Sep 15, 2017

Court: Broker negligent in underestimate of insurance coverage

In a recent court case, an insurance producer was found to have negligently advised a client concerning the insurance coverage limits required to replace the client’s bowling alley and its contents in the event of a total loss.

The case of Loyle v. Greater New York Mutual Insurance Co. and Brouwer, Hansen & Izdebski Associates involved the total loss of Loyle’s bowling alley due to arson perpetrated by a rival bowling alley owner. An appraisal conducted after the fire revealed the replacement cost for the building and its content was $6,395,247.32. However, Loyle’s policy only provided replacement-cost coverage and business interruption coverage totaling $3,825,000. Loyle sued its insurance broker, BHI, for the difference between the policy limits and the actual cost of replacing the building.

At trial Loyle argued that BHI was negligent in failing to recommend an appraisal of the bowling alley after the carrier in this case, Greater New York, raised the coinsurance requirement and because the building coverage had been the same since 2004. Further, Loyle argued that BHI had breached its duty to Loyle by advising it that no further insurance was needed on the property despite renovations to the property and Loyle asking if an increase was needed. After the trial, a jury found that BHI was negligent in its underestimate of the insurance needs of Loyle and awarded Loyle $2 million.

BHI appealed the decision, but did not challenge the finding that it had breached a duty to Loyle. Instead, BHI made a host of evidentiary arguments as well as argued that GNY owed a duty to BHI. BHI argued that GNY conducted annual inspections of the property and calculated a replacement value for the building that was used to determine the policy premiums. Therefore, GNY owed BHI a duty to accurately calculate the building’s replacement value.

The court confirmed the jury verdict and rejected Loyle’s argument that GNY owed a duty to either BHI or Loyle. In reaching this conclusion, the court found that GNY did not owe a duty to provide BHI with an accurate statement as no evidence was presented by BHI that GNY agreed to take on the duty of valuing Loyle’s property.

The court went on to say that a fiduciary duty exists between a producer and client in part because the producer is sophisticated in the field of insurance and the client is not. In the case of a producer and a carrier, there is no similar imbalance of sophistication. Further in the present case, there was no evidence that BHI relied on any determination by GNY concerning the replacement of Loyle’s building when BHI advised Loyle that no additional coverage was required.

While this decision did not focus in great detail on the duty a producer owes their client, producers should take care that when providing replacement-cost figures, coverage amounts and/or appraisals that they are accurate.