Agent Potentially Responsible For Failing to Insure to Value
One of the most commented upon topics presented by this Blog has been the question of co-insurance, or insurance to value, and where liability lies when there in an improper valuation. Although not specifically dealing with co-insurance, I commend to your reading the case of English Mountain Retreat, LLC. et. al. v. Suzanne Crustenberry-Greg, et. al., a case decided by the Eastern Section Court of Appeals on September 21, 2010. In this case, a building owner had contacted an agent and inquired about insurance. The agent made a couple of visits to the property and, during one visit, presented a proposal with her recommendations as to different coverage limits for the various buildings involved. With respect to one of the buildings, which was subsequently destroyed by fire, the agent used what she described as the “accepted practice" of multiplying the square footage of the building by the cost to replace one square foot to obtain the replacement cost. The agent testified that she typically requires the customer to provide the square footage of the property, but in this case could not recall how the square footage figure was determined. As it turns out, her proposal included an estimate of the square footage of the property that was only off by approximately 4000 square feet, resulting in the building being underinsured.
The Trial Court dismissed the case upon directed verdict by finding, in part, that the building owner’s reliance upon the insurance agent's recommendation was not justified because the owner should have had independent knowledge of the value of the building. The trial court also found that there was an absence of proof of financial loss. The Court of Appeals reversed and remanded for a full trial.
Click here for a full PDF version of the opinion (PDF).
Answering Questions Posed About Valuation for Purposes of the Co-Insurance Penalty
We have had some excellent comments and questions on the topic of co-insurance, and specifically whether there can be any “iron-clad” or “black and white” rules as to who is responsible for any undervaluation. Obviously, the readers are concerned as to who, between the applicant/insured and the agent or company, should be held responsible for the valuation of the property.
There may be some “hard and fast” rules in some jurisdictions, but for the most part, the answer as to who will be responsible is – it depends! If an applicant approaches an agent, and affirmatively represents the value of property, and the agent or company takes no step to assess the property’s valuation, then the likelihood is that the insured would be responsible for any undervaluation. This should be true even if the applicant is basing his or her opinion as to the value of the property on a real estate appraisal done in the course of obtaining financing, a tax assessment (which almost always undervalues the property), or any other type of valuation. The point here is that, as between the agent and the applicant, the only person discussing valuation is the applicant.
However, experience shows that agents and companies are often involved in the valuation of property. For instance, most agents today can run a replacement cost calculation based upon the square footage, the type of construction, and the location of the property. If we were to assume that an applicant contacted an agent, and stated that he or she did not know the value of the property (if, for instance, it was inherited),and asked the agent to run a valuation on the property, then who should be responsible if the coverage is issued for that amount,? In my mind, that is going to be the agent’s responsibility, and the carrier is probably going to be estopped to contest the insurance to value of the property, such that the co-insurance is not going to be applied. In another instance, as our readers know, Tennessee’s valued policy law provides a 90 day period during which a company can inspect the property and assign a different value to it than that contained on the application. I have seen his inspection change the value of the insured property on only a few occasions, but the point for consideration here is that a valuation specifically placed on property by the insurance company within 90 days of the issuance of the policy should estop the insurance company from contesting the value of the property when a loss occurs shortly thereafter.
The bottom line is that there is really no rule, in my opinion, that will govern each and every case without regard to the facts. It is extremely important to assess who (as between the applicant and the agent/insurer) placed the value on the property. If the applicant had sole responsibility for placing the value, then the applicant should be responsible for an undervaluation. If the agent or company placed the value, then the company probably should not be able to assert the undervaluation of the property (presuming that the insured provided correct and accurate information). If it was a mixture of the two, it is going to depend on the circumstances.
