Hurricane Ian Shoreline Loss: Four Policies, Oh Joy!
October 19, 2023
In Kendall South Medical Center v. Consolidated Insurance Nation, No. 3D16-926, 2017 WL 1908376, *1 (Fla. 3d DCA May 10, 2017), the Third District Court of Appeals reversed the lower court’s fourth dismissal of Kendall South Medical Center’s complaint for negligent procurement, holding that there may be liability for negligent procurement where an agent fails to explain to an insured a coinsurance provision that could reduce coverage to less than the amount requested by that insured.
Plaintiff Kendall South had a commercial property insurance policy with Defendant Consolidated Insurance Nation (“Insurance Nation”) that provided $100,000 of coverage for the physical improvements and contents of the subject property. The subject policy also had a $1,000 deductible and a 90 percent coinsurance clause. As a general matter, a coinsurance provision divides the risk of loss between an insurer and insured by penalizing the insured’s loss recovery if the limit of insurance purchased by the insured is not equal to or greater than a specified percentage (here, 90 percent) of the value of the insured property. When a coinsurance provision applies, the insurer pays the amount of the loss reduced in proportion to the amount the property at issue is underinsured.
The subject policy in Kendall South was issued in August 2011—and was later renewed—after Kendall South allegedly met with Insurance Nation’s agent, during which time it allegedly instructed the agent to obtain “a commercial property coverage policy of insurance in the amount of $100,000[.]00 that would cover [its] property, equipment, supplies, and improvements.” Kendall South also allegedly informed the agent that it spent over $100,000 improving the medical building and had in excess of $100,000 worth of equipment in the building. In response, the agent allegedly informed Kendall South that Insurance Nation would procure a commercial policy that would satisfy Kendall South’s request and would cover and protect all of the property, equipment, furnishings and improvements Kendall South described during the meeting.
On January 3, 2013, the sprinkler system in the subject property malfunctioned, causing approximately $260,000 in damage to Kendall South’s building and equipment. Kendall South made a claim for $100,000 in coverage (less its $1,000 deductible) but received only $16,562.67 from Insurance Nation due to the coinsurance clause in the