When an agent prepares applications for a risk, which questions on the applications are especially important – the nature of the operations, the uses of the vehicles, the condition of the building? The answer depends on the losses that may follow. The agent cannot know beforehand what information will prove to be most important, as an Illinois agency learned.
An office furnishings supply company leased warehouse and office space in a building owned by a related entity (the same individual owned controlling interests in both companies.) The furnishings company leased the space seven years before the other company bought the building. The building’s roof was in two sections – one made of PVC membrane, the other made of tar and gravel. The PVC membrane had not been replaced since the furnishings company had moved in.
An inspection of the roof at the time of the purchase revealed that the PVC membrane had shrunk, leaving “a substantial amount of water” trapped between the two layers of roof. The inspector recommended replacement within one or two years. Instead, the building owner had patches applied whenever evidence of water penetration appeared.
The furnishings company’s insurance company non-renewed its policy a few years after the purchase, citing a loss ratio of more than 100%. The insurance agent later testified that “it was assumed” that he would find replacement coverage. He asked the insured for updated information about the property and operations, though he could not remember whether the insured responded. The applications he prepared were silent about the roof’s age and condition.
Eight carriers declined to quote because of the insured’s poor loss history. Finally, the agent contacted another agent with whom he had brokered business in the past. This second agent obtained a quote from his carrier. The first agent recommended to the insureds that they accept this proposal, and they did so.
Both agents met with the insureds so the second agent could interview them and complete the applications. While the ACORD application did not provide an age or condition of the roof, a supplemental application stated that it was five years old. Later testimony disagreed on whether the second agent requested this information, though the insureds later admitted that they never gave it to the first agent. The first agent did not ask questions at the meeting, nor did he review the signed applications.
The following month, the roof over the warehouse sprouted a leak. The resulting damage cost more than $2.2 million. The insurer’s investigation of the loss revealed that the insureds had misrepresented the roof’s age and condition, their loss history, and the roof’s previous inspections. They denied coverage for the loss, and the insureds sued the agency for negligence.
The case went to trial, and a jury awarded $467,721.50 to the furnishings business but nothing to the building owner. The judge, however, overruled the jury’s verdict and granted judgment in favor of the agency. The insureds appealed.
The appellate court also ruled in the agency’s favor. While the judges agreed that the agency owed the insureds a duty to exercise the care an insurance agent would ordinarily owe, they ruled that that duty began only after the insured requested coverage. After such a request, the agency had a duty to obtain the requested coverage. They wrote, “The evidence shows that (the insured) did not make a specific request for coverage, only that it was assumed (the agent) would find replacement insurance …. (T)he insurance producer, found an insurer … to provide a replacement policy as requested. … (D)efendants fulfilled their duty owed to plaintiff.”
The agency won this case only because they never received a specific request for coverage from the insured. Had the insured been more precise in their instructions, it could have gone the other way. It also appears that the agent did little upfront underwriting of the risk, as the submission had no information about the roof’s age and condition and no documented loss history.
While an insurer always has the option to inspect a risk, the agent is their first source of information. Thorough and accurate submissions, signed by the insured, will always help an agent to beat an E&O claim.