The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | July 27, 2017 • 4 min read

Court Rules for Agent in Duty of Care Case

In November 2013, two truckloads of copper were stolen from trucks owned by now-defunct Atic Enterprises Inc., which transported general freight.

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Atic had an insurance policy with Westchester Fire Ins. Co., sold to it by Cottingham & Butler.

When Atic purchased its initial policy, covering the period of July 2012 to July 2013, it never informed Cottingham & Butler that it transported copper, instead listing that it transported canned goods, paper products, nonalcoholic beverages and general merchandise.

When a renewal of the policy was discussed, Cottingham & Butler sent a side-by-side comparison of the proposed 2013-2014 policy and the 2012-2013 policy. The newer policy explicitly excluded copper (a change from the prior policy), but Atic did not update the cargo it transported to include copper.

When the two truckloads of copper were stolen, the claim was denied. Atic filed a lawsuit against the insurance agent, claiming negligence, arguing that Cottingham & Butler owed a duty of care to the insured, that it breached that duty and that the breach caused the insured’s damages.

The U.S. District Court for the Western District of Kentucky dismissed Atic’s claim. On May 23, the U.S. 6th Circuit Court of Appeals agreed with that decision.

“We find that Cottingham & Butler had no such additional duty [of care] under Kentucky law, and even if it did, that the company satisfied that duty,” the appeals court ruled.

It noted the insurance agent sent many documents to the trucking company notifying it of the copper exclusion, even though the trucker did not admit that it transported copper.

It also noted that a “duty to advise” an insured occurs when the insured pays the agent consideration beyond a mere payment of premium; where there is an extended period of time which would “put an objectively reasonable insurance agent on notice that advice is being sought and relied on;” or when an insured clearly asks for advice.

None of those factors occurred in the case, the court ruled.

Scorecard: The insurance agent was not negligent when a copper theft claim was denied.

Takeaway: Since Atic never informed the agent that it was hauling copper, the agent had no reason to further advise the trucker about the exclusion.

Professional Services Not Covered Under Policy

Morningstar Consultants Inc. was hired to inspect construction projects of Centex Homes. Its alleged failure to competently do that resulted in property damage to certain construction projects and lawsuits in eight states for negligence.

Morningstar sought defense and indemnification from State Farm Fire and Casualty Co., which had issued it commercial general liability policies from 2000 to 2012, and again from 2012 to 2016.

State Farm declined, citing provisions in the policies for damage or injury related to “rendering or failure to render any professional services or treatment.”

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Morningstar filed a lawsuit charging the exclusion is inapplicable because it holds no professional licenses, and that the exclusion, if enforced, would “render the … policies meaningless.”

State Farm countersued, seeking to dismiss the lawsuit. The U.S. District Court for the District of South Carolina upheld State Farm’s motion on May 24.

The court ruled that Morningstar’s arguments were “implausible,” noting it offered no argument to back up its claim that the lack of professional licenses would impact the insurance policy. It also said that the CGL policies provided other coverages regardless of its professional services exclusion and thus, were not meaningless.

Scorecard: State Farm does not have to defend or indemnify the building inspector.

Takeaway: The professional services exclusion was unambiguously listed in the policies.

Debris Removal Not Covered by Flood Endorsement

In October 2012, a Long Branch, N.J., apartment complex owned and managed by Oxford Realty Group Cedar, CLA Management and R.K. Patten LLC, (“Oxford”) suffered flood damage from Superstorm Sandy.

Oxford filed a claim with Travelers Excess and Surplus Lines Co. under a flood endorsement to a property policy that provided flood coverage limited to $1 million. Oxford filed a $1 million claim for flooding and $208,000 for debris removal costs.

Travelers paid Oxford $1 million, and rejected the debris removal claim, saying the policy was limited to $1 million for flood damage. In April 2014, the New Jersey Superior Court ruled in favor of Travelers, finding the policy to be unambiguous about coverage limits, and that the $500,000 additional coverage for debris removal listed in the policy “must yield” to the $1 million coverage for all losses caused by the flood.

That decision was reversed by the N.J. appellate division, which ruled the $1 million cap only applied to Oxford’s buildings, rather than an insured occurrence, and that Travelers must pay for the debris removal. The state’s Supreme Court reversed again, on May 25.

“Although the policy assigns debris removal a coverage sublimit, it does not constitute a self-contained policy provision outside the application of the $1 million flood limit,” the court ruled.

Scorecard: Travelers does not have to pay $208,000 for debris removal costs.

Takeaway: The flood endorsement “controls the extent of flood coverage and it is not modified by the rest of the policy’s terms.”

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]