In most states, the insured has a duty to read and know the contents of a policy. Many insureds still rely on their agents for information about their coverage, and trouble can ensue if the information provided is wrong.
An Iowa limited liability company (LLC) owned a vacant building that had once been a nursing home. In June 2007, the property insurance policy on the building was cancelled. The mortgage lender pressured the owners to obtain replacement insurance.
Two of the LLC’s members searched for new property coverage but found that standard markets were uninterested. They turned to an independent insurance agency which submitted the risk to a brokerage. The brokerage obtained a quote, the LLC asked for coverage to be bound, and the insurer issued a policy starting in September. The policy included an endorsement that excluded coverage for losses caused by leakage from an automatic sprinkler system.
One of the LLC members received a copy of the policy, read it, and was “comfortable with the coverage it provided.” Neither he nor any of the other members objected to the extent of the coverage, nor did they ask the agency to obtain sprinkler leakage coverage.
That fall, the insurer performed a loss control survey of the building. The sprinkler system’s main drain had not been tested in three years; the insurer recommended regular testing to minimize the exposure to fire loss.
Two weeks later, the agency’s producer exchanged emails with one of the brokers. The producer claimed that the brokerage had indicated that the insurer’s recommendations about fire extinguishers and the sprinkler system “could be ignored since the building is rated as a vacant structure.” The broker disputed that account. A week later, the producer wrote to the LLC that fire extinguishers weren’t required but testing of the sprinkler system’s main drain was.
The insurer renewed the policy in 2008 with no significant change in coverage. In October, the LLC members told an agency employee they wanted to drain the sprinkler system so they could completely vacate the building. The agency told them that any future losses would be uninsured if the sprinkler system did not pass inspection.
That December, the sprinkler system in the unheated building froze and burst. The insurer denied coverage based on the sprinkler leakage exclusion. The agency later determined that the insurance policy did not have a “protective safeguards” endorsement requiring the LLC to maintain a working sprinkler system to continue coverage. In October 2009, the LLC sued the agency for negligence and negligent misrepresentation of the policy’s terms, kicking off seven years of litigation.
A jury awarded the LLC $351,784. However, the judge found that the jury awarded the cost of restoration, not the amount of the building’s diminished value, which was at most $115,000. He ordered a new trial. The agency then asked the court to rule in its favor based on the law, which the court did, and the LLC appealed. However, because the agency had not been paid to act as an insurance counselor to the LLC, the appellate court ruled in the agency’s favor.
Although the insured had a duty to read the policy, the agency gave them inaccurate information about what it required. The insured left water in an unheated building’s sprinkler system because the agency told them they would have no coverage if they didn’t. That was untrue, and the LLC suffered an uninsured loss because of it. The agency should have contacted the insurer’s underwriter to verify what the effect of a drained sprinkler system would be. That might have avoided the entire problem.
