Any time an insurance agent misstates policy provisions to a client, problems can result. When the mistake involves tens of millions of dollars and losses occur, the problems become extremely serious. In the case of a large insurance brokerage that had a contract with a condominium association, the problem equaled $11 million.
The insured association managed a condominium tower building in Palm Beach County, Florida. It contracted with large national agency to obtain property insurance coverage. The agency arranged for the insured to purchase coverage from the Citizens Property Insurance Corp., the Florida residual property insurance market. The policy limits were nearly $50 million.
A series of hurricanes hammered Florida in the summer of 2004. Two of them hit Palm Beach in September. Both caused extensive damage to the tower. The insureds attempted to dry out the property. However, as the bills mounted, they contacted The agency to confirm that their policy provided coverage on a per occurrence basis, rather than an aggregate basis. With coverage on a per occurrence basis, the insured would have $100 million available to cover the repairs ($50 million for each of the two storms.) The agency told them that coverage was indeed on an occurrence basis.
Relying on this advice, the insured gave up on the drying process, which was apparently very slow. Instead, they began reconstruction of the property and eventually spent more than $100 million. When they sought reimbursement from Citizens, however, the insurer maintained that the policy’s $50 million coverage was an aggregate limit, not a per occurrence limit. The insured sued Citizens, and eventually the two sides settled for $89 million without a reaching a determination as to the occurrence versus aggregate question. This left the insured with millions in uninsured costs.
They subsequently sued the agency for breach of contract, negligent misrepresentation, breach of good faith and fair dealing, negligence, and breach of fiduciary duty. However, the trial court dismissed the suit without a trial, and the insured appealed.
The appellate court actually decided that the agency’s interpretation of the policy was correct – it was an occurrence policy. Accordingly, it ruled against the insured on the breach of contract, negligent misrepresentation, and breach of good faith and fair dealing allegations. However, it hedged on the negligence and breach of fiduciary duty grounds.
The agency was arguing that all of its obligations to the insureds were contained in its contract with them. Negligence and breach of fiduciary duty are torts – wrongs that are independent of contractual obligations. If the contract covered all of the agency’s obligations, then the insured could not claim tort damages. Florida courts recognized a rule that created a boundary between contractual obligations and tort liability. With few exceptions, where two parties were in a contract, one could not successfully sue the other for torts.
The appellate court referred the question of whether the insured could recover from The agency to the Court of Appeals. That court considered the history of the rule, which had historically applied only to product liability cases but had expanded over the years to apply in other situations. The agency maintained that the rule should apply to an insurance brokerage’s services, while the insured said it should apply only to product liability.
A divided Court of Appeals sided with the insured. In the majority’s opinion, “… expansion of the rule beyond its origins was unwise and unworkable in practice.” They returned its application to product liability cases only, preventing The agency from escaping liability under the rule. Two justices on the court disagreed, calling the decision a costly expansion of the use of tort law. Nevertheless, the majority’s view prevailed, and the case against The agency proceeded. Another court would have to decide whether The agency was negligent.
Ironically, it appears that The agency gave its insured correct information. If The agency made a mistake, it was in giving the insured its own opinion of the policy’s provisions, rather than requesting confirmation from the carrier. When a loss occurs, it is usually better for agents and brokers to let the carrier determine how coverage applies. That way, any mistakes will not be the agent’s fault.
The moral for agents: Be very careful when interpreting coverage for insureds after a loss occurs. A wrong statement can be costly.