Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

Peter Biging wrote two articles on this topic over the past week, Courts Shield Agents, Brokers From Added Duties To Procure Coverage, and Special Circumstances May Mean Agents, Brokers Owe Greater Duties. Both should be read and placed into research files if you have an interest in these cases. His checklists are excellent.

Biging wrote that courts are not expanding insurance agent duties to procure coverage without proof of a special circumstance:

It follows then, as a general rule, that absent special circumstances, an insurance agent or broker has no special duty to advise customers what coverage to obtain, or to provide continuing advice or guidance with regard to coverage procured.

An insurance agent or broker’s basic duty of care is simply to obtain the coverage that has been requested. If the agent or broker cannot procure the requested coverage within a reasonable timeframe, then the producer must tell the customer that he or she cannot do so. But that’s it.

The rationale that guides this general principle is that the agent or broker should not be placed in the position of being the guarantor of the sufficiency of the customer’s coverages. (See related textbox, “Becoming Special.”) While insureds are making efforts to get courts to read the basic duty of care more expansively, recent decisions indicate courts are not taking the bait.

While I do not think many unsuccessful agent error and omissions cases presented sufficient evidence of the respective agent’s duties and the training and reasonable expectations that were the impetus for such duties, Biging’s checklist, though from a conservative point of view, is an excellent list of factors policyholder attorneys can use to determine if a case is viable. It provides:

• When the agent or broker has been asked for specific advice or guidance on a coverage issue and provided it.
• When the agent/broker has undertaken special duties in handling the customer’s account.
• When the broker has agreed to accept or has charged special compensation in addition to the standard commission for advice/guidance with regard to coverage.
• When the agent or broker has held himself out as an expert, and knows or has reason to believe that the customer is relying upon his expressed expertise with regard to a coverage issue.
• When the agent/broker and the customer have a relationship of such significance in terms of time, trust and reliance that the agent/broker should know or have reason to know that the customer is relying upon his advice with regard to coverage issues.

From a public policy standpoint, insurance agents should not be viewed as mere order takers. Most agents are licensed and trained and are expected to do something more than simply take orders from a largely ignorant consuming public. Obtaining factual information that establishes an agent’s duty and special circumstances that show a client’s reasonable reliance on that duty is paramount to establishing whether an insurance agent can be held accountable when coverage does not exist.

Most insurance agents claim to provide special service: determining the needs of customers and "making certain" customers are insured for the unexpected. Unless an agent is selling on price alone, it would seem that many agents are promising to provide one type of relationship at the point of sale and avoid accountability for it later. The following ad is typical of what many good, hardworking and accountable agents promise to do -- at a minimum -- for their clients: 
 

Sometimes, agents imply they can do even more and are special agents as indicated in this funny promotion:

Insurance agents and brokers should be especially cautious with insurance to value calculations. They should explain the importance of insuring a structure to full replacement cost and explain the consequences for the failure to do so. From what most policyholders tell me, as well as my own experience, the discussion of insuring to value often goes something like this:

Agent: “Joe, we have to place on the application how much insurance you need.”

Joe Policyholder: “I just hope I can afford what you are about to quote me.”

Agent: “Well, how much is your building value if you had to replace it?”

JP: “I don’t know. How much did I have it insured for last year?”

Agent: “A little more than a million, $1.23 million. Have you made any improvements since last year?”

JP: “We added some computer wires, made a new conference room, and upgraded the air conditioning for our IT Department. I think all that would be around $200,000. Maybe we should add that amount to what we had from the year before? Didn’t the carrier send out a guy to look at the building? What did he say?”

Agent: “I cannot seem to locate it. Do you feel comfortable if I insured it for $1.45 million as the replacement cost? If you feel that is the right amount and can replace the property for that, I can get some quotes with cheaper premiums if you agree that you have insured to 90 percent or 100 percent of the full replacement cost value. You have to be sure about the amount of insurance or there ca be a penalty if we get this discount for you.”

JP: “Great. Gosh, I didn’t know we could save money just by insuring to the full replacement cost. Fantastic! Thanks.”

Now, most agents reading this will say they go into far greater detail. Many do, and I have seen a number of in depth discussions and proposals fully explaining everything. But, I have also been in clients’ offices while the insuring value is discussed. Often, my hypothetical is not far off from what I have heard. Policyholders want great coverage at great prices. Many agents simply want sales. Sometimes, both choose to ignore the small details of exactly how the product works and the grave importance of insuring properly because price is higher and agent shopping may ensue.

Christopher Boggs, a CPCU, wrote an excellent article last week, Applying Coinsurance to Homeowners' and CPP's, that is simply a must read for agents and brokers because of his warnings regarding possible claims of errors and omissions claims. Policyholders and adjusters can also learn a lot from it as well. The possible claims against agents for leaving policyholders with a 100 percent coinsurance policy could not be clearer:

“The commercial property policy allows the insured the option to use 80%, 90% or 100% coinsurance. As the coinsurance percentage increases, the property rate (or loss cost) decreases. But should 100 percent coinsurance be used?

From an errors and omissions perspective, probably not; using 100 percent coinsurance leaves no room for an incorrect calculation which requires the insured to always have 100 percent of the value in force. Even attaching the inflation guard endorsement may not give the insured adequate coverage at the time of the loss.

Commercial property policy insureds also have the opportunity to write all property coverage under a blanket limit of protection. Blanket limit policies are the preferred method when the insured is trying to avoid undervaluing a particular class of property or a particular property location (especially if there are several properties or contents moving among several buildings or locations). However, use of a blanket limit requires the minimum coinsurance percentage be increased to 90 percent.
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But, as stated above, even though the property is valued at 100 percent of its TIV, do not increase the commercial client's coinsurance to 100 percent (even though there is a slight premium break). Use 90 percent to avoid most miscalculation problems and allow some room for an unexpected increase in replacement cost.”

This is excellent advice. It is very difficult to accurately estimate the replacement cost of a significant structure. Even bids for construction can wildly vary. How much should anybody really bet on any one estimate getting the replacement cost just right?

Another useful tip was to use “agreed values:”

“One approach CPP insureds can employ to avoid the application of coinsurance is "agreed value." As the name suggests, the agreed value is the value the insured and the underwriter agree the property is worth. Attaching the agreed value endorsement suspends the coinsurance provision for one year. At the end of the year, a new schedule must be submitted and a new agreement reached.”

The last thing a policyholder wants is to have a loss. Having a loss where the claim is not paid in full will undoubtedly cause issues about why enough insurance was not obtained. My view is “safe is better than sorry.” I suggest when it comes to coinsurance, it is the best policy.