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Determining the Value of a Property for Insurance Limits



Recently, we have seen an E&O claim trend around insurance limits based on values. The customer’s property has not been properly evaluated, but who should be responsible for determining the value? The advice from Swiss Re Corporate Solutions has long been that the customer is responsible for determining the value of the property. The agent should then take the value provided by the customer and provided insurance based on that amount. Many times, the agent takes on the role of the advisor and a customer will look to the agent to assist with the valuation. In this situation, the agent is likely creating a “special relationship” and has greatly increased their standard of care. If agents are using valuation tools, they must realize the answers they provide are only as good as the information that is entered into them. The agent also then assumes the responsibility of making sure the values are regularly updated to reflect any changes to the property.


Here is an example of what can go wrong and what an agency can do to avoid a $2 million E&O claim.


Andrew, an experienced agent at a large insurance agency, placed Commercial Property coverage for his client who was a real estate developer. Among the properties he owned, the real estate developer owned a shopping center. The agent and his client had verbal discussions when the policy was initially placed regarding the value of the property. According to the agent, the value of the building was ultimately determined by the real estate developer, but nothing was put in writing by the agent to reflect how the value was determined or whether the client agreed with the valuation. The agent procured a replacement cost property policy with $2.5 million in replacement cost for the building.


The policy was then renewed each year for 5 years. During this time period, neither the agent nor the client re-visited the issue of the valuation of the property or considered or discussed possible increases in the value of the property. The shopping center then burned to the ground. When the client submitted the claim, the carrier paid the limit of the policy. However, the property owner claimed that the replacement cost of the property was actually $7MM and claimed that the property was undervalued. The real estate developer admitted receiving the renewals each year but not reading them. He further claimed that he completely relied on his agent to determine the appropriate insurance coverages, that it was the agent that set the initial value of the property and that the agent never recommended an appraisal at any point. The real estate developer proceeded to file suit against Andrew and his agency.


What are the major issues in this case?

· Agent’s failure to document property valuation process in writing

· Agent’s undertaking to set the value of the property when that is potentially outside his/her area of expertise and the agent may not have a duty to undertake this task. In addition, the property owner is in a superior position to know the value of his/her own property

· An insurance broker is not required to ascertain the levels of coverage for a risk. However, if the agent assumed this obligation even though he didn’t have to, he thereby created a special relationship that obligated him/her to exercise a greater degree of care and diligence.

· Agent’s failure to consider and discuss increases in value of the property over time i.e. by not performing a yearly analysis of coverages and making necessary modifications to the level of coverage.


What could have been done differently by the agency?

· Yearly review of property values with sign off by client

· Written documentation of valuation with client sign-off

· Written recommendation that the client have the property appraised


What do you think was the outcome?

The case was tried and the agent paid almost $2MM in damages for taking on the responsibility of valuing the property and not doing it properly as well as failing to review the value

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