All of a sudden, bedbugs are hot. But what could bed bugs possibly have to do with an article dealing with errors and omissions? As it turns out, quite a bit. I recently put out a request regarding the availability of coverage for damage to property as a result of insect infestation or rodent damage. I received a number of responses corroborating my opinion that coverage is and was available. In addition, many of the respondents wanted to know if the issue related to bedbugs.
Related: Read "Reality bites."
My issue was not bedbugs, but rather damage by insect infestation on a commodity during transit and in storage at a covered a warehouse. I am researching a case where the proximate cause of damage to the commodity was insect infestation. The client requested coverage for all possible risks that might occur to his property while being warehoused and in transit. The insured’s agent responded by providing his client with an "all risk" inland transit policy with a warehouse extension. The inland marine policies, like most property policies, contain an exclusion regarding damage by insects and rodents. What happened next is obvious: The insured shipped its products to a customer, who discovered damage by insects after receiving the product. To make matters worse, subsequent investigation revealed insect damage to inventory owned by the insured at the covered warehouse.
A properly documented claim was made and denied based on the exclusion in the policy. Just as darkness follows daylight, the insured instituted litigation against his agent, alleging the agent did not provide the coverage requested, never explained the exclusion and never advised that the coverage requested was not available.
It is too early in the course of the litigation to have an idea of the outcome of this matter. Nevertheless, subject to further discovery, the agent clearly has problems because the coverage requested was available and not only did the agent not provide the coverage requested, he also did not explain the key exclusions in the insurance contract he provided to his client.
Before you sit back and relax because this is an uncommon type of claim, let me remind you that vmost property policies, including homeowners’ policies, have similar exclusions. Look at the subject line of an e-mail that is currently being distributed to attorneys across the country: "Fourmile Canyon Fire Insured Losses Highest In Colo."
Headlines like the above are unfortunately very common these days. Our Colorado expert is acutely aware that in the past few weeks approximately 170 homes, some of them very high value, were destroyed in one fire and two in three homes were destroyed in a second fire. Finally, as this article is being written a third wild fire is getting started
State Farm, the largest home insurer in the state, is estimating the losses at approximately $75 million. In contrast, a recent newspaper article indicates that $217 million in claims have been filed. One does not need to be an expert to realize that there are going to be many upset insureds. This situation creates a "perfect storm" example of a problem waiting to explode.
Most homeowners’ policies sold today have a replacement cost endorsement that means that damaged construction and contents of the home will be replaced based on "new for old," with the maximum payment not to exceed the policy limit. The catch is that in order to be paid based on "replacement value" the policy limit must be at least equal to 80 percent of the value of the replacement cost. Unfortunately, once the insured purchases his or her homeowners’ policy, it is filed in a safe place and not looked at until a problem or a claim arises. Likewise, insurance agents, once they have sold a policy, frequently move onto the next client and the policy is placed in a file cabinet. The policy renews each year automatically and little thought is regularly given as to whether the agency clients are properly insured. Based on our experience with prior catastrophe losses such as Hurricanes Ivan and Katrina and the Hayman wildfires, we believe that at least 50 percent of the insureds do not have sufficient insurance to replace the destroyed homes.
Companies and nonprofit organizations are rallying to support and provide discounted services in an effort to make the rebuilding process as easy and cost-effective as possible. We to would like to support your clients who undoubtedly are facing litigation possibilities. Toward that end, we are offering a no-cost-no obligation consultation to our attorney clients. This offer would be very beneficial to attorneys evaluating litigation issues. In our opinion, underinsurance and standard of care undoubtedly arise once people realize they do not have sufficient insurance to rebuild their home. Our team and our associated experts have extensive experience dealing with a proper valuation of a home, the duty of the insurance agent to maintain insurance and the overall claim process. Please call upon us we look forward to working with you and your clients.
At this point, if this was a seminar instead of an article, I would be asking the audience to raise their hands if their clients were aware of the exclusion for insect damage or if they thought their agency had done a good job of making sure that property replacement values reflected current costs. If audience members were being honest, I am certain there would be darn few hands raised.
Back to bed bugs
Now back to the question: What do bedbugs have to do with errors and omissions?
I have always found that when difficulties were facing the insurance industry, it usually created an opportunity for new sales and establishing closer relationships with your clients. This is one of those opportunities. If your clients read a newspaper or listen to television, they are aware of the bedbug problem. This is a great opportunity to communicate with your clients and let them know about the exclusion and possibly suggest a solution if available. Of course, at the same time you might suggest increasing the building and personal property limits to reflect higher replacement cost. If you undertake such a program you have done a service for your clients, almost certainly created new business and gone a long way to reducing the agency’s exposure to litigation.
A challenge
Because of our experiences with catastrophe loss claims, it is no surprise that insufficient limits of insurance are a significant issue in most catastrophe losses. Therefore, I propose a challenge directed to the honest readers of this article who did not raise their hands indicating that they thought that their policyholder clients were familiar with key exclusions in their insurance contract or they thought that client property insurance policies reflected current replacement values. I challenge you is to devote time over the next 3 months reviewing your policyholder records to determine whether your clients have been properly advised regarding policy terms and conditions and proper policy limits. If you take the challenge and let me know what you find, I will publish the results in my April column.