Some real estate transactions are more complex than others. These complicated arrangements require careful attention to details when creating the related insurance program.
A building in St. Louis housed a bar and grill. The company that operated the restaurant agreed to buy the building over a 30-year period. There was no mortgage; instead, the owners were to hold the title to the property until the end of the payment period in 2047. The purchase price was $1,275,000.
The purchase agreement required the buyer to buy and maintain a fire insurance policy in the amount of the purchase price, with the seller listed as the named insured. The buyer asked a local independent agency to obtain the necessary coverage. The agency sent ACORD applications for property, general liability and liquor liability coverages to a managing general agent for a specific carrier. The property application listed two other parties as loss payees.
The following day, the MGA emailed the agency that the requested property limit was too low. An email back to the MGA requesting a higher limit followed, and the MGA in turn asked for a new property application showing the higher limit. The agency sent the requested new ACORD application, but the new application omitted the loss payees and listed one of them as mortgagee. There was no mention of the building owner.
The MGA issued a quote based on this, subject to receipt and review of signed ACORD applications. The agency submitted a signed ACORD 125, the non-coverage specific application, that named the building owner as an additional insured. Other ACORD forms, including one listing the owner as loss payee and mortgagee, were submitted but not signed.
The MGA issued the policy at the agreed upon limit, listing the purchaser as the named insured and one party (not the owner) as an additional interest. No one told the building owner about this. The policy also included a protective safeguards endorsement that excluded fire coverage if the named insured did not maintain the building’s automatic fire sprinkler system.
Less than a year later, a fire destroyed the building. The sprinkler system was not operative at the time. The carrier denied coverage for the loss, and multiple lawsuits ensued between owner, purchaser, mortgagee, loss payees, carrier, and the insurance agency. The trial court ruled that the carrier did not owe the building owner any coverage. The owner filed a separate lawsuit against the insurance agency for negligence and breach of contract.
The court held that:
- The owner was not an insured under the policy
- It was not a mortgagee because it did not hold a mortgage on the building
- Even if the owner had been an insured or mortgagee, the protective safeguards endorsement would have excluded coverage for them because the sprinkler system was not operational.
In addition, the court said that the insurance agency did not cause the building owner’s loss. “Had Mixon (the agency) procured the Policy in precisely the manner requested by BMG (the buyer), and had the Policy issued with Boulevard RE (the owner) listed as a mortgagee or other additional insured,” the judge wrote, “Boulevard RE would nonetheless be in the same position in which it now finds itself—without available coverage under the Policy, due to the exclusion under the Endorsement.” She also said that the owner and purchaser should have examined the policy itself, and not the quote, to determine what coverage was provided.
The court did not find the agency liable, but there appear to have been a series of errors by many parties in this saga. The agency listed the wrong named insured on the application, left some additional interests off the revised application, and did not proactively tell its client about the protective safeguards endorsement. The client and the building owner made their fair share of mistakes, too. This legal action could have been avoided if everyone had taken the time to carefully review the applications, the quote and the issued policy.
Details can make or break an insurance coverage determination. The lesson for insurance agencies is “always pay attention to the details.”