Join Us this Wednesday & Thursday for an Online & Interactive E&O Class.
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This course will discuss the common types of errors and omissions that insurance broker/agents make in the transaction of insurance. The course uses the acronym PRIDE to instruct on how to avoid common mistakes. PRIDE stands for: procedures, regulations, implementation, documentation and education. Following the class, the participants will be in a better position to identify their exposure to making errors and how to implement procedural safeguards.
1. Overview of E & O
3. Regulations and Requirements
4. Implementation of Procedures
Wednesday & Thursday
September 12 – 13
Two Day Class for CE Credit
The “Courts” view of Under Insurance Cases
The Good, the Bad and the Ugly!
We are going to start with the good which is hard to find in cases of “under-insurance”. The good news is that California, at least, has learned its lesson after years of massive fires; earthquakes; and, we can’t forget, riots. Whether natural disasters or man-made we have seen our share of CAT losses and learned firsthand what underinsurance; incorrect insurance or failure to place coverage, at all means when a major loss occurs.
So, what is the good news? The good news is that last year, the California Department of Insurancepassed and enforced new regulations that require all insurance agent/brokers that write residential insurance to take a class specifically in residential valuation and comply with new regulations for estimators and record maintenance. This regulation was made as a direct result of a demand made against the California Department of Insurance by the claim ravaged insureds of the San Diego fires to go after the culprits—the insurance
representatives—who sold (or didn’t sell) the correct coverage. This is good news because now the agents have the tools to use for estimators and a better understanding of the legal requirements.
This is clearly NOT a California problem only. As I write this article, my TV is updating the status of Hurricane Isaac. It was only a month ago that Colorado was hit by wildfires where insurers expect to pay out nearly $450 million to victims of the Waldo Canyon and High Park fires according to the Rocky Mountain Insurance Information Association. Whether it is a single property loss or one classified as a CAT loss, the insurance industry faces the question of whether the insurance written was adequate from both a coverage and limit perspective. The majority of these claims come from homeowners who have lost their homes.
The “bad news” is that no matter how well we try to write the residential coverage to value, it is a guessing game at best. Let’s begin with the basics: how do we decide what limit to write for a homeowner? Here are a couple of the methods or a combination of approaches:
1. An escrow company or bank demands that a certain limit be written to cover the loan on the policy
2. An insured may request a limit of insurance to cover the amount they paid for the home
3. An insured might request the same limit that the prior homeowner had on their policy
4. The agent or representative may base the amount on the issuing insurance company’s worksheet. What we have all experienced is that there can be a significant difference from one company to another as to the amount of insurance that is being required. What do we do then?
5. The agent or representative may base the amount may provide a secondary cost estimator based on other resources such as Marshall & Swift which provides yet another amount for the home insurance
6. The agent or representative may personally go out and inspect the property and do an on sight estimator. The reality is that most individuals in the insurance industry have minimal knowledge of what goes in to a home inspection
7. On rare occasions there is a formal appraisal performed for insurance purposes—again another number then the one we calculated with the insurance company’s estimator
8. And we cannot forget the plea from our insured to write the very lowest amount possible so they can save money. Trust me they will not remember that discussion when the house burns to the ground.
Regardless of how we determine the values, all methods have one common element which is that amount of insurance is probably too low to handle a total loss that involves all the unknown costs we never took into consideration. This coverage deficiency is especially true in a loss that involves more than just a single home, such as in the wildfires or hurricanes, where the cost of reconstruction skyrockets with the escalated cost of labor and shortage of materials. To make these matters worse, the other coverages provided in the Homeowners Policy are percentages of the limit that was set on the Dwelling—if that amount was underinsured then the other limits may prove inadequate, as well.
The good and the bad……
The insurance industry solution to the chronic problem of underinsurance in residential property was twofold: Guaranteed Replacement Cost or Extended Replacement Cost.
• Guaranteed was basically a limitless policy for the Dwelling—“guaranteeing”, as the title suggests “full replacement cost”. But that form fell short of “full replacement cost” or any guarantee. We learned that the hard way in the aftermath of San Jose, California fires when we first “learned” that “guaranteed” did not mean the policy guaranteed to pick up the cost of all the new ordinance or laws in affect at the time of loss. This left the insureds without funds to bring their homes up to the building code requirements mandated for replacement.
