A Missouri insurance agency obtained a commercial property insurance policy for a company that had to buy one to insure another party. When the issued policy left that party’s name off, the result was two lawsuits and an appeal of one.
The agency had been retained by a company that operated a bar in a commercial building. The company had a contract with the building’s owner, a real estate company, to purchase the building. The contract held that the title would remain in the seller’s name until the buyer had paid the purchase price of $1,275,000 in full.
Another requirement in the contract was that the buyer would purchase fire insurance on the building in an amount equal to the purchase price. The contract required the buyer to obtain a policy, at its own expense, naming the seller as the insured.
The buyer asked the agency to obtain fire insurance with a limit equal to the purchase price. They also asked for the policy to list the seller as a “named insured, loss payee, additional insured, and mortgagee.” The policy the agency obtained did provide the required amount of insurance, but it did not name the seller as any of these types of coverage beneficiaries. It did, however, include a Protective Safeguards Endorsement. The endorsement:
- Required the property to be protected by an automatic sprinkler system, and
- Excluded coverage for fire losses if the system was not in operation.
It is unclear whether the agency informed either the buyer or seller about the Protective Safeguards Endorsement. However, they did not inform either party that the seller was not listed on the policy as a named insured or any other type of beneficiary.
A year later, the building burned down while the automatic sprinkler system was out of operation. The seller, claiming to have an insurable interest in the property as a “lender,” submitted a claim and proof of loss to the insurance carrier. The carrier responded by going to court, asking for a declaration that the seller was not insured under the policy and was not entitled to coverage.
The seller in turn sued the agency for breach of contract and negligence in obtaining the insurance. Interestingly, their complaint was about the fact that the policy did not insure them as mortgagee. They did not mention the Protective Safeguards Endorsement as a basis for the suit.
A court ruled in the insurance carrier’s favor in the first lawsuit, concluding that the contract for sale of the property did not make the seller a mortgagee under state law. In fact, the court held that naming the seller as a mortgagee “would be a material misrepresentation and would void the policy as a result.” In any event, the court said non-compliance with the requirements of the Protective Safeguards Endorsement would have barred the seller from coverage even if the policy had named them as mortgagee.
A trial court ruled in the agency’s favor in the seller’s lawsuit against them. After they appealed, the appellate court likewise ruled for the agency. The sellers argued that, if they had known that the policy did not cover them as a mortgagee, they would have sought alternate coverage. Accordingly, they argued, the agency’s failure to get a policy naming them as mortgagee caused their loss.
The appellate court rejected that argument, saying, “Noncompliance with the policy, not (the agency’s) failure to notify, barred recovery.”
The court opinions omit some important details such as whether the building’s buyer signed insurance applications that did not request mortgagee coverage for the sellers. Given that there was apparently no dispute about the policy’s inclusion of the Protective Safeguards Endorsement, the parties must have been aware of it.
The lesson for agencies from this case is to document all communications about a policy. Further, an agency might want to educate clients that naming one party as “named insured, loss payee, additional insured, and mortgagee” is redundant and contradictory. The buyers evidently did not understand what they were requesting. Explaining the correct approach and documenting that explanation might not have prevented this suit, but it could have made it less likely.
