Underinsurance Help
Former CA Insurance Commissioner John Garamendi with independent agent/UP advisor David Shaffer and Amy Bach at a hearing on solving the underinsurance crisis.
United Policyholders first saw the underinsurance problem when we tackled our first disaster-- a northern California wildfire that destroyed 3000 homes in 1991--and we've seen it ever since all across the country. We’ve seen it in Arizona, Kansas and New Mexico after wildfires and in every one of the Gulf Coast states that have been hit by hurricanes in recent years. The underinsurance problem most often affects disaster victims, but it also affects people who lose structures in isolated incidents. UP staff and volunteers now spend approximately half their working hours helping underinsured consumers.
Insurers sell the promise that they'll "put you back where you belong," but they don't always deliver. Homeowners and businesses (policyholders) take insurers at their word and rely on agents to set their policy limits at full replacement value. But when policyholders come up short, they are shocked to learn that the laws in most states give agents immunity for failing to fully insure property.
UP is working hard every day to help individuals and policy makers solve the underinsurance problem.
The following links will lead you to resources to help you avoid being underinsured in the first place or solve the problem if you lose property and find yourself underinsured.
Pre-loss Buying Tips
Avoiding Underinsurance
Buying Tips
Getting homeowners insurance—CNNs 5 Tips
Post-loss Claim Tips
Underinsurance 101 (pdf)
Basic Tips for the Underinsured
Causes and Solutions
FAQs for Disaster Survivors (pdf)
After Fires, Homeowners Feel an Insurance Pinch
Laws and Lawsuit Information
Underinsurance generally involves legal issues. The following are articles written by attorneys and documents from lawsuits brought by policyholders who were underinsured. Why “Everett v. State Farm” was not new law in California Court Document re: Underinsurance (pdf) Broker Responsibility Extends Beyond Procuring Coverage (pdf) Liability of Insurance Agents and Brokers for Under-insuring Homes (pdf) Underinsurance Law and Remedies (pdf)
Liability of Insurance Agents and Brokers
for Under-insuring Homes
by Scott Glovsky
(download pdf 84K)
After the 1994 Northridge earthquake, most insurance companies writing homeowner’s coverage stopped issuing “guaranteed replacement cost” policies. Hence, most homeowners whose homes were destroyed in the recent fires in Southern California will have, at best, an “extended” policy limit; that is, a promise by the insurer to pay some fixed percentage above the policy limit should repair costs exceed the policy limit. The demise of guaranteed replacement cost coverage highlights the importance to policyholders of having adequate coverage. This article addresses the liability of insurance agents and brokers when a residential property is underinsured.
Is the property underinsured?
The first question to address is whether a property is underinsured. Homeowners’ policies specify their coverage limits on their Declarations page. The Declarations page provides separate limits for the dwelling (often listed as Coverage A), separate structures (Coverage B), and personal property (Coverage C). The dwelling limit applies to the cost to repair the dwelling or structure. The separate structure limit applies to the cost to fix dwellings or structures that are not attached to the main dwelling or structure. The personal property limit applies to repairing or replacing personal property.
In many policies, the dwelling limit provided on the Declarations page is not the actual dwelling limit. Many policies include provisions such as Guaranteed Replacement Cost Coverage (“GRC”) or Extended Replacement Cost Coverage (“ERC”) that raise the dwelling limits beyond the amount specified on the Declarations page. Although most carriers no longer offer GRC, it generally expands the dwelling limits to the full cost to repair the dwelling regardless of the limits listed on the Declarations page. ERC often extends the dwelling limits to 150% of the amount stated on the Declarations page. California Insurance Code section 10101 requires residential property insurers to provide policyholders with a separate disclosure form that specifies whether the policy includes GRC or ERC.
Is the potential defendant an agent or broker?
To evaluate the potential liability of the agent or broker that procured the insurance, it is crucial to determine whether the individual is an agent or broker.