• The use of “Guaranteed Replacement Cost” on residential is not readily available by most carriers. Even if the companies are saying they are writing “Guaranteed Replacement Cost”, they are most probably issuing an Extended Replacement Cost Endorsement referred to as ERC. ERC extends the coverage over and above the policy limit by a percentage indicated in the policy. Typically 25% is the minimum increase. The Extended Replacement Cost does NOT include Building Ordinance which must be written for a separate amount of insurance typically by endorsement.
You are sued. Short and simple, the claim did not go well and your client has decided to sue you and anyone else they can name in the lawsuit. Discovery now begins often times going back years and years when you first wrote the coverage. You will answer such questions as:
1. Who set the limit of insurance initially (very possibly does not even work for you anymore)
2. Who else was involved in setting limit during the term of the policy (we are talking everyone who touched that file AND the producer(s) who spoke with the insured.
3. Was the insurance reviewed annually and a new estimator completed and reviewed?
4. Is there a clear documentation trail? We are talking not just the old fashion hard copies but all the laws regulating electronic discovery.
5. Did the insured ever receive any of the estimates in writing? This is now required by law in California but best practices was that we always provided our insureds this information
6. Did the insured acknowledge receipt of the estimator and verify in writing that the amount was acceptable?
The reality is that, in most cases, insureds rely on their insurance agent/broker to set the policy limit and to make sure they are “fully” covered. However, the general rule is that an insured is responsible for the establishment of the policy limit. Case law in California has, historically, been kind to the insurance agent or broker in finding that they do not have the “duty” to suggest or volunteer that an insured should purchase higher limits or additional coverages. (Fitzpatrick v. Hayes, (1997) 57. Cal.App.4 916. So far this sounds like good news but it is about to get “Ugly”
There are important cases that were decided before Fitzpatrick v. Hayes that weighs heavily on the obligation of the insurance agent/broker in setting limit. One of the most important was Jones v. Grewe (1987) 89Cal.App.3rd 950. This case involved third party liability and the court held that an insurance agent could NOT be held liable for failing to obtain sufficient limits on a third-party liability policy. The Jones case held that an agent could not reasonably forecast the upper limit of liability that an insured might need. The case went on to reason that if liability were extended to agents for not obtaining sufficient liability limits that it would amount to an insurance agent being put in the position of an excess insurer. It is important to remember that this case dealt with liability and not setting limits on property.
In 1992, the Jones decision was followed by Free v. Republic Ins. Co (1992) Cal.App.4th 1726. This case involved a homeowner who specifically asked his broker whether his policy limits were sufficient to cover his home for a total fire loss. The broker affirmed that he was “fully insured to value”. The insured sustained a loss for which he did not have adequate limit and sued his broker. The broker was held liable. In the Free v. Republic case, the court made a distinction about “misrepresentation” in setting limits on a first party (property coverage) as opposed to a third party (liability coverage) as held in Jones v. Grewe. The court reasoned that a broker/agent can objectively determine the amount of replacement cost value for a dwelling in the event of a total loss which is not the case of the subjectivity concerns in a third party policy.
In 1996 the court ruled in Desai v. Farmers Ins. Exchange, (1996) a47 Cal.App.4th 1110. In this case the insured requested that his agent provide him with “100% coverage” for his home in the event of a total loss. The insured issued a policy for $150,000 which included earthquake and there was no Guaranteed Replacement Cost provision. The insured suffered damage in the Northridge Earthquake with a cost to repair the home at $546,757. The court held on appeal that the agent negligently represented that the policy provided 100% replacement cost and that the language in the policy representations found in areas such as the “value protection” clause and inflation protection that gave more credence to the assertion the insured was fully covered. .
