Hell hath no fury like that of a group of property owners who believe insurance should have covered the damage to their property. When there’s no coverage, they will seek to blame many people, possibly including their insurance agents.
Two retail insurance agencies in Hawaii, working through a surplus lines broker, obtained homeowners policies for a large number of households from several Lloyd’s of London syndicates. The surplus lines broker acted as “coverholder to and authorized agent of” the Lloyd’s syndicates.
A volcano eruption in 2018 caused major damage to the insureds’ homes and properties. However, the Lloyd’s syndicates denied coverage for the damage because the policies contained exclusions for loss or damage caused by lava.
Late that year, the homeowners filed a class action lawsuit against the retail agents, the surplus lines broker and the Lloyd’s syndicates. They alleged that the insurance firms carried out an elaborate scheme to steer customers toward the purchase of “essentially worthless” surplus lines coverage. They did this, the homeowners claimed, to increase profits and commissions while reducing insured losses. Specifically, the insureds claimed that the defendants:
- Illegally obtained coverage from the surplus lines market rather than from the Hawaii Property Insurance Association (HPIA), which supposedly offered more comprehensive coverage
- Misrepresented to the homeowners that the surplus lines markets were the only ones available to them, despite not having conducted the diligent search of the admitted market required by state law
- Inflated the property and liability coverage amounts beyond those that the HPIA would provide in order to claim that HPIA policies would not meet their needs.
They sued all the defendants for allegedly violating laws against unfair and deceptive practices, for unjust enrichment, and for a declaration that coverage was owed. In addition, they sued the agents and broker for breach of fiduciary duties and negligence.
One of the retail agents asked the court to dismiss the suit against it. The court agreed.
The court ruled that, because the homeowners were essentially claiming that the agency committed fraud, a legal rule that governs fraud claims applied. This rule requires the party claiming fraud to show “the who, what, when, where, and how of the misconduct charged.” The homeowners, the judge wrote, failed to adequately make any specific claims against the agency:
Specifically, the complaint did not “allege specific facts plausibly giving rise to Plaintiffs’ suspicions of a ‘scheme,’ other than that they ended up with unsatisfactory coverage.” It said nothing about specific acts of the agency or what it did or failed to do. Because of this lack of specificity, the judge dismissed all claims against the agency.
However, he did write that, “… the Court acknowledges and is troubled by the allegations that Broker Defendants artificially inflated Plaintiffs’ property values to preclude them from qualifying for HPIA coverage …” He rejected those allegations only because of the homeowners’ lack of specificity.
This was a case of failure to set client expectations properly. It is apparent that the agency did not tell the clients in writing that their policies did not cover loss caused by lava. If it had, that documentation would have been introduced into evidence and defeated the suit all by itself. It’s possible that the producers informed clients of this verbally (clients’ memories of spoken conversations can be short when it comes to exclusions); it’s also possible that it was never discussed or that the producers did not even know about the exclusions.
Had the agency told the clients at the time of placement that 1) the policies excluded coverage for lava damage, and 2) these policies were the best the agency could obtain, the homeowners would have had a much more difficult task in justifying a class action lawsuit. That apparently did not happen, and the agency had to defend itself in court because of it.