business Income coverage premium by excluding coverage for ordinary payroll expenses. Should the sawmill be shut down because of a fire, the agent said, hourly workers would be laid off and their payroll expenses would not continue. By excluding ordinary payroll, the owners could purchase a lower Business Income limit without fear of incurring a coinsurance penalty.
The agency sent applications to a wholesale broker who in turn obtained a quote from a surplus lines insurance carrier. The quote, which the wholesaler forwarded to the retail agent, did not mention an exclusion for ordinary payroll from the Business Income coverage. It also did not include the ⅙ Monthly Limit of Indemnity option that was in the retail agent’s submission. This option suspends the Business Income Coverage Form’s coinsurance condition.
The carrier later claimed that the computer file containing the wholesaler’s submission had become corrupted and they had trouble opening it. Regardless, a few days later the carrier sent the wholesaler a quote, which the wholesaler sent to the retail agent and the agent presented to the insured.
None of the parties involved noticed the missing ordinary payroll exclusion and monthly limit of indemnity. The carrier issued the policy in September 2015 without those provisions.
A fire damaged the sawmill in 2016 and the owners submitted insurance claims for loss of business income. The carrier applied a substantial coinsurance penalty to its payment calculation because the purchased limit was well below that required under the policy condition. The agent asked the carrier to retroactively add the ordinary payroll exclusion and monthly limit, but the carrier declined to do so. The insured received an amount equal to only 53% of their losses.
The insured sued the retail agent for $3 million, and the agent asked the wholesaler to indemnity them under the terms of the contract between the two. The wholesaler declined, and the retailer sued them. A jury ordered the retailer to pay the insured $2.2 million in damages for negligence and breach of contract in obtaining the Business Income coverage. It also found that the wholesaler had no duty to indemnify the retailer. The retail agent appealed the decision on the indemnification question.
The appeals court upheld the verdict. The insured’s losses, the judge wrote, were not necessarily related to the wholesaler’s failure to give the carrier a readable file including the request for a monthly limit of indemnity. “Based on our review of the record,” he wrote, “the jury could also have found that Saratoga’s claims for damages against Ward arose entirely out of … Ward’s own negligence in, among other things, failing to exclude ordinary payroll from the insurance application.” Since the jury could have plausibly reached this conclusion, the judge ruled that their verdict was not incorrect.
This problem occurred because apparently no one checked either the quote or the policy against the original applications to see if there were differences. Had the retail agent conducted a careful review of both, the absence of the ordinary payroll exclusion would have been apparent. That would have supported the purchase of a reduced limit and lowered the risk of a coinsurance penalty. The Monthly Limit of Indemnity option would have suspended the coinsurance condition altogether, but it appears that no one checked for that, either. Instead, the problems came to light only after a fire occurred, and that is the wrong time to find out.
When business owners are shopping for insurance, they are naturally focused on its cost. It is the agent’s job to at least remind them of the importance of coverage. If the agent does not check to make sure the requested coverage is in place, the insured might not check either. This agency’s failure to do a quality check cost it a very large jury award.
It was not disclosed of how much E&O coverage this agency had, but if it had only a $1 million of coverage, then the agency would have to cover the additional $1.2 million out of their own funds. Some agencies may still have a $1 million dollar policy because this is all that some carriers require, however this is like getting minimum auto insurance liability. Every agency owner is at risk for exhausting their E&O limits, but the ones who have higher limits are much less at risk than those with a very low $1 million limit.