Claim Scenarios

A Reporting Slip-Up

An insurance broker secured commercial general liability (CGL) coverage with an insurance carrier for the owner of an apartment building. A third party suffered bodily injury from a slip and fall in the parking lot of the building and filed a lawsuit against the owner and the property manager. The owner reported the claim to their broker. Unfortunately, the broker failed to notify the CGL insurance carrier that would have, in all likelihood, provided defense and indemnity for the bodily injury claim if properly notified. Instead, the CGL carrier denied coverage for late notice. Because no defense was provided, there was a default judgment against the apartment building owner for more than $575,000. Negotiations ensued and a settlement for $250,000 was achieved by Berkley Service Professionals on behalf of the broker (who contributed $10,000 toward the settlement through their deductible). Defense costs were about $15,000.

Lessons learned:

Notice of any incident/claim from a client to an insurance broker should be immediately reported to all appropriate insurance carriers. A notation should be made in the client’s file that the matter was reported and include confirmation of receipt of the incident/claim.

Blown Away by Non-Payment

A wholesale apparel distributor in Florida suffered property damage during a hurricane. When they contacted the insurance provider to file a claim, they were informed the apparel distributor did not have coverage for property and wind damage due to non-payment of the policy premium. Because the policy was established on a direct-bill basis, a notice of cancellation had been provided by the insurance carrier directly to the apparel distributor (the distributor’s insurance broker was also notified). However, the apparel distributor alleged that it called the insurance broker to inquire about coverage prior to the hurricane and was advised by the broker that coverage was in place and paid. Unfortunately, this allegation was confirmed by an email from the broker to the apparel distributor. The distributor had a number of insurance policies and the broker mistakenly advised that the wind coverage policy was still in effect.

The damages proved difficult to assess due to the apparel distributor’s ownership of numerous structures on or near the property and the lack of photographs of the damage. In addition, repair documentation was missing and there was no record of the insurance policy that would have been in place had premiums been paid. An expert was retained and made a site inspection. However, analysis was delayed significantly because of difficulties obtaining prior insurance policies which were in effect to determine damages. After nearly four years of investigation and depositions, negotiations ensued and a settlement for $1.2 million was achieved by Berkley Service Professionals. Defense costs were $27,000.

Lessons learned:

Even when the premium is directly invoiced to the policyholder, the insurance carrier typically notifies the insurance broker when payment is not received. In turn, the insurance broker should contact the client—both verbally and in writing—to ascertain the situation and advise the client of the consequences of non-payment of the policy premium. Further, brokers should use extreme care when responding to a client’s inquiry about in-force coverage.

Be Sure to Ask

A home builder built a custom home in another state and the homeowners made claims of construction defects. The insurance carrier declined coverage as its builder’s risk policy did not cover projects built outside the domicile state of the builder. The builder had not notified its insurance broker that it was constructing homes outside the state but still alleged negligent misrepresentation and negligent failure to procure appropriate insurance coverage to cover this scenario.

The builder settled its lawsuit with the owners for $97,500 (out of pocket) and assigned its rights against the insurance broker to the homeowners. The owners, in turn, sued for recovery of additional funds against the insurance broker including legal fees and other costs of approximately $300,000. Mediation was unsuccessful and the case moved toward trial.

The case ultimately settled on the courthouse steps, after depositions revealed that the builder had repeatedly declined coverage for construction defects, which this case hinged on, and that the insurance broker issued certificates of insurance on the builder’s behalf to an out-of-state lender, which implied the broker was aware of the out-of-state activity. The homeowners accepted a settlement of $160,000, which was in addition to the $97,500 already paid by the builder. Berkley Service Professional also settled with the builder to cover roughly half of its settlement and defense costs for a total of $92,750. In addition, the insurance broker contributed $80,000 toward legal expenses through its deductible.

Lessons learned:

Regardless of what the insurance application requests, an insurance broker should ask where and in what states their client currently conducts or intends to conduct business. The question and response from the client should be in writing and documented in the broker’s files. In addition, when providing certificates of insurance where there are known location exclusions, the requests should be scrutinized before issue.

Over Exposed

A property insurance company denied coverage to a school district for flooding and mudslides that happened to a middle school after a forest fire. The coverage was denied because the type of damages claimed were specifically excluded from the policy.  The school district sued both the property insurance carrier and the broker, in part claiming that the insurance broker did not properly explain coverage. The school district reached a $250,000 settlement with the property insurance carrier but maintained a separate claim against the broker.

Berkley Service Professionals resolved the claim during mediation for $42,500, which was significantly less than the original demand of more than $100,000. The insurance broker paid $21,250, which was within the deductible and Berkley Service Professionals paid the remaining $21,250 due to the policy’s mediation credit. The insurance broker was also responsible for more than $18,000 in legal expenses.

