Property Insurer Liable for Shortfall in Policy Benefits Promised by Agent, Due to Unexplained Effect of Coinsurance Clause

A Florida state Court of Appeal reversed the dismissal of a claim for negligent procurement of property insurance, because, when placing the coverage, the insurer’s agent failed to account for a reduction in insurance loss proceeds caused by operation of a coinsurance clause in the policy issued. The decision, filed May 10, 2017 is reported as Kendall South Medical Center v. Consolidated Insurance Nation at 2017 Fla. App. LEXIS 6571.

As explained by the court, an insurance policy “coinsurance” provision divides the risk of loss between insurer and insured, by imposing a “penalty,” or partial forfeiture of property insurance proceeds, that depends on the relative dollar amounts of the policy and the actual value of the property insured. When a coinsurance provision applies to an insured loss, the insurer does not pay the full amount of the loss, but rather that amount reduced in proportion to the extent the subject property is underinsured. Here, the coinsurance clause required 90 percent insurance to value to avoid any forfeiture of loss proceeds.

As alleged by the policyholder in this case, the facts were that Kendall South Medical Center operated a medical center on leased premises located in North Miami Beach, Florida. In 2013, a leak occurred in the building sprinkler system, resulting in water damage to physical improvements made by Kendall and equipment and machinery it used.

Kendall South sued the management company of the leased property for its loss, and the management company responded that Kendall South had failed to maintain sufficient insurance on the premises to comply with the parties’ lease agreement. In a subsequent complaint, Kendall South sued the company that performed the work on the sprinkler system and still later Kendall South sued its own insurer, Consolidated Insurance Nation, Inc. dba Insurance Nation, for its agent’s negligence in failing to procure $100,000 of property insurance coverage for the medical center’s physical improvements and contents.

Stating the well-recognized claim against an agent for failing to provide coverage after agreeing to get it (Harnett, Responsibilities of Insurance Agents And Brokers (Lexis-Nexis, 2016), § 3.03 [“An insurance agent or broker will be held to what she undertakes to do.”]), Kendall South alleged that it had met with Insurance Nation’s agent in 2011 in order to obtain a commercial property policy in the amount of $100,000 that would cover the property, equipment, supplies and improvements of Kendall South. At that meeting Kendall South told the agent that its premises contained office equipment, supplies and furnishings exceeding $100,000, together with betterments or improvements of the medical center costing more than $100,000.

After so informing the agent, Kendall South requested him to procure coverage of $100,000 to cover the property, supplies, furnishings, betterments or improvements of the medical center. Kendall South alleged that the agent promised to procure such a policy.

Left unstated by the court was whether the policy Insurance Nation issued contained Florida’s consumer protection, statutory warning under Florida law (Fla. Stat. § 627.701(1)) of the negative consequences to the insured of a coinsurance clause. Without the warning, the clause would have been void and of no effect (United States Fire Ins. Co. v. Roberts (1989) 541 So. 2d 1297, 1300), so it may be inferable that the warning was present.

The sprinkler water loss occurred after the policy was renewed on the same terms in August 2012. The damage caused by the sprinkler leak exceeded $260,000, but the policy provided coverage in the amount of only $16,562.67, less than 7 percent of the loss amount, because of a $1,000 deductible and the penalty exacted by the policy’s coinsurance clause. It was the penalty that became the basis of Kendall South’s lawsuit against the insurer. It appears that, to avoid a coinsurance forfeiture, Kendall South would have been required to purchase more than $1.4 million of property insurance.

In some jurisdictions, the problem of underinsurance is generally laid at the feet of policyholders for not ordering enough insurance for their needs. (See, e.g., Harnett, Responsibilities of Insurance Agents And Brokers (Lexis-Nexis, 2016), § 3.05, fn. 1 [insured’s responsibility to advise agent what policy limits insured wants]; Everett v. State Farm (2008) 162 Cal App 4th 649, 660 [it is up to the insured to determine whether he or she has sufficient coverage for his or her needs]; Gibson v. Government Employees Ins. Co. (1984) 162 Cal App 3d 441, 452 [it is insured’s own obligation to order sufficient insurance to satisfy his or her expectations]. Fitzpatrick v. Hayes (1997) 57 Cal.App. 4th 916, 927 [agent has no duty to volunteer to insured that he should procure additional or different insurance coverage].) In the health insurance context, the principle has been stated, although in a state chief justice’s concurring and dissenting opinion, “The role of an insurer should be to provide clear, accurate and adequate information to its insureds; once it has done so, it should not have to act as a paternalistic overseer.” (Sarchett v. Blue Shield of California (1987) 43 Cal 3d 1, 18 (Chief Justice’s dissent).)

Kendall South, however, avoided these negative judicial formulations by alleging that the insurer, through its agent, had a duty to procure coverage as the insured had requested, and a duty of reasonable care to explain the policy of insurance bought on Kendall South’s behalf. These duties were allegedly breached, the complaint alleged, when the agent of the insurer negligently failed to procure the insurance ordered (2 Witkin, Summary of California Law (10th Ed.), Insurance § 20(3)), and did not explain to Kendall South how the operation of the coinsurance clause could defeat its expectations.

“As a general rule, when the agent of the insurer acts in an authorized and nontortious manner, he cannot be held personally liable to the insured for acts undertaken on behalf of a disclosed principal” – here the insurer. (Harnett, Responsibilities of Insurance Agents And Brokers (Lexis-Nexis, 2016), § 3.03[4][b].) The rule may be the opposite in California, where a defendant insurance agent – but not the insurer itself – has a duty to use due care in filling an order for insurance. (2 Witkin, Summary of California Law (10th Ed.), Insurance § 23.) But see Lippert v. Bailey (1966) 241 Cal.App. 2d 376, 382 [agent not liable to insured for negligent performance as agent of insurer].)

The insurer, on its behalf, claimed that Kendall South was attempting to manufacture a broker’s liability claim against the insurer, even though it had received the insurance it requested and never specifically asked for a higher level of insurance despite the value of its office equipment.

“When an insured sues the insurance agent or broker for failing to procure adequate or an appropriate insurance policy, the agent will frequently assert as a defense that the insured had a duty to read the insurance policy, and having failed to so, is barred in whole or in part from recovery against the agent. Often the application of the duty to read defense depends on whether the agent procured the coverage that the insured requested, failed to procure the coverage requested, made any representations, or owed a fiduciary duty to advise.” (8 ALR 6th 549.)

These rules have particular relevance here, where the insured renewed the original policy as is, so the insured was twice duty-bound to read its terms before the sprinkler loss occurred.

The Florida Court of Appeal concluded that the allegations made by Kendall South sufficiently stated a cause of action against the insurer for negligent procurement of insurance. Kendall South alleged that once it informed the agent that both the physical contents and the improvements were each valued at more than $100,000, and that Kendall South wanted to procure just $100,000 of insurance, it was incumbent upon the agent to apprise Kendall South of the effect of the coinsurance clause, and to explain that different coverage was required to satisfy Kendall South’s desired amount of insurance.

The Court of Appeal explained that it was not implying that an agent or broker has a general duty of knowing and/or valuing the contents and improvements of premises before procuring or renewing commercial property insurance. Nor was it a case holding that an insurance agent has a general duty to explain a coinsurance clause to the policyholder before issuing a policy containing one. “Rather, when an insured alleges that it specifically communicated its insurance needs to an agent who then undertook to procure a policy addressing such needs, the insured states a cause of action for negligent procurement if it also alleges that, without providing an explanation that different coverage was required, the agent procured a policy not meeting those expressed needs.”