Every insurance transaction arranged by an agent or broker carries some risk. Most of the time, things do not go wrong, but they could. The insurance company could run out of money. The client could fail to pay the premium. The insurer could deny coverage because of an exclusion or some condition the insured did not meet. The client could withhold the truth about the property or operation. The insurer and the policy could turn out to be the wrong match for the client.
This last possibility was the case for some agents in Maryland. It turned out to be a costly error.
A married couple owned several commercial properties in Baltimore. All were in high risk parts of the city and had been partially vacant at times. The couple asked their insurance agent to arrange coverage. The agent in turn contacted a wholesale surplus lines broker. The broker obtained coverage from a non-admitted insurer.
The policy conditions required the insureds to maintain on the properties automatic sprinkler and fire alarm systems and central station burglar alarms. The policy would not cover fire losses if they failed to do so. Also, the policy would not cover vandalism losses in any building that had been vacant for more than 60 consecutive days before the loss.
A few weeks after the policy took effect, vandals trashed two sections of one location and knocked out power to it. Three of the building’s six sections were vacant at the time. The building also lacked the required safeguards. Two months later, fire damaged another building, which also did not have the safeguards. A month after that, the first building was vandalized again. The insured submitted claims for damages and lost rents totaling $668,421.
The insurer denied all of the claims. Instead, it declared the policy void because of “misrepresentations, omissions, and concealments” by the insureds, their agent and the wholesaler in the application process. The insurer asked a court to declare that it had no obligation to pay the claims. The insureds sued the insurer for breach of contract and the agent and broker for failing to procure appropriate coverage.
The trial court dismissed the insureds’ claims. It found that the policy provisions were clear, that any negligence on the agent’s part did not cause the loss, and that the wholesale broker was not the insureds’ representative. The insureds appealed.
Regarding the case against the insurer, the insureds argued that the vandalized property was actually one building in multiple sections. The insurer considered the sections to be separate buildings, each with its own safeguard requirements and vacancy clause. The appeals court sent this question back for a jury to decide.
However, the court reinstated the claims against the agent and the wholesaler. It ruled that the wholesale broker may have acted as the insureds’ agent in obtaining the coverage, for three reasons:
· The insureds had some control over the broker through their agent
· The broker was acting for the insureds’ benefit
· The broker had the authority to bind the insureds to coverage.
The court also found that the agent’s and wholesaler’s negligence may have caused the loss. The insureds produced testimony that some other insurers might cover large, vacant buildings. They also provided evidence that lack of occupancy sometimes affects only the premium, not the coverage. They also showed that the insurer providing their coverage sometimes covers such buildings.
For all these reasons, the court sent the claims against the agent and the wholesaler back to a jury for fact-finding.
Both the agent and the wholesaler made key mistakes in their handling of these properties.
· They could have done a more diligent search of the market for insurers who would have provided coverage without the safeguards or vandalism clause.
· They could have done a better job communicating to the clients the conditions that had to be met for coverage to apply.
· They could have better informed the insurer as to the nature of the properties and the protections (or lack thereof) they had.
The producers in this case were potentially on the hook for $668,000 in losses. Agents handling any business, especially high-hazard business, should follow careful procedures to avoid the same fate.