On the Hook for Property Undervaluation
If an insured suffers an underinsured loss, whose fault is it?
According to Marshall & Swift/Boeckh, more than 60% of U.S. homes are undervalued by an average of 25%. In some cases, according to MS/B, as much as 73% of an agency’s book of homeowners business may be undervalued by an average of 35%. The problem isn’t just limited to homes. According to MS/B, 75% of commercial buildings could be undervalued by an average of 40%. If an insured suffers an underinsured loss, whose fault is it? According to one recent court decision, in some cases, it could be the agent’s.
In Martinonis v. Utica National Insurance Group, the Massachusetts Court of Appeals held the agent might be held liable for failure to adequately insure a home based on the long-term relationship between the agency and client wherein regular reliance on the agent’s advice and assurances regarding policy limits created a special relationship.
The agent obtained a homeowners policy for the plaintiffs whose home was subsequently destroyed by a fire. The policy liability limit of $469,000 was paid in full by the insurer. The plaintiffs contended that the actual damages were $1,164,012.43 and that the agent was negligent in failing to advise them to obtain higher limits. The trial court awarded summary judgment in the agent’s favor.
The Court of Appeals reversed, stating: “[T]here is no general duty of an insurance agent to ensure that insurance policies procured by him provide coverage that is adequate for the needs of the insured…[however] in an action against the agent for negligence, the insured may show that special circumstances prevailed that gave rise to a duty on the part of the agent to ensure that adequate insurance was obtained.”
The insureds presented facts demonstrating a long relationship with the agent (almost 10 years), including procurement and advice on insurance policies placed with him on a variety of other properties, that led them to rely on his expertise. The agent had previously advised the insured that their contents limit was inadequate and, following his advice, they increased that amount. However, they contended that, after expressing concerns about their dwelling limit, the agent assured them that the limits were proper.
They thought the $469,000 dwelling limit was too low. The assessed value of the house was around $400,000 and the insureds expressed concern that the assessing authorities were slow to catch up with market value. They also knew that houses in their area were selling for over one million dollars.
According to the Court of Appeals: “There is no general duty of an insurance agent to ensure that the insurance policies procured by him provide coverage that is adequate for the needs of the insured…The agent does not, in general, have a fiduciary duty to the insured in this regard…Nevertheless, in an action against the agent for negligence, the insured may show that special circumstances prevailed that gave rise to a duty on the part of the agent to ensure that adequate insurance was obtained.”
In the court’s opinion, the plaintiffs presented adequate evidence of such special circumstances, in opposition to the agent’s motion for summary judgment, to create a genuine issue of material fact on that issue. Their testimony about the long relationship with the agent, the reliance placed on his review of the adequacy of their insurance, his specific assurance on past occasions in response to inquiries that the policies had adequate limits of liability, and the specific assurance in this case that the limits were proper, were sufficient to defeat a motion for summary judgment.
The agent’s defense rested largely on the fact that no separate compensation in addition to normal commissions on premiums was requested by or paid to the plaintiffs to reflect the services he rendered in supplying counsel and advice. However, according to the court, the absence of separate compensation does not mean that special circumstances giving rise to a duty of care did not exist. The facts were enough to create a material issue of fact in the eyes of the court as to whether special circumstances exist on the issue of duty sufficient to survive summary judgment.
Bill Wilson (firstname.lastname@example.org) , director of the Big “I” Virtual University