Insurance policies are contracts of good faith. Both sides rely on the good faith and the accuracy of the other side’s statements. If one or the other prove unreliable, the contract falls apart.
A cellular phone provider in California engaged an insurance agency to obtain property and liability insurance. The agency may have had a limited number of markets; it had a brokerage agreement with a general agency. Using the brokerage agreement, the insured’s agent placed the coverage initially with CNA. Later, the agency moved the coverage to Travelers (the court opinion does not state the reason for the move.) The general agency was a Travelers agent and gave the insured’s agency access to that market.
The submission to Travelers included a commercial questionnaire that included the question, “Sprinklers/Smoke Detector” followed by a blank space. The insured’s agent completed ACORD applications and the questionnaire and sent them to the general agency with a request for a quote. The applications and questionnaire indicated that the insured had “SMOKE DETECTORS/FIRE EXTING./SPRINKLERS.” The general agent subsequently provided a quote along with a reminder to review the proposal for coverage details. The insured’s agent asked the general agent to bind coverage based on the proposal. This was done, and a policy was issued.
The commercial property coverage part in the policy contained a “Protective Safeguards Endorsement For Sprinklered Locations and Restaurants”. It required the insured to maintain an automatic sprinkler system and related supervisory services. It also excluded coverage for fire losses if the insured knew of the suspension or impairment of the sprinkler system and failed to tell Travelers, or if the insured failed to maintain the sprinkler system in working order.
The policy renewed the following year with no changes. The general agent sent it to the insured’s agent with instructions to review it and advise of any needed changes. The general agent did not receive a response to those instructions.
Fire struck the building on the second day of the renewal period. Travelers advanced the insured $250,000 and hired an independent adjuster to handle the claim. The adjuster found that the building did not have a sprinkler system installed; the only protective devices were a functioning alarm system and some fire extinguishers. Consequently, Travelers denied coverage, noted the inaccurate information on the application, and announced that it wanted its $250,000 back.
The insured sued Travelers and the two agencies. The trial court ruled in Travelers’ favor, in part because the insured’s agent did not represent the carrier. Legally, the insured’s agent was acting as a broker when it obtained coverage from the general agent. The court ruled that the insured had the burden of proving that its agent was ostensibly acting as a representative of Travelers, and it failed to meet that burden. The insured was ordered to pay Travelers $305,000, and they appealed.
The appeals court agreed that the insured’s agent did not represent Travelers. It found no evidence that Travelers made any statements or committed acts that would lead the insured to believe that its agency was a Travelers agent. In fact, the insured had testified that he received no correspondence other than invoices and policies from Travelers, and no one from the carrier visited his premises. The court also found that the insured’s agent filled out the application with the inaccurate information, supposedly based on a conversation with one of the insured’s employees. Since there were no disputes over the facts, the court found that Travelers had no liability.
There was a very simple way the insured’s agent could have avoided this situation: Someone from the agency should have visited the insured’s premises and toured the building. A glance upward would have told an inspector that there were no sprinkler heads protruding from the ceiling. The agency could then have accurately completed the questionnaire, the carrier might not have attached the protective safeguards endorsement, and a major fire loss might have been covered.
Writing insurance is more than taking information over the phone. To do it well, an agent needs to get in-depth knowledge of the client’s premises and operations. Visiting the insured’s place of business is a good place to start.