Another Hole in the Dike: Court of Appeals Allows Errors & Omissions Claim; Business Income Coverage for Employees’ Payroll and Commissions; The Mudslide Tragedy— Insurance Aspects
Another Hole in the Dike: Court of Appeals Allows Errors & Omissions Claim
Business Income Coverage for Employees’ Payroll and Commissions
The Mudslide Tragedy— Insurance Aspects
Another Hole in the Dike: Court of Appeals Allows Errors & Omissions Claim
The New York Court of Appeals has again denied an insurance broker’s motion for summary judgment in an errors and omissions lawsuit. New York courts have always ruled that an insurance broker’s duty is to place the coverage ordered by the insured or notify the insured of its inability to do that in a reasonable time. Further, New York courts charge the insured with knowledge of the contents of the policy once the policy has been received. Most importantly, a broker has no duty to advise the insured during the policy period unless the insured and the broker have a “special relationship.” In case after case, insureds have been unable to establish a special relationship claim. That may be changing.
Deborah Voss owned several businesses in Liverpool, New York. CH Insurance Brokerage Services (“CH”) was her insurance broker. CH is a successful insurance agency with offices in Syracuse, Rochester, and Rome, NY. In 2004, CH recommended Voss obtain a comprehensive policy that included $75,000 in coverage for business income losses.
In 2006, she purchased a new building, thereby doubling the space occupied by her business. The new building encountered numerous roof problems and Voss submitted several insurance claims that included claims for lost business income; she closed the business temporarily. In 2007, Voss discussed renewal of the insurance with CH. The policy was renewed and the business income limit was reduced to $30,000.
In 2008 Voss sued CH claiming that it had failed to advise her on the proper amount of business income insurance she needed. The New York Supreme Court for Onondaga County granted the insurance company summary judgment dismissing Voss’s claim. This decision was affirmed by the Appellate Division. However, the Court of Appeals has reversed the lower courts and denied summary judgment to the broker.1 The decision recounts meetings between Voss and Joe Convertino, Jr., a representative of CH. It reads, in part, as follows:
…Convertino recommended a comprehensive policy with defendant The Netherlands Insurance Company (formerly Peerless Insurance Company) that afforded…$75,000 per incident in coverage for business interruption losses. When Voss questioned whether the $75,000 limit was adequate, Convertino allegedly assured her that it would suffice based on the condition of the building as well as the size of her businesses. According to Voss, Convertino also averred that he calculated the level of coverage at a threshold level and reemphasized that, each year, CH “would take it up as the business evolved.”
The Court of Appeals denied the broker’s summary judgment motion. Voss will be able to make her arguments when the case goes to trial. The claim may be settled before trial, which would be at least a partial victory for Voss. Without the Court of Appeals decision, she would have gone home with only legal bills to show for her efforts.
Summary judgment motions are an important part of an attorney’s toolkit. They can end the endless legal maneuvering that runs up endless legal expense2. Here’s my layman’s take on summary judgment:
In brief, the party making the summary judgment motion argues that:
• Even if what the other party says is true, there is insufficient evidence to send the case to a jury, and
• The law, which is the judge’s responsibility to interpret, supports the motion-maker’s position.
The judge can act on a summary judgment motion without a full trial.
Given the limited responsibility imposed on insurance brokers in New York, summary judgment in favor of the broker on an errors and omissions claim was the usual outcome. By denying CH Insurance Brokerage summary judgment, it appears that “he said-she said” arguments will be permitted.
David B. Karel, a New York City attorney who represents policyholders, writes “Voss clearly makes it significantly easier to defeat motions for summary judgment and thereby easier to sustain litigation against brokers and agents. (The court’s finding) that a question of fact existed as to whether or not a special relationship existed… in Voss, is another chink, crack, opening to drive a truck through for plaintiffs. 3”
Stay tuned—and re-examine your errors and omissions insurance coverage and limits.
Business Income Coverage for Employees’ Payroll and Commissions
A Westchester agent asks:
I have an insured that suffered a Business Interruption claim for a Dependent Property. The insured’s customer suffered a fire loss which caused a Loss of Business for the insured…
The insured pays a commission to his salespeople. The carrier has indicated that they will deduct the commission that is normally paid to salespeople when they calculate the business income loss because commission is not a continuing expense. They make a distinction between “payroll” and “commission.” As I review the policy, barring a contractual requirement to pay the commission, the carrier may be on solid ground. Any thoughts?