Back now to Fitzpatrick v. Hayes. (a997) 57 Cal.App.4th 916, which was referenced in the beginning of this article. The Fitzpatrick case had the precedent cases of Jones, Free and Desai to rely on its opinion. The Fitzpatrick case set the three recognized exceptions, under California law, to the general rule of whether agents and brokers could be held liable for under insurance. The general proposition is that an insurance agent does not have a duty to volunteer to an insured the need to procure additional or different insurance coverage UNLESS one of the three following situations occurs:
1. The agent misrepresents the nature, extent or scope of the coverage being offered or provided;
2. There is a request or inquiry by the insured for a particular type or extent of coverage; or
3. The agent assumes an additional duty by either express agreement or by “holding himself out” as having expertise in a given field of insurance being sought by the insured.
In looking through these criterion, and understanding that only one has to apply for an agent to be held liable, it is easy to see how an agent could fall in the trap. The questions would be:
1. Did the agent represent to the insured that the limits were adequate
2. Did the insured specifically ask the agent if they had adequate coverage; full coverage; 100% coverage or any other qualifier of this type.
We spoke earlier of the practice and requirement that agents use insurance company’s estimators to arrive at a minimum amount of insurance to be offered the insured. As we go through this process with our insured, it clearly gives them a false sense of security that we know what we are doing. It is an understatement that we have to be cautious as to how we communicate the estimator’s figures—emphasizing this is an “estimator” and this is an “estimate” only NOT an appraisal of property. What the Fitzpatrick case cautions us is that if the insured requests full coverage or questions the agent to affirm that the coverage is adequate, and we say “yes” that the agent will fall within one of the Fitzpatrick exceptions. There are, of course, situations where an insured never spoke with their agent about the policy limits. This may not get us off the hook, however. This lack of communication may be because the insured has relied on the insurance agent’s expertise in the area of estimating the value and did not feel they had to get any further involved. Even though the agent may not have had any oral or written communication concerning values; courts will check to see if there is any advertising, such as on a website, or other promotional materials that would portray the agent as “holding himself out” as being an expert. The reality is that the very first thing we do, as expert witnesses, is check out the agent’s website to read the representations that are being made.
The cases cited in this article are from California; however, every state has their own case law as relates to an agent or brokers responsibility for underinsurance. The legal issues we discussed here will be the same issues that each of the cases of underinsurance will contain. I believe that other states will follow the requirement set by the Department of Insurance to mandate education and regulate how records are to be maintained.
The Good, the Bad and the Ugly was a lot funnier when viewed as the movie about a bounty hunting scam to find a fortune in gold buried in a remote cemetery. (stared Clint Eastwood, Eli Wallach and Lee Van Cleef in 1966). Unfortunately, there is no humor in a court of law regardless of what state you are from.
Laurie Infantino AFIS, CISC, CIC, CRIS, ACSR, CISR
President, Insurance Community Center
The first time anyone heard of a “continuous trigger” decision was back in 1995 when the California Supreme Court issued its ruling in the Montrose case. This created a watershed moment for underwriters, claims adjusters, agents and insurance buyers alike. The result of this decision was the insertion of “known loss or damage” language into the insuring agreement of the General Liability policy, first by an endorsement in 1997 and subsequently included the next published ISO edition. There is a new decision by the California Supreme Court that will have an impact on the method of claim payments for continuous or repeated injury or damage. Clearly this is significant for construction defect and some products liability claims. Although these decisions are California jurisdiction, anytime there is a significant court decision anywhere in the country, form revisions and exclusions often follow. In order to discuss the latest decision, State of California v. Continental Insurance Company, it is appropriate to go back to that original decision and others that followed to have a contextual understanding of how these decisions have cumulatively affected coverage and claims and will continue to do so for quite some time.
Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 655
Montrose was named as a Potentially Responsible Party in the EPA’s mandated clean-up of the Stringfellow Superfund Site in Riverside County, CA. When this PRP notification was received by Montrose, they notified their Environmental Impairment Liability carrier but not their General Liability carrier, Admiral. When litigation subsequently commenced against Montrose, not only by the Federal government for environmental damage, but other injury and damage claims by individual litigants, Montrose then turned to their insurance carrier, Admiral Insurance Company for defense. Admiral declined, stating that the manifestation of these losses occurred upon notification of the PRP status, which occurred during a time that Admiral was not Montrose’ insurance carrier. At that time, adjusters were using a “manifestation” trigger of a single liability policy to pay ongoing injury or damage claims. The judicial review of the policy obligations to defend an insured took almost a decade to complete. The 1995 decision by the California Supreme Court provided a strict interpretation of the policy language regarding the policies that are required to defend. The Montrose court applied a “continuous” trigger for continuous or progressively deteriorating injury or damage. This means that all insurers, beginning at the point a reasonable person believes that the injury or damage first began, all insurers during the subsequent injury or damage period and concluding when legal liability has been imposed.
