Insurance agents are asked to obtain coverage for all kinds of risks. A few are perfect, most are average, and a handful are so bad they may be uninsurable. An agent may have to do extensive searches for insurers willing to take on the worst risks. Placing such a risk with the wrong insurer and the wrong policy can be worse than not obtaining coverage at all.
A man in Indiana inherited a house and decided not to insure it. Rather than live in it himself, he permitted his cousin to live there. The cousin proved to be a poor caretaker. Over a two-year period, the owner received several complaints about animals on the property and “odors emanating” from it. In fact, the local animal control and health, fire and police departments removed seven dogs and 30 cats from the home “while his cousin was in jail.”
Eventually, the cousin got out of town and abandoned the animals still living there. Animal control removed three dogs (two emaciated and one dead) from the home and reported that it “was covered in feces, fleas, and garbage.” Firefighters wore oxygen masks when they entered. The health department condemned the home and allowed people to enter it only to clean.
It was at this point that the owner decided it would be a good idea to insure the home.
He contacted a local insurance agent for coverage, though he seemed to be primarily concerned with obtaining liability insurance. The property was vacant, uninhabitable, undergoing renovations, and the owner planned to rent it out. He later claimed that he told the agent all of this. The agent submitted an application for dwelling fire coverage to an insurer, but the application omitted any of these details. The agent testified that he reviewed the application with the owner, who signed it. The owner testified that he did not remember signing it.
The insurer issued the policy in April, and in June the home burned to the ground. After investigating, the insurer denied coverage and claimed that the application had contained material misrepresentations and false statements about the property. It rescinded the policy back to the effective date and returned all the premium. The insured promptly sued the insurer and the agent, claiming that the false statements on the application were the agent’s, and accusing the agent of forgery, insurance fraud and deception. He asked for coverage for the loss, reinstatement of the policy, and compensatory and punitive damages. The total damages sought were probably hundreds of thousands of dollars.
The trial court sided with the insurer and agent and dismissed the suit, and the insured appealed. The appellate court reinstated the suit against the agent but upheld the dismissal of the suit against the insurer. The case then went to the Indiana Supreme Court, which affirmed the appellate court’s decision.
The Supreme Court found the insured’s claim against the agent for “negligent failure to procure appropriate insurance” to be valid. “The Agents did show that even if the application had completely and truthfully reported the condition and use of the property, no dwelling fire insurance policy would have been issued,” wrote the lead justice for the decision. “But,” he continued, “the Agents failed to exclude the possibility that other types of fire insurance coverage for the property could have been obtained and issued.” In the court’s opinion, the agent should have explored other types of insurance, such as builder’s risk.
The court reinstated the lawsuit against the agent. The record is unclear as to whether it proceeded further or if the agent’s errors and omissions liability insurer settled it.
Clearly, this insurance risk was about as bad as they come. However, given that the home was under renovation and intended for rental, a builder’s risk policy would have been a more appropriate coverage vehicle than a fire policy. The agent’s mistake was in either not fully understanding the applicant and the risk, not exploring all coverage options, or both.
In theory, any property can be insured for the right price. In extreme cases, finding that coverage and that price may be difficult, but the effort will help prevent lawsuits.