Lessons learned:

Insurance brokers must discuss all potential exposures with their clients and explain what risks are covered under a standard policy and what risks require additional premium. The client should then make the decision as to which risks to cover, what deductible they should choose and how much premium they will pay. Insurance brokers should document the options presented to and discussed with the client, recommendations made by the broker and decisions made by the client.

Careless Consultation

A landscaping company made a claim with their property insurance company for the destruction of $320,000 in materials and business interruption as a result of a winter storm, which had freezing temperatures and caused power outages. The property insurance company denied coverage for loss of inventory and business interruption due to policy exclusions for “extreme temperature” and “property in the open.” Because the loss of materials was excluded by the property insurance company, the business interruption coverage was not triggered. The landscaping company then made a claim against their insurance broker because they had relied on the broker to secure appropriate coverage.

During the claim process, questions arose about the property insurance coverage as the policy did cover “ice” damage and had an endorsement which extended to items 1,000 feet beyond building limit. However, further documentation showed that the landscaping company signed a statement in the insurance application that it had only $50,000 of materials on site. Based on this statement, the landscaping company ultimately settled its destruction of materials claim with the property insurer for $46,000. The business interruption claim was virtually eliminated due to the landscaper’s ability to recover some of its lost business due to dramatic increase in sales after the storm.

The landscape company maintained their claim against the insurance broker for the uninsured portion of the property loss (about $275,000). Without incurring any legal expenses, Berkley Service Professionals negotiated a settlement of $185,000, which helped the insurance broker preserve an amicable relationship with their client. The broker paid this amount directly, as it was within their deductible.

Lessons learned:

Insurance brokers must discuss all potential exposures with their clients and explain what risks are covered—types of claims and dollar values—under a standard policy and what risks require additional premium. In addition, it is important for an insurance broker to know their client’s business very well, which should include personal visits to assess and discuss potential exposures with the client.

Playing Both Sides Can Be Costly

A real estate agent was accused of breach of fiduciary duty and damages in connection with the sale and purchase of a home. In this case, the agent represented both the buyer and the seller, which elevated their fiduciary duty.

In addition to being a dual agent on this transaction, the real estate agent had also handled a previous sale of the property. The buyer alleged that the agent had prior knowledge of a foundation issue and had failed to obtain proper professionals to further investigate an initial inspection report.

The agent and seller both contended that the sales price was below market value, reflecting the items flagged in the home investigation, but this was not documented. While the claim settled for $175,000, the majority was paid by the sellers. Berkley Service Professionals negotiated a settlement for our policyholder for $50,000. Defense costs came to nearly $10,000 and the policyholder contributed $15,000 to the settlement and legal expenses through their deductible. In addition, the buyer agreed to withdraw their complaint filed with the department of real estate.

Lessons learned:

Inspections and related repairs are a frequent source of claims. In this matter, the real estate agent should have documented their discussions with the buyer regarding the home inspection results and obtained a signed agreement that the buyer understood the defects and that the price of the home had been reduced accordingly. In general, agents should keep detailed notes of key discussions, recommendations provided, decisions made, and follow-up required. This advice is particularly important when an agent is representing both buyer and seller. Having good documentation is key in claim defense.

Failure to Disclose

A buyer purchased residential property and alleged that their real estate agent failed to adequately advise them regarding recommended inspections and/or protect him with modifications to the purchase agreement when defects were discovered prior to closing.

Inspections before closing revealed drainage and HVAC issues and the seller was requested to address them. The transaction proceeded to closing and the buyer discovered afterward that the seller had not addressed or had not adequately addressed the issues that needed to be fixed. The buyer alleged that their real estate agent failed to modify the purchase contract to reflect the seller’s obligations prior to closing to ensure that the required repairs had been undertaken.

The buyer’s real estate agent, however, maintains that the buyer was told to have the property re-inspected before closing to ensure the repairs were done. The agent assumed the buyer would do so and because of this did not modify the purchase agreement. Unfortunately, this was not documented in writing and the buyer denies they ever received this instruction.

As a result, the buyer paid more than $75,000 to undertake the repairs and then sought reimbursement from their real estate agent, as well as the seller and the seller’s real estate agent. Since the defense had to rely on a jury believing the real estate agent over the buyer because communications weren’t documented in writing, Berkley Service Professionals negotiated a settlement for our policyholder for $45,000. Defense costs of $50,000 were incurred before settlement was achieved.

Lessons learned:

Detailed documentation is necessary for disclosures and interactions among all parties to have a verifiable record of these communications.

Seen and Unseen

A home buyer alleged that a real estate agent failed to disclose issues with the garage drainage, lack of foundation and unpermitted construction on a residential property they purchased. Most of the alleged deficiencies were identified in a pre-closing inspection report and the purchase price was negotiated accordingly. However, other alleged deficiencies were concealed and unforeseen.