To use a simple illustrative example: A water pipe is damaged during construction and over the next 6 years the property sustains water damage. It is first noticed by the property owner in 2010. Under the old claims guidelines, the 2010 policy was triggered. Under the “continuous” trigger, all of the policies from 2006 through 2010 are triggered. If the damage continues past 2010, all insurers will continue to be triggered until legal liability has been imposed.
This ruling left several coverage questions unaddressed:
1. Does this decision apply to damages?
2. Can the insured stack their limits of insurance over the entire continuous time period?
3. What happens if the insured has a time period for which they are not insured during the continuous injury or damage period?
4. How does this decision affect allocation of defense and damages among the various insurers on any given loss?
5. If the insured has both primary liability coverage as well as excess liability coverage, how does each policy respond?
Each of these questions have been subsequently addressed by either California Appellate Courts or by the California Supreme Court.
Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., supra, (1st Dist., Div. 1, 1996) 45 Cal.App.4th 1, 55-57, 52 Cal.Rptr.2d 690
This ruling held that insurers on the risk must pay the insured 100% of the insured’s liability to third parties even though the insured was uninsured or self-insured for a portion of the time during which “occurrences” were occurring.
Stonewall Ins. Co. v. City of Palos Verdes Estates, (1996) 46 Cal. App. 4th 1810
The Stonewall case deals with a couple of the issues raised above. This case involved a property owner, Papworth, who filed litigation against the City for the ultimate condemnation of his property due to actions of the City over a significant timer period, beginning somewhere around 1971 and continuing until the home’s effective destruction in 1980. The jury awarded Papworth $1,188,791.57 as damages for negligence and nuisance and $1,881,946.70 as damages for inverse condemnation. Judgment was entered for $1,881,946.70. Pending appeal, the underlying action was settled by payment of $1,600,000. Of the $1,600,000 settlement, $350,000 was paid by the City, $300,000 by The Jefferson Insurance Company of New York (“Jefferson”) and $950,000 by Stonewall Insurance Company (“Stonewall”). Other insurers of the City refused to contribute toward the settlement.
The court addressed the following questions:
Question 1: How much of a judgment is the City entitled to recover from each primary insurer?
Question 2: In what proportions are the primary carriers to share in whatever payments any of them made or makes toward the $1.6 million loss?
The Stonewall court concluded: “We find the answer to Question 1 in Montrose ‘s analysis: All primary carriers on the risk are liable to the City (up to the limits of their respective policies, less any applicable deductibles or retentions) for the full $350,000. Inherent in Montrose ‘s conclusion that in cases involving a “continuing injury” trigger of coverage is the principle that damage was occurring throughout the period in question and that all carriers issuing primary policies for dates within that period are fully liable to the insured for the entire loss. Once an injury triggers coverage, … the insurer must indemnify the insured for “all sums” which the insured becomes obligated to pay, whether during the period of the policy issued by that insurer or after.”
Question 2 involves allocation among the primary carriers during the time of the risk. The Stonewall court resolved this question by stating that “because we must consider both principles of equity and principles of public policy, formulating a principle of allocation is no easy task. Equity indicates that all insurers whose policies covered the loss should participate in the cost of indemnifying the insured.” …”Apportionment based upon the relative duration of each primary policy as compared with the overall period during which the “occurrences” “occurred” (the “time on the risk” method).” In this case, the court recognized that there may need to be exceptions to this allocation method and did not make it a mandatory rule to follow in future cases. The court addressed the “other insurance” clause that may appear in the policies in question. If that clause allows for a pro-rate allocation method, then that would dictate apportionment. The court also applied a “horizontal” exhaustion rule, which stated that all of the primary policies would respond, and only after the total exhaustion of the primary policies limits, could the excess liability policies be required to respond. The Stonewall decision also concluded that since the insured is entitled to payment of damages up to the limit of liability, any self-insured (or lack of insurance) is not calculated into this qualified time on the loss.
