Carrier Loans Money to Claimant for Damages, Collects from Negligence Suit Against Broker

A California appellate court ruled that an insurance brokerage owes its client $461,795.24 for malfeasance in litigation that was financed by an insurer against its own producer, involving damages to a house owned by a church that was intended to house a pope.

A panel of 1st Court of Appeal on Monday reversed a trial court decision and found that SBC Insurance Services in Los Altos, Calif. was liable for professional negligence to St. Mary’s and St. John Orthodox Coptic Church in its purchase of an insurance policy from Philadelphia Indemnity Insurance Co.

The policy contained a clause that voided coverage if the house was vacant for more than 60 consecutive days. When the church discovered a water leak that damaged the house 57 days after closing escrow, the Tokio Marine unit refused to pay.

Instead, Philadelphia Indemnity loaned the church enough money to cover the damages, on the condition that it be repaid from any funds it collected through litigation against SBC.

Attorney Margaret Miglietta, a partner with Cummins & White in Newport Beach, said the arrangement was an “innovative” way of handling a sensitive claim.

Miglietta said the appellate court’s ruling is important because it affirmed that the agreement to finance the litigation was appropriate. The decision was also significant, she said, because the 1st Court of Appeals found that a vacancy clause in a commercial property policy includes time that passed even before the property was purchased, which is why the water damage to the church’s house was not covered even though the church had owned the property for only 57 days.

“I researched this case across the country and I could not find any case with this issue,” she said.

The insurance claim that started the dispute has a long back story.

The Coptic Orthodox Church was founded in Alexandria, Egypt in 43 A.D. The pope of the church lives in Egypt, but many of the faithful have emigrated to the United States and established local congregations. There are 38 Coptic churches in California alone.

In 2014, the church asked the St. Mary and St. John Church in Pleasanton to find a house that could serve as the pope’s residence in the western US. It would also accommodate visiting bishops.

St. Mary’s found a suitable home in a gated community that surrounds the Ruby Hill Country Club in Pleasanton, a suburb in the San Franscico Bay area. The church closed on the sale in May 2015, in plenty of time for a visit planned by the pope in October 2015. The house would remain vacant in the meantime.

The family that founded St. Mary’s and continued to serve on its board of directors had used SBC Insurance Services for decades, so it was only natural that the church would ask the brokerage to bind a policy for its new papal residence. Erika Berumen, a commercial account manager, “exercised broad discretion” and placed the house on the church’s commercial insurance policy rather than purchasing a separate homeowner’s policy, according the the appellate court’s opinion. She filled out and submitted an insurance application without first submitting it to the church for review.

Miglietta said any vacancy clause would have been far less restrictive if SBC had purchased a homeowner’s policy.

“Your insurance agent needs to ask the right questions to protect the insured,” she said. “In this case, we had a sophisticated broker and they blew it.”

The church reached an agreement with Philadelphia whereby the insurer would loan enough money to cover the damages, but make no admission that it owed coverage for the claim. Under the agreement, St. Mary’s would repay the loan from any award in a professional negligence lawsuit against SBC. Philadelphia would manage the litigation.

The church filed a civil complaint in Alameda County Superior Court. Judge Paul D. Herbert found that SBC had breached its duty of care, but there were no damages to the church because the water damage to the house was covered by Philadelphia’s insurance policy. The judge ordered Philadelphia to pay $372,215.44 for damage to the home, $40,000 for loss of use and $49,543.80 for remediation — a total of $461,759.24.

Philadelphia appealed. The appellate court agreed with the insurer that it is not liable for damages because of the vacancy clause.

“Vacancy provisions like the one at issue, which bar coverage for loss occurring in a property that is vacant for a certain period of time ‘before that loss or damage occurs,’ have been found to be clear and unambiguous in specifying that they apply retrospectively from the time of loss rather than prospectively from policy inception,” the court said.

The Coptic Orthodox Church’s website shows that Pope Tawadros did visit the United States as planned in October 2015. Church officials did not return calls when asked to comment.