An insurance agent, on the one hand, is an individual “authorized, by and on behalf of an insurer, to transact all classes of insurance other than life insurance.” Cal. Ins. Code § 31. Agents are required to be licensed by the California Department of Insurance and must file with the Department of Insurance a notice of appointment from each insurer that they represent. Cal. Ins. Code §§ 1631 and 1704(a). Agents’ main responsibility is to represent insurance companies and their conduct can be imputed to insurance companies.
An insurance broker, on the other hand, is an individual “who, for compensation and on behalf of another person, transacts insurance... with, but not on behalf of, an insurer.” Cal. Ins. Code § 33. Thus, because brokers do not work on behalf of insurers, they are not agents of insurers and their conduct cannot be imputed to insurers.
Determining whether an individual is an agent or broker depends upon their role in the insurance transaction at issue – regardless of whether they refer to themselves as an agent or broker. Maloney v. Rhode Island Ins. Co., 115 Cal.App.2d 238, 244, 251 P.2d 1027, 1031 (1953).
Liability of insurance agents
Insurance agents generally have no duty to advise policyholders that they should purchase additional or different coverage. In Fitzpatrick v. Hayes, 57 Cal.App.4th 916, 927, 67 Cal.Rptr.2d 445 (1997), plaintiff was standing on a street corner when she was hit by an automobile and suffered brain damage. Plaintiff received the driver’s $15,000 policy limit, and then recovered an additional $85,000 under her own State Farm underinsured motorist coverage. Plaintiff then sued her State Farm agent for failing to recommend that she purchase a State Farm umbrella policy that would have provided her with additional coverage at a nominal cost. Although plaintiff had bought insurance through the State Farm agent for 20 years, she had not asked her agent or State Farm about obtaining higher underinsured-motorist limits before the accident. The Court of Appeal determined “as a general proposition, an insurance agent does not have a duty to volunteer to an insured that the latter should procure additional or different insurance coverage.” Id. at 927.
Notwithstanding the general rule, agents assume “special duties” when they (1) misrepresent the nature, extent or scope of coverage being provided, (2) fail to procure coverage specifically requested by an insured, or (3) hold themselves out as having particular expertise in the type of insurance that the insured is purchasing. Agents assume special duties when they misrepresent the nature, extent or scope of the coverage that is being provided. Id. at 927.
In Desai v. Farmers Ins. Exchange, 47 Cal.App.4th 1110, 55 Cal.Rptr.2d 276 (1996), the plaintiff purchased insurance to cover property in Santa Monica. He advised his Farmers agent when he bought the policy that he wanted “100 percent coverage” for the cost of repairing or replacing the property. The agent assured him that the policy provided 100% coverage for the cost to repair or replace the property. The policy provided limits of $150,000 for dwelling damage. The Northridge Earthquake damaged the property. The repair cost totaled $546,757.
Farmers argued that its agent could not be liable based on case law suggesting that insurance agents have no duty to advise policyholders that they should purchase additional or different coverage. But the Court of Appeal rejected Farmers’ argument and reasoned that the agent could be liable because the agent “negligently represented that the policy in fact provided the 100 percent replacement cost coverage that [plaintiff] demanded . . . This is not a ‘failure to recommend more coverage’ case; it is a ‘failure to deliver the agreed-upon coverage’ case.” Id. at 1119.
Similarly, in Paper Savers, Inc. v. Nasca, 51 Cal.App.4th 1090, 59 Cal.Rptr.2d 547 (1996), the plaintiff purchased property insurance to cover his business from a Farmers insurance agent. The plaintiff was not sophisticated in insurance matters and relied on the agent’s expertise. The agent represented that despite the fact that the policy had business personal property limits of $500,000, the policy would “provide full coverage to replace all business personal property... regardless of the policy limit.” Id. at 1093. The agent stated that the plaintiff could “rest easy” because he was fully insured against loss. Id. After the property was destroyed by fire, Farmers refused to pay more than the limit of $500,000. The Court of Appeal determined that triable issues of fact existed about whether the agent had misrepresented the meaning and effect of the replacement cost coverage endorsement. The court ruled that this factual question “must be resolved to determine whether in making the representations he assumed a special duty toward Paper Savers to ensure it had adequate insurance coverage to in fact replace all the... personal property in the event of a total loss.” Id. at 1104.