My thoughts: First, the agent deserves kudos for covering her insured’s dependent property exposure. Second, she’s probably correct that the insured does not have coverage for the salespeople’s lost commissions.
In determining a business income loss, the insurer calculates the net profit that was lost and adds to that the insured’s expenses that necessarily continue. If there are no sales no commission is paid, therefore there’s no continuing expense for commission.
What if the insured actually pays its employees? What if the insured actually pays the salespeople commissions even though there were no sales? More broadly, what if the insured continues to pay all employees even though there’s nothing for them to do because the business has been shut down by, for example, a devastating fire? Are these covered as continuing expenses?
Coverage for payments made to employees who can’t work due to a covered interruption of operations has long been a disputed issue. The ISO business income form CP 00 30 10 124 contains a loss determination provision reading as follows:
3. Loss Determination
a. The amount of Business Income loss will be determined based on: …
(3) The operating expenses, including payroll expenses, necessary (emphasis added) to resume “operations” with the same quality of service that existed just before the direct physical loss or damage;
Notice that I’ve emphasized the word “necessary.” Insureds argue that they must continue to pay employees or else they’ll find other jobs and be unavailable when operations resume. Insurers respond that in many labor markets, particularly today, most employees can easily be replaced and therefore continuing to pay employees who are not working is not a covered expense necessary.
This dispute can be avoided. ISO has a new endorsement that makes the policy do what many insureds want, that is pay employees who have no work because the business is shut down by an insured peril: It’s Discretionary Payroll Expense form # CP 15 04 06 07
The endorsement adds coverage for payroll expenses for the job classifications or employees identified in the endorsement schedule. When the insured pays these employees, the payments are covered expenses. (Payroll expenses include: payroll, employee benefits, FICA and union dues payments paid by the insured, and workers’ compensation premiums.)
The insured selects the maximum number of days for discretionary payroll expense, which is shown in the schedule. The number of days need not be used consecutively, but only those within the period of restoration are covered.
If the insured’s policy doesn’t include the discretionary payroll coverage, the insurer will cite the availability of such coverage when arguing that payments to nonworking employees are not covered by the basic business income policy.
If the insured doesn’t plan to continue some or all of its employees, you should eliminate or limit coverage for the payroll using Payroll Limitation or Exclusion endorsement CP 15 10 10 12. That reduces the insured’s coinsurance basis and the amount of insurance that must be carried.
The Mudslide Tragedy— Insurance Aspects
The tragic mudslide in March in Darrington, Washington that killed at least 37 people with some still unaccounted for at this writing, has an insurance aspect.
The insurance question is: what coverage might there be for the dozens of homes that were destroyed and for homes and businesses that might be destroyed in future mudslides?
With regard to the homes destroyed in Washington, ISO and most other homeowners policies contain earth movement exclusions that shut the door on mudslide claims. Here’s some of the ISO exclusion wording:
Exclusions:
Earth Movement
Earth Movement means:
a. Earthquake, including land shock waves or tremors before, during or after a volcanic eruption;
b. Landslide, mudslide or mudflow; (emphasis added)
That doesn’t leave much room for landslide or mudslide claims on homeowners policies. How about National Flood Insurance, doesn’t it provide some coverage for mud? It does. Here’s the pertinent wording:
Flood, as used in this flood insurance policy, means:
1. A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is your property) from:
a. Overflow of inland or tidal waters;
b. Unusual and rapid accumulation or runoff of surface waters from any source;
c. Mudflow. (emphasis added)5
You might think that triggers mudslide coverage from NFIP until you read the definition of mudflow:
Mudflow (is a) river of liquid and flowing (emphasis added) mud on the surfaces of normally dry land areas, as when earth is carried by a current of water. Other earth movements, such as landslide, slope failure, or a saturated soil mass moving by liquidity down a slope, are not mudflows (emphasis added).
The key words are “liquid and flowing.” What happened in Washington does not meet the NFIP definition of mudflow.
What about commercial coverage? Commercial property policies are quite similar to the homeowners when it comes to excluding mudslides and mudflows. NFIP commercial flood coverage is identical to NFIP personal coverage. Even the ISO commercial property flood endorsement limits coverage for mudslide to “a river of liquid and flowing mud.” There’s no coverage in those forms.
So what is one to do? Many insurers provide flood and earth movement coverage by endorsement to their commercial property policies. Most mimic the coverage provided by the NFIP or ISO flood coverage and cover only earthquake, not mudslide or landslide. Some however, provide the coverage by eliminating the earth movement and water exclusion. The forms have to be carefully reviewed, but that might solve the problem.
