E&O Spotlight: Insuring Commercial Properties? Important Issues to Watch For

Most agencies write some degree of commercial insurance. There is a good chance that insuring the building is part of the overall program for these commercial exposures. Unfortunately, as demonstrated by the following claim, numerous issues can occur with this type of exposure.

An agency secured coverage for a building owner who leased part of the premises to a customer. The rest of the building was vacant. A fire occurred when a vagrant, sleeping in the vacant area, knocked over a candle. The building sustained damage in the area of $1 million. Following the fire, the carrier denied coverage and started a rescission action claiming: 1) the application stated the building was fully occupied; 2) the square footage was twice as much as what was reported on the application; and 3) the application stated the building was fully renovated when it was not.

The carrier used an inspection company that did not report the above discrepancies. The agent apparently knew the square footage and vacancy responses on the application were incorrect. The client demanded $500,000, and the claim was settled for just over $400,000, with the errors and omissions (E&O) carrier and underlying insurance carrier splitting the settlement amount. What could the agent have done better? Let’s take a look.

Visit the Premises

It is always advisable to visit the risks. This will help in the marketing of the account to the various markets. Doing a “walk through” with the customer present can help you identify any issues that could cause marketing challenges. It would also enable you to ask some key questions dealing with a multitude of issues, such as occupancy, the plans for the building, when the last time the wiring was updated, etc.

Document the questions — and answers — not only in your file, but also in an e-mail/letter back to the customer. This will help address any misunderstandings in communication. In this case, it is possible the agent would have seen evidence of the vagrant occupying part of the structure.

Be Honest With Carriers

While this sounds like common sense, this unwritten rule is, unfortunately, not always followed. That is a shame because the basis of the relationship between the agency and the carrier is built heavily on trust and honesty. It appears in the claim example that the agent knew the information on the application was incorrect. Were they thinking, “if I tell the carrier the truth, they probably won’t write the risk”? Probably. But that is no excuse.

Secure a Signature on the App

It appears from the customer’s response that they were unaware of what the agent put on the application. A good approach to take that has significant potential in the defense of an agency is, after completing the application, requesting that the customer review it and, if everything looks in order, having them sign it. In virtually all jurisdictions, a customer is responsible for the contents of a signed application. If the customer misled the agent in this case, the outcome of the claim would have been much different.

Valuation

With all due respect to the various approximator tools in the industry, it is almost a “garbage in, garbage out” scenario. The quality of the input definitely determines the quality of the output. Square footage is a key component in conducting a valuation. Through a personal visit, you should be able to pick up on a square footage discrepancy of this magnitude.

Don’t Rely on Inspections

Should the inspection company have picked up on some of the issues? Probably, but that might depend on what they were asked to look at. Bottom line, it is the agent’s responsibility to understand the risk and present it accurately and honestly to the carrier.

Since these risks can vary, using one of the various Exposure Analysis Checklists is a great starting point.

You don’t have to do anything wrong to get sued, but taking preventive measures could help you reduce the likelihood of a claim like this happening to you.

Topics Carriers Agencies Commercial Lines