A New York independent insurance agency, given a prospective client’s declarations pages, quoted a replacement policy based on that information and nothing more. The result was an errors and omissions liability lawsuit after a powerful storm damaged the insureds’ properties.
The agency insured two adjoining buildings, owned by one entity and leased to two affiliated entities. The buildings had an open floor plan with a pathway between them that permitted the occupants mutual access to each. In the summer of 2011, the agency replaced the insureds’ coverage with a new carrier. The insureds instructed the agency to obtain similar coverage to what they had before, but at a lower premium. The prior policy provided flood insurance with a limit of $1,000,000 and a deductible of $10,000. The replacement policy provided the same flood limit but a $25,000 deductible.
The policy’s flood coverage endorsement made coverage contingent upon coverage available from the National Flood Insurance Program (NFIP.) The amount the carrier would pay depended on whether:
- The loss was covered by an NFIP policy
- The property was eligible for NFIP coverage but no NFIP policy was in effect
In either case, the carrier would pay only the amount in excess of the maximum amount the insureds could purchase from the NFIP, which was $500,000. Although the two buildings were located in a community that participates in the NFIP (New York City,) the insureds did not purchase an NFIP policy, nor did they ask their agent to obtain one for them.
The carrier extended the initial policy two months and then renewed it for the 2012-13 term. The renewal policy was in effect when Superstorm Sandy hit New York in October 2012. The insureds had to suspend their business operations and suffered damage to their personal property. Although the loss exceeded $2.1 million, the carrier paid them less than $69,000.
The insureds sued the carrier for breach of contract, among other things, and the agency for negligence in obtaining the coverage. The carrier moved to dismiss the allegations of breach of contract and acting in bad faith and dealing unfairly. It also asked the court to prohibit the insureds from recovering because of the policy’s terms and conditions. In an unusual move, the agency joined the insureds in opposing these motions.
The agency asked the court to order the carrier to provide the missing coverage. Alternatively, the agency asked the court to permit it to use the carrier’s defenses to the insureds’ recovery if the court upheld them. The agency also opposed the insureds’ motion to hold it responsible for their lack of flood coverage.
The judge ruled entirely in favor of the carrier but also rejected the claim against the agency. The policy’s terms and conditions, she said, were unambiguous in providing coverage only in excess of that available from the NFIP. She also wrote that, under New York law, the agency had a duty to obtain the requested coverage, if possible, but had “no continuing duty to advise, guide or direct a client to obtain additional coverage.” Also, the insureds admitted that they gave the agency copies of only the declarations pages from their previous policy, not the complete document. Consequently, the agency was unable “to undertake a more comprehensive (comparison) or evaluation of insurance coverage for Plaintiffs’ properties.”
Because New York narrowly defines the scope of an agent’s duties to clients, this agency escaped legal liability for a large uninsured property loss. However, the case illustrates the danger of quoting based simply on what the insured had before. The insureds did not carry an NFIP policy, despite being located just a few blocks from a canal and a bay in Brooklyn. This presented a large coverage gap that came back to haunt them during a powerful storm. While the agent was not legally obligated to discuss purchasing an NFIP policy with the insureds, a documented discussion might have ended this court challenge before it began.
Many insureds will tell agents they want the same coverage for less. The problem is that the same coverage might not be enough. Agents should analyze their clients’ risks and offer suggestions for them to accept or reject.