Otherwise, Difference in Conditions (DIC) coverage is a possibility.6 DIC policies were originally used to provide an insured with all-risk coverage wrapped around a named peril policy. With widespread availability of “all-risk” forms, they’re now mostly used to add flood and earthquake coverage.
Unfortunately many DIC policies are no longer as broad as they once were. Many just mimic ISO and NFIP wording, which limits earth movement coverage to earthquake and flood coverage to the NFIP definition. That leaves a gap in coverage for events like the Washington mudslide. Many insurers use their own DIC forms, but that is becoming less common now that the American Association for Insurance Services (AAIS) and ISO have produced their DIC forms. The AAIS form is the most widely used. In that form, the mudslide and mudflow coverage reads as follows:
c. mudslides or mudflows if caused by (emphasis added):
1) unusual and rapid accumulation or runoff of surface waters or waves; or
2) currents of water exceeding anticipated cyclical levels.7
Although the wording lists mudslides and mudflows, the “if caused by” wording that follows restricts the coverage to NFIP-type flood claims. This wording would not provide coverage for an event like the one in Washington.
The ISO form has arguably better coverage. It includes coverage for water damage, which is defined to mean:
a. Flood, surface waters, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not;
b. Mudslide or mudflow;
c. Water that backs up from a sewer or drain; or
d. Water under the ground surface pressing on, or flowing or seeping through:
(1) Foundations, walls, floors or paved surfaces;
(2) Basements, whether paved or not; or
(3) Doors, windows or other openings.
Furthermore, there’s no exclusion for landslides, so even if the event isn’t a mudslide it would be covered as a landslide.
I haven’t seen any DIC policies written on ISO forms, have you? If you have or if you can find companies that use the form, let me know. I’ll check to see what I can turn up. Anything I find out will be in my next column.
In the way of independently developed coverage, Poulton Associates located in Salt Lake City, Utah offers a catastrophe insurance program through underwriters at Lloyds for both homeowners and commercial firms on independent forms.8 The forms are not all-encompassing, but they do offer landslide coverage in addition to earthquake and flood. Landslide is defined as “physical damage caused by the sudden movement of earth and/or rock… including sliding of land, mudflow, (and) land sinking, rising or shifting…”9
A quick review of the forms turned up an 80% coinsurance provision and a segmentation of the occurrence into 72 day pieces, which could trigger additional deductibles if the flooding lasted more than 3 days. Neither limitation is typically found in DIC forms
There’s also a difference in the debris removal coverage. The Lloyds form provides debris removal coverage equal to the greater of $25,000 or 10% of the loss. The debris removal provision in ISO’s DIC form follows ISO’s other commercial property forms: 25% of the loss plus $10,000.
For a loss that’s less than $60,000, the Lloyds form will provide more coverage for debris removal. Above $60,000, the nod goes to ISO. For a $1,000,000 loss, Poulton’s form would cover $100,000 of debris removal expense. ISO’s formula would provide $260,000 of coverage. Furthermore, Lloyds is non-admitted so there’s no guaranty fund coverage if the insurer becomes insolvent.
The excess/surplus lines brokers you work with may have other forms available. Check with them and carefully review any form that you offer to your clients.
Despite the shortcomings, let your insureds know that this coverage is available.
1 Deborah Voss et al v CH Insurance Brokerage Services, Co., Inc. et al, NY Court of Appeals 2014 NY Slip
Op 01259 Decided on February 25, 2014
2 IBM’s Thomas Watson is often quoted as having said: “My legal staff has an unlimited budget and every year they exceed it.”
3 Extract from 4/14/14 email from David B. Karel, partner Wilkofsky, Friedman, Karel & Cummins
4 The wording of the actual policy did not exactly duplicate ISO business income form language, but to make my answer more useful for general readers, I’ve used ISO wording. My opinion based on the actual wording would be the same in this case.
5 National Flood Insurance Program General Property Form Standard Flood Insurance Policy December 31, 2000
6 Some independent (non-ISO) forms provide broader coverage than standard or NFIP forms for earth movement and water damage obviating the need for DIC coverage.
7 AAIS DIC form M 7801 04 07 Copyright, American Association of Insurance Services, Inc., 2007
8 See: https://www.catcoverage.com/faq.aspx (accessed 4/24/14)
9 From specimen homeowners and commercial forms supplied by Poulton Associates.