Agents also assume “special duties” where they fail to obtain coverage specifically requested by an insured. In Westrick v. State Farm Insurance, 137 Cal.App.3d 685, 187 Cal.Rptr. 214 (1982), the plaintiff purchased automobile insurance from a State Farm agent. Later, the plaintiff considered purchasing a pickup truck and asked the State Farm agent if the pickup truck would be covered after he purchased it. The agent advised him that the pickup truck would automatically be covered for 30 days after it was purchased.
The plaintiff did not purchase the pickup truck, but two months later, purchased two different trucks. He then advised the State Farm agent that he had purchased the trucks and offered to provide the trucks’ serial numbers and license plate numbers to the agent. The agent advised him that he did not need the additional information and that the agent’s office would contact the plaintiff the next day.
The next day, one of the new trucks was involved in an accident. State Farm denied coverage for the accident on the ground that truck was not covered under the policy. The Court determined that plaintiff ’s complaint adequately stated a cause of action against the agent for negligently failing to inform the plaintiff that the truck was not covered under the policy. Id. at 687. See also, Macey v. Allstate Property and Cas. Ins. Co., 220 F.Supp.2d 1116 (2002).
Agents also can assume a special duty when they hold themselves out as having particular expertise in the type of insurance that the insured is purchasing. Fitzpatrick, 57 Cal.App.4th at 927.
Liability of insurance brokers
Like insurance agents, insurance brokers generally do not have a duty to advise policyholders to purchase additional or different coverage, but they can assume “special duties” when they misrepresent coverage, fail to procure coverage specifically requested, or hold themselves out as experts.In Jones v. Grewe, 189 Cal.App.3d 950, 234 Cal.Rptr. 717 (1987), the owners of an apartment building were sued after a child was injured in the apartment building’s swimming pool. The owners sued their insurance broker for failing to ensure that their liability limits were sufficient. The owners had purchased insurance through the broker for ten years and the broker claimed to be an insurance expert. Regardless, the appellate court determined that the broker had no duty to advise the owners to obtain additional coverage.
But brokers can assume a special duty where they misrepresent coverage or fail to obtain the requested coverage. In Free v. Republic Ins. Co., 8 Cal.App.4th 1726, 11 Cal.Rptr.2d 296 (1992), the plaintiff homeowner repeatedly asked his broker if the coverage limits of his policy were sufficient to rebuild his home if it were destroyed by fire. His broker repeatedly advised him that the limits were sufficient to rebuild his home in the event of a fire. By responding to the plaintiff ’s inquiry, the broker assumed a special duty of care.
In addition, brokers can assume a special duty when they hold themselves out as experts in a particular type of insurance. For example, in Kurtz, Richards, Wilson & Co. v. Insurance Communications Marketing Corp., 12 Cal.App.4th 1249, 16 Cal.Rptr.2d 259 (1993), an insurance broker claimed to be an expert in group health insurance. The broker wrongly advised the insured that the insured’s group plan was not subject to the Medicare provisions of the Tax Equity and Fiscal Responsibility Act (which made the company’s private medical insurance primary to Medicare).
The insured relied on the broker’s advice and included this information on the insurance application. Later, after the insured submitted a claim under the policy, the insurer denied the claim based on the misrepresentation in the application. The Second District Court of Appeal ruled that because the broker held itself out as an expert in the area of health insurance, and the insured relied on the broker’s representation, the complaint stated a cause of action against the broker for negligent misrepresentation.
Liability of insurance companies
Because an insurance agent is an agent of the insurance company, the agent’s conduct can be imputed to the insurance company and the insurance company can be liable for the agent’s misrepresentations or failure to obtain requested coverage. For example, in Desai v. Farmers Ins. Exchange, supra, Farmers argued that it could not be liable for misrepresentations of its agent. The Court rejected its argument and held that Farmers could be liable for its agent’s failure to deliver the “agreed-upon” coverage under theories of ratification and ostensible authority. Desai, 47 Cal.App.4th at 1120. See also, Paper Savers, 51 Cal.App.4th at 1099.
