A typical situation where a retail agent needs outside help obtaining coverage involves at least four players – the insured, the retail agent, a wholesale broker and the insurer. When things go wrong, it’s a safe bet that each player will point fingers at the others. That is what happened when a building in New York caught fire.
The insured was a company located on Long Island that accepted construction and demolition debris for sorting and shipping to recyclers. Until September 2013, their building was insured under one insurance company’s program. That month, the wholesale broker who had arranged the placement learned that the insurer had ended the program and that the policy would not be renewed. The retail agent completed a new application for commercial property insurance and sent it to the wholesale broker, who forwarded it to an underwriter with another insurer.
The underwriter wrote an email to the wholesaler to ask about the types of waste products that the location handled, whether recycling was done there, the types of waste being recycled, and asking for three to five years’ loss history. The wholesaler responded that the waste was “mostly construction debris,” that debris was shipped to a recycler and not stored at the insured’s building, that the building was “100% sprink[lered],” and that they had no losses during the one year the wholesaler had obtained coverage. He promised a “no loss letter” and said that loss runs had been requested.
The carrier issued a policy effective two days later, insuring the building for $2,514,000. The declarations described the premises as a “Construction Debris Transfer Station.” The policy contained a warranty in which the insured represented that recycling was not performed on the premises, nor were hazardous materials handled there.
The insurer hired a firm to inspect the property. Four weeks after the effective date, the inspection report stated that the building had a non-automatic sprinkler system connected to a fire department and did not have an automatic fire detection system. Photos showed piles of debris and waste inside the building. In response, the underwriter’s manager instructed him to “get off this account” and to obtain facultative reinsurance on the building for losses in excess of $250,000 until the coverage terminated. The underwriter decided asking the wholesaler to replace coverage would be faster than buying reinsurance and sending cancellation notices.
Four days later, the building burned and was eventually demolished. The insurer investigated and denied coverage, voiding the policy entirely, claiming that the insured had made misrepresentations on the application. The insured sued the carrier and agent, the carrier sued the insured and the agent, the agent sued the carrier and the wholesaler, and the wholesaler sued the agent.
The judge dismissed the cases against everyone except for the carrier. She found that the information on the application the retail agent completed was consistent with what the insured told them. Further, while the carrier’s underwriting guidelines stated they would not insure recycling operations, different people within the company gave different definitions of “recycling” in their depositions. Finding that the term “recycling” was ambiguous, she held that the retail agent could not have misled the carrier when its own employees could not agree on the word’s meaning.
This agency accurately completed an application, submitted it to a trusted wholesale broker, and trusted that the broker and the carrier would communicate clearly. There was not much within the agency’s control that could have prevented the ensuing litigation. Other agencies should follow this one’s example – accurate completion of applications with documentation backing up the statements made on them.