The real estate agent only had an obligation to disclose known facts and those evident by visual inspection. The buyer allegations included potential fraud because of the failure to disclose and breach of fiduciary duty. In the sale, the real estate agent represented both buyer and seller, which enhanced their fiduciary duty.

The buyer sought more than $200,000 in damages.  In order to avoid the cost of further litigation, the matter settled in mediation without admission of fault by the real estate agency. The home purchaser received a total settlement of $57,000. Berkley Service Professionals paid $25,000, the policyholder/real estate agency paid $15,000 of the settlement through their deductible and an individual agent contributed $17,000. In addition, Berkley Service Professionals paid $20,000 in defense costs.

Lessons learned:

There is an enhanced duty with dual representation by agents. Make sure the dual nature is disclosed and acknowledged by all parties. Keep detailed notes of all conversations and disclosures.

Lost in Transaction

A real estate agent represented the seller in the sale of their house to a contractor for more than $2 million. The contractor/purchaser financed the property with a first mortgage loan from a private lender and two notes from the seller in the combined amount of $770,000, which were all secured by the house and property.

The contractor/purchaser defaulted on payments on the loans and notes. Due to a possible overvaluation of the property at the time of the sale, there was insufficient equity in the property to repay the lien holders if the property was sold. The sellers alleged that the real estate agent provided improper advice on the risks of the structure of the financing of the sale and failed to encourage them to retain an attorney in the transaction, which was not required by law.

Berkley Services Professionals paid $385,000 on behalf of the policyholder and defense costs of $24,000. The policyholder paid an additional $15,000 in defense costs via their deductible.

Lessons learned:

Real estate agents have potential exposure to liability for breach of fiduciary duty and good faith. This can happen, as it did in this case, when complicated financing structures are involved and there is a failure to properly investigate the condition of the borrower in the transaction or to obtain current financial information from the borrower. It is also commonly acknowledged that a seller carryback loan has inherent risks that a real estate agent should disclose in writing to the seller before close of escrow. In addition, the real estate agent should have advised the homeowner client to obtain independent legal advice before engaging in two seller-financed mortgages.

Resident Retaliation

An apartment resident filed a housing discrimination complaint against the property manager (our policyholder) with the county’s Human Rights and Relations Department (HRRD), alleging that the property manager failed to repair defective conditions in the apartments (water damage, mold and mildew) leading to health issues, increased utility bills and retaliation when complaints were made.

The property manager moved the resident to a different unit, but it had the same problems. To complicate matters, the property manager found additional resident-caused damages to the vacated apartment (but could not supply documentation). They alleged that the property manager said they wouldn’t charge the resident for those additional damages if they dropped their housing discrimination complaint. HRRD was prepared to issue a “Determination of Reasonable Cause” based on the failure for reasonable accommodation and the coercion attempt and asked the property manager if they were interested in making a conciliation offer to right the situation. They were.

Berkley Service Professional was successful in negotiating the terms of a conciliation agreement—without the admission of liability or wrongdoing by the property manager—that secured a full release from the resident for a settlement amount of $3,500, which was about half of what was originally demanded. The agreement also required fair housing training for all property managers, maintenance supervisors and office staff to be monitored by HRRD. Defense costs for this claim mounted to $10,000. Both the settlement and the defense costs were within the policyholder property manager’s deductible.

Lessons learned:

Housing discrimination claims need to be taken seriously, addressed and clearly documented, including a timeline of events and actions taken.

Protected by Proper Procedures

An apartment resident filed a housing discrimination complaint against a property manager with the city’s Human Relations Commission (HRC) alleging wrongful eviction in violation of Title VIII of the Civil Rights Act of 1968. The resident was repeatedly late in making rent payments in violation of the lease terms. The property manager provided multiple proper notices to the resident indicating a violation of the lease’s payment terms.

When the property manager commenced lease termination and eviction proceedings in accordance with the lease, the resident was still permitted to remain in the apartment and catch up on rent payments. Notice of non-renewal of the lease was properly issued but the resident refused to vacate the premises. The property manager received a favorable judgment in regard to the eviction proceeding, but the claimant nonetheless filed a complaint with the HRC.

While the HRC action was pending, the property manager paused the eviction process and offered to forgo eviction proceedings if the resident paid overdue rent and dropped the HRC complaint, but the resident did not respond. Ultimately, the HRC complaint was dismissed due to a finding of no reasonable cause.

While there was no liability, Berkley Service Professionals aided this policyholder by providing counsel from an attorney. The property manager paid the $6,000 legal cost which was within their deductible.

Lessons learned:

Having an insurance carrier that will partner with their policyholder to steer them through a claim minefield is invaluable. Following proper procedures and having documentation to corroborate actions is the best defense to claims—especially baseless ones.