Finally, in litigating cases involving underinsured residential properties, search the policy for any guarantees that the insurance company will periodically adjust the dwelling limits to ensure that the limits will be sufficient to replace the damaged property in the event of a loss. If this type of provision is in the policy, the insured can argue that the insurer assumed a special duty to ensure that the dwelling limits were adequate to replace the dwelling and therefore is estopped from limiting coverage to the stated dwelling limits.
Scott Glovsky is in sole practice in Claremont, California. His practice emphasizes insurance bad-faith actions, often against HMOs.
Getting homeowners insurance
5 Tips Home Edition: What to do if you have no coverage.
as posted at www.money.cnn.com
February 10, 2006
NEW YORK (CNNMoney.com) - Insurance isn't protecting homeowners like it used to. Today more and more insurance companies are refusing to write new policies in vulnerable areas and canceling other homeowner policies in order to help their bottom line.
In today's top 5 Tips we're going to tell you what you can do if you find yourself without coverage.
1. You have options
If your insurer refuses to renew your policy coverage, don't sweat it. The insurance industry is still rife with competition. If you live in areas outside of Florida or Texas, you'll have a lot of options, says Amy Bach, founder of the insurance information Web site www.unitedpolicyholders.org.
Some states have hundreds of insurers you may not know about. The Internet has opened up many more opportunities to find these players.
And if you do live in an area that has seen more than its fair share of natural disasters, chances are your state has set up a joint underwriters program are insurance pools that sell insurance to people who can't get coverage in the private market. But this should really be a last resort. These policies are expensive and don't give you as much coverage as a private insurer.
2. Get the blueprint
There are three basic ways you can get coverage. Of course you can go to one of three insurance behemoths -- State Farm, Nationwide and Allstate. Here you will work with one agent who will assess your situation and suggest policies within that company for you. You'll be paying commissions of about 15 to 18 percent generally, according to Rich Attanasio of insurance rating company AM Best.
You can also go through independent insurance agents who can help you compare quotes from several large insurers, but you'll be paying about 20 percent in some cases.
The cheapest option may be to call direct agents like AIG Direct or Geico and avoid commissions altogether. Unfortunately, according to AM Best, there aren't many homeowner policies that are sold directly by the seller.
3. Meet your needs
Make sure you know how much insurance you're going to need. Estimate how much it would cost to replace your home by calculating how many square feet you have and multiply that number by the local construction cost per square foot for homes in your neighborhood.
To find out these construction costs, call your local real estate agent or builders association. Web sites like InsWeb have free cost calculators. If you have a rare art collection or you collect antiques or have expensive jewelry, you'll want to buy additional coverage. In most cases a homeowners policy will only cover jewelry for $1,000 to $2,000.
4. Shop around
Get quotes from direct sellers and Web sites like insweb.com or insure.com. You always want to see what the smaller guys are offering before you go to a large insurer. This way you may have more leverage as a customer.
You can also check in with your state's insurance commissioner at naic.org to see if there are any complaints that have been lodged against the company.
5. Get flood insurance
We've all seen the headlines about how financially strapped the Federal Flood insurance program is. That shouldn't deter you from getting flood insurance. According to the Independent Insurance Agents and Brokers, there is an overhaul of the system in progress. For one thing, the program is going to be able to get more money from the government, says Sue Nester of the IIAB.
And considering that flooding is the most costly natural disaster in the U.S., and only about 1 in 4 homes in high risk areas carry this kind of protection, you should think about this coverage. Go to www.floodsmart.gov for more information. You can get coverage of up to $250,000 for the house and $100,000 for what's inside it. And while that's not a lot of coverage, at least it's something. The average premium is about $450 a year.
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Gerri Willis is a personal finance editor for CNN Business News and the host for Open House. E-mail comments to 5tips@cnn.com.