Katrina, Sandy and Harvey – What Have We Learned and What Can We Do Better? (Part 2)
Katrina, Sandy and Harvey – What Have We Learned and What Can We Do Better? (Part 2)05.02.2018
In my blog last month, I started and will now continue looking at lessons learned from E&O claims that followed Hurricanes Katrina and Superstorm Sandy and how the insurance community responded to Hurricane Harvey with the goal of reducing the likelihood of such claims in the future and enhancing the prospect of a successful defense as to those claims that are made. After last month painting the landscape in which an insurance agent operates following a natural disaster focusing on what plaintiff’s lawyers are saying and the decisions that Courts are issuing, I now turn my attention to specific E&O claims that could be expected following a natural disaster, before next month proposing service standards as a risk management tool and managing client expectations.
As with E&O claims in general, insurance agents are faced with upset and frustrated clients whose life may have been turned upside down and are looking for someone to blame (other than themselves) and compensate them for the insurance they do not have or to fill in the gaps for missing or insufficient coverages. The claims generally fall within the failure to procure or failure to advise categories, and arise from the fact that many hurricane claims are denied because it is determined that the loss was due to flood instead of wind. In such an instance, clients may claim that (i) they requested flood coverage, but the agent failed to act; (ii) they were told that the regular homeowner’s policy covered damage due to flooding; or, (iii) they were told that flood coverage was not needed as their property was not located in a flood zone or not otherwise needed.
Alternatively, a client believes he or she has wind coverage in place but, at the time of the loss, learns that is not the case. This could arise from a number of scenarios since insurance agents do not have the authority to bind coverage under various state and federal insurance plans which depending on the jurisdiction are not generally effective until the application and/or premium payments are received. As an example, lenders require evidence of insurance before closing in a real estate transaction. Unlike under homeowner policies where binders are ok because coverage can be bound by the agent without premium payment, such binders are meaningless in wind and flood coverage situations if the payment and/or application was not received by the plan at issue. Banks will allege that binders led them to believe that coverage was in place, and look to the insurance agent to cover the uninsured loss. While this is understandable, it is equally preventable with an agent providing a quote and evidence of coverage that will be in place once the premium and/or application is fully processed.
Even if a client’s claim is fully paid by the policy, the possibility of an E&O claim against the agent still exists. In this connection, a client could allege an agent assumed an enhanced duty to advise and guide. This could involve the agent determining or assisting the client in calculating coverage limits whether, for example, through the use of a cost estimator with the possibility of not taking into account improvements/betterments or considering the impact of a coinsurance penalty. A client that has a homeowners and a flood policy could provide a fact pattern for an example of this type of claim. Most dwelling limits on a homeowner’s policy increase annually to account for inflation but not so with wind or flood policies. Thus, after several renewal cycles, the dwelling limits could be quite different and, in the event of a hurricane, there may be insufficient dwelling limits. I am not suggesting there is legal duty to assure the limits are consistent, but good business sense and best practice would be to have clear documentation regarding how the limits were initially established and, at renewal, inquire in writing whether a limit change needed on the wind or flood policy to match the increased HO policy.
Finally, while the majority of catastrophe related E&O claims arise from personal lines, some claims are made by commercial clients. The most common commercial claim relates to business interruption coverage and claimed loss of income. Typically, a client (i) declines to obtain business interruption coverage to keep the premium lower, or instructs that business interruption limits be obtained at a limit that is insufficient to match potential losses.