State of California v. Continental Insurance Company, et al., Case No. S170560
On August 9, 2012, the California Supreme Court issued a long-awaited unanimous decision, affirming that a policyholder is allowed to recover up to the total limits of all triggered policies over multiple policy years and may stack limits across the triggered policy periods.
For the background, we go right back to the Stringfellow Superfund Site. The State of California was held liable for remediation costs (as high as $700 million) and sought to recover from its various liability insurers.
The Supreme Court has now ruled on each of the following points:
• Each insurer during the continuous loss has an obligation to pay the entire claim, even if only part of the damages occur during their specific policy period (“all sums”). The Supreme Court affirmed that once coverage for continuous damage is triggered, the insurer is required to pay for all sums up to the policy limits of liability. It rejected a pro-rata, time-on-the-risk approach. The Supreme Court noted that “It is often ‘virtually impossible’ for an insured to prove what specific damage occurred during each of the multiple consecutive policy periods in a progressive property damage case. If such evidence were required, an insured who had procured insurance coverage for each year during which a long-tail injury occurred likely would be unable to recover.”
• The insured can stack policy limits across the various policy periods, even when coverage is issued by the same insurance company. The Supreme Court affirmed the Court of Appeal’s ruling that a “no-stacking ruling” was erroneous and concluded that the insured was entitled to stack the limits of all triggered policies across all applicable policy periods.
• The court stated that an insurer can limit their exposure by including an anti-stacking provision in their policies
• If the policy contains a self-insured retention, then that SIR must be paid for each policy period
The Supreme Court reasoned that its “all-sums-with-stacking” rule has several advantages:
• It resolves, as equitably as possible, the question of insurance coverage in long-tail injury or damage
• It allows a fair distribution of coverage, paid in annualized premiums by the insured, and allows the insured to receive coverage up to each policy’s liability limits
• It allows recovery from the insurance policies by looking at the entire amount of damages , rather than requiring it to be broken into artificial periods of injury or damage
So, here’s what we are left with:
Many insured’s face long-tail injury or damage losses. Each insurance company providing a policy can be held responsible to pay up to their policy limits but can charge the insured any retention on the policy. There has been a long-standing argument from insurance adjusters on this issue. There is one more case that I did not address above and that is the Armstrong decision that allows the insured to “select” a particular policy to defend and pay damages. Should the insured tender to one carrier for defense and damages and notice only the other possible insurers? In light of this decision, that choice may be moot as it appears that the court will allow the insurers to distribute the claim proportionately, even among their own multiple policy periods. Watch how fast the adjusters use this decision to apply multiple deductibles and multiple retentions, even if notice was tendered to only one policy period.
We are likely going to see “clarification” in the insuring agreement regarding the issue of “all sums for which the
insured is legally liable”. The current policies do not use this phrase and instead state: We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies.
There may well be challenges at some future point on this distinction. Stay tuned.
The court left intact a horizontal application of insurance coverage, requiring the primary policies to contribute their full limits on a pro-rata allocation basis prior to attaching the excess liability policies. There is likely to be yet another long and costly battle among primary insurers vs. excess insurers on this issue.
In the absence of an anti-stacking endorsement, the insured is entitled to stack the policies. That is likely to be the next industry response: an anti-stacking provision that up until this decision, has been omitted from the vast majority of policies. All of these decisions should concern the insurance agent as well as the insurance buyer. From the insurance buyer’s perspective, they need to retain coverage information indefinitely. From the insurance agent’s perspective, filing claims on the insured’s behalf, explaining how a SIR may affect their coverage response as well as the applicability of limits of liability, just got a little more complicated.
