When a business purchases insurance on a building, who is responsible for selecting the limit – the insured or the agent? A Michigan building owner tried to hold their agent responsible after a fire destroyed the property.
The building was a 300,000 square foot warehouse. The original owner was a limited liability company (LLC) formed by a single individual; the agency had written the insurance throughout the LLC’s 30 year history. In 2009 the LLC sold a 50% interest to another LLC owned by a separate individual. The insurance policies covered both owners from then on.
According to the appellate court’s opinion, the policies always insured the building on an actual cash value (ACV) basis. The first owner later testified that he would read the policies when he received them from the carrier. He also testified that he knew the policies stated that the carrier would determine the building’s value at “replacement cost minus depreciation.” However, he also claimed that the agent told him at least “15 times” that, regardless of the words in the policy, the limit was sufficient to pay for replacing 250,000 square feet should a loss occur. He also understood that the appropriate amount of insurance was determined by the carrier.
The agent denied having told the insured that the limit was enough to replace the building. He also said he had no way to independently determine the building’s replacement cost and therefore could not have made the promises alleged by the insured. The insured admitted he took no steps to independently determine the replacement cost, claiming it would have been a “monumental task.”
A fire destroyed most of the building in December 2019. The insureds determined that it would take $13,860,000 to rebuild it to accommodate the needs of their tenant. The purchased insurance limit left them with a shortfall of more than $7,000,000. When the tenant balked at a rent increase to make up for the shortfall, the insureds decided not to rebuild.
In 2020 the insureds sued the agency and the producer for breach of contract and negligence. They claimed that they were led to believe that the insurance limit would be sufficient for a reconstruction that varied from the original building because it was old, too expensive to rebuild with original materials, and the wrong size for the tenant. The agency argued that they had no duty to advise the insureds as to whether their limits were adequate. Since they had no way to determine whether the limits were adequate, the insureds could not show that the agency did not follow professional standards.
The trial court agreed with the agency, the insureds appealed, and once again lost.
The agency, the court said, obtained the insurance that was requested. The problem was that the insurance carrier miscalculated the appropriate limit. “Accordingly,” they wrote, “there was no breach of defendants’ duty to procure because … defendants did procure the policy but were misled by (the carrier) regarding the sufficiency of the coverage.”
One thing that might have prevented this dispute is use of a “functional building valuation” endorsement. It provides a solution between full replacement cost and ACV. It permits the insured to purchase a limit lower than full replacement cost but that is adequate to rebuild a structure differently. It is appropriate for older buildings that have obsolete or expensive building materials or that are larger than they need to be for the current use. If the insureds’ carrier had such an endorsement available for use, it may have been appropriate for this situation.
The agency won the suit and the appeal, but a 30-year relationship was ruined, so the dispute still cost them. To prevent disputes like this, agents should work closely with knowledgeable underwriters to find creative solutions that meet insureds’ needs. That will demonstrate agents’ value to their clients and help keep them out of courtrooms.
