Most Homeowners insurance policies follow a defined formula for determining the coverage limits that apply to the insured’s property. Coverage A applies to damage to the dwelling itself; the limit of insurance is based on the cost of repairing or replacing the dwelling. All of the other property coverage limits are percentages of that amount. For example, the standard limit for Coverage B, Other Structures, is 10% of the Coverage A limit.
For the average homeowner, this formula provides sufficient coverage. A problem can occur if someone’s loss exposure is greater than average.
A married North Dakota couple bought a Homeowners policy from an independent agent and renewed it annually. The agent placed coverage with an insurer based in the state. At the time the couple bought the policy, the property consisted of a two-story home and a detached two-story carriage house that the family used as a garage.
The description of Coverage A in the policy said that the insurer covered “(t)he dwelling on the ‘residence premises’ shown in the Declarations, including structures attached to the dwelling …” The description of Coverage B said:
“We (the insurer) cover other structures on the ‘residence premises’ set apart from the dwelling by clear space. This includes structures connected to the dwelling by only a fence, utility line, or similar connection.”
The couple built a large deck behind the house. It was “lag-bolted” to the house and attached to the garage. They did not tell their insurance agent about the deck, did not contact him regularly, and he did not visit the home.
Five years after they bought the first policy, a fire destroyed the garage. The renewal policy in force at the time provided a Coverage A limit of $348,907. In accordance with the standard formula described above, the Coverage B limit was $34,891. The damage to the garage was estimated at more than $87,000.
The insurer determined that the Homeowners policy covered the garage under Coverage B and paid the insureds the full limit of $34,891, less than half the amount of the damage. The couple sued both the insurer and the agent. They argued that the garage was attached to the deck which was attached to the house, making the garage a structure “attached to the dwelling.” In their view, Coverage A with its $348,907 limit applied to the loss, not Coverage B.
They also claimed that the agent “violated his duties to protect them from any gaps in coverage and to advise them about their proper insurance needs.”
The trial court judge ruled that the policy was “clear on its face” that Coverage B applied to the garage. “The garage and the dwelling share no walls, roofs, foundations, or entryways,” he noted.” The clear space between the dwelling and the garage is the deck.” He also dismissed the negligence claim against the agent. The insureds appealed to the North Dakota Supreme Court
The judges unanimously agreed with the trial court. Though this specific issue had not previously been decided by a North Dakota court, they cited decisions in four other states holding that structures such as unroofed decks and concrete patios were “clear space” setting a structure apart from a dwelling. They wrote that the insureds’ argument would render the Coverage B limit meaningless.
They also found that the agent had not breached his professional duty. Saying that under special circumstances the agent may have had a duty to take action not requested by the insureds, they ruled that no such circumstances existed.
This dispute illustrates the importance of regular communications with clients. A note or a phone call asking if the insureds had made any changes might have helped. If the agent was not in the custom of visiting every home he insured (as is probably the case with most agents,) he could have requested photos of the home and garage. That might have started a conversation about whether there was enough insurance on the garage. ISO offers an endorsement to increase the Coverage B limit; possibly, this insurer had a similar endorsement.
The agent won this lawsuit. However, it could have been prevented by properly inspecting the premise or using online tools to understands the scope of the risk. Once an agent better understands the risk, communication the issues with the insured is key, While the agent won the court case, it also lost as court cases become part of the public record. In addition, word can get out in the community that can affect the reputation and ultimately lose business due to incidents like this.