Marjorie L. Segale, AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR
President Segale Consulting Services, LLC
Where does that phrase come from, anyway? It appears that there is no definite answer to that question. One writer believed it came from an ancient Roman proverb and that the Romans believed that apples had magical powers to cure illnesses. Another source believes the phrase first appeared in a magazine published in Wales: Notes and Queries. The article referred to a Pembrokeshire proverb that read ‘Eat an apple on going to bed, and you’ll keep the doctor from earning his bread.”
Just when you thought you were making a healthy choice, U. S. A. Today reported on 8/10/12:
“Sliced apples distributed to fast-food and grocery chains nationwide are among packaged products being recalled due to possible listeria contamination. No illnesses have been reported, but listeria was found on equipment used to produce apple products by Missa Bay LLC, owned by Ready Pac Foods Inc. of Swedesboro, N.J. Packaged apple slices distributed to McDonald’s and Burger King in some states are included in the recall as are packaged food containing apples distributed to Wawa convenience store and Wegman’s grocery chains and some “Ready Pac” products. Recalled products have use-by dates of July 8 through Aug. 20. Missa Bay announced the voluntary recall on Friday, saying the food went to 36 states and the District of Columbia.
So, the salient point – who pays the cost for this? Wawa, Wegman’s or McDonald’s? Believe me, when you know the incredible costs of recalling a product, everyone is going to be running for the exit. Suddenly, the purchase orders are checked by all of the various parties. Knowledgeable retailers have distribution contracts with either the manufacturer directly or with the distributor. Because they often receive so many products, the issues of hold harmless agreements, including recall costs, often goes unaddressed. Ultimately, the original manufacturer will be held responsible, but if that has not been made clear between retailer, wholesaler and manufacturer, it could be happy times for the lawyers. The reason the manufacturer will be held responsible goes back to the implied warranty inherent in product liability: the product will be fit for its intended use. The courts view this obligation through the lens of strict liability, which requires no negligence to be proved. Res ipsa loquitor: the thing speaks for itself. If the product is received by the distributor from a non-U. S. company, the distributor will “step into the shoes” of the manufacturer.
So, what is involved in recall? First, the product, including unit or lot number must be identified at all retail locations. Next, the product must be removed from all consumer access. The product must then be returned to the responsible party for testing and then either distributed back to the marketplace or destroyed. Of course, this step also involves the cost of transportation and storage as well as the actual cost of destruction. Clearly this involves significant payroll expenses and can also result in loss of revenue for the entire stream of distribution. All of these costs and loss of income will be sent to the manufacturer for payment.
Notice that the question does not ask about insurance. That is because the majority of retailers, wholesalers and manufacturers do not have any coverage for these types of expenses and loss of product. The general liability policy does NOT respond for any of this. The only solution available is a Product Recall policy. Too bad that this coverage is not understood, translated to the client in a coverage offer with facts and costs included. Since this insurance coverage is not widely distributed, the premiums remain high. Creating a broadened marketplace, fostering competition and thereby driving down the cost of the insurance is driven by the sales of a product by producers. Historically there has been a lot of adverse selection in this area of insurance and that will continue to keep prices high for this insurance coverage. For any producer out there – this can be an area to have a serious discussion of risk exposure with your client. Review their contracts and find out if there is either a transfer of risk, acceptance of risk or if there is simply nothing in the contracts about this issue. Determine if your client is the position of reducing their risk of loss, transferring it to someone else, implementing loss control or funding the risk protection with insurance. Bear in mind, the bad press that results from this is challenging for everyone involved and can adversely affect the company for months or years to come. This is particularly true with food borne illness. For the food industry, the coverage for the extra expense of advertising as well as the resultant loss of income has an extremely narrow marketplace, but there is coverage for brand restoration available. Part of these costs can be picked up in a broad product recall policy as well.
Now that I have to be extra cautious eating apples I decided to google an alternative—french fries and vodka to see if they have had recalls or lawsuits alleging they were dangerous to your health (other than the obvious). And to my surprise, both french fries and vodka have had their share of law suits. So I guess the choice is ours.
Laurie Infantino AFIS, CISC, CIC, CRIS, ACSR, CISR
President, Insurance Community Center
Marjorie L. Segale, AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR
President Segale Consulting Services, LLC