Policies with little endorsement or claim activity are easy to renew without thought. The carrier bumps up property insurance a few points every year to account for rising construction costs, but otherwise the agent might deliver the renewal to the client without change. Over a long period of time, the client can become significantly underinsured.
A California man built a secondary home in 1972 with the idea of renting part of it out. He obtained property insurance from a local family-owned agency. When the first policy was issued, the dwelling limit of insurance was “right on the money,” according to the client.
Over the next 44 years, the policy renewed with increases in the dwelling limit. After the agency principal passed away, his son handled the account. By his own admission, the client never spoke with anyone at the agency about the limits. He never asked to have the property inspected, nor did he get an estimate of its replacement cost from a home builder. He accepted his agent’s message that the limits would rise every year to account for inflation.
In 2016, fire destroyed part of the home. The insurer paid the client $339,577, an amount that included the limit of insurance on the home plus extended replacement cost coverage for the dwelling and debris removal. However, a local contractor told the client that the cost of rebuilding would be at least $323,000 to $340,000 more.
The client sued the insurer and the agent for negligence (failure to obtain and provide adequate coverage) and negligent misrepresentation (telling him he had adequate coverage.) He argued that they were obligated to review the coverage annually to determine its adequacy.
The insurer and agent disputed both allegations, saying that they had provided the limits the client requested. In support, they produced ten years’ of renewal offers that included policy declarations pages and notices. The notices described the levels of coverage available and specifically stated that the client did not have “guaranteed replacement cost coverage” that would pay for rebuilding the home regardless of the limits. They also warned of the dangers of being underinsured. The client did not respond to these notices.
The client said he assumed the insurer and agent were responsible for informing him of the proper amount of coverage. The agent said that the client never asked for guaranteed replacement cost or for a specific amount of insurance on the home.
The trial court ruled for the insurer and agent on both allegations, and the client appealed. The appellate court, however, affirmed the ruling. Acknowledging that insurance buyers generally seek adequate coverage, the judges wrote that to imply a contractual obligation based on that request would essentially make the agent the insurer. “(A) request for, or assurance of ‘adequate’ coverage is not the same as a request for, or assurance of, ‘100% replacement cost’ coverage’,” they wrote. For the same reason, they ruled that the agent made no misrepresentations.
Possibly the only thing the agent could have done to avoid this lawsuit would have been to complete a current building cost replacement estimator at renewal and update the coverage with a notification to the insured. There may be a fallacy that an insurance agent may lose a customer if the rate increases. However a good insurance customer is going to appreciate and recognize they do need a higher limit. If you are doing it on your entire book, you will likely increase the revenues of your agency even if you lose a few customers. Chances are your best customers will stay and the more difficult customers will choose to leave. This will further help your loss ratio, E&O risk and as mentioned, your agency’s revenues. Doing regular renewal reviews is really smart business.
Fortunately, this agent had other documents to support his handling of the account, so he won. Once again, solid documentation was the key to defeating an errors and omissions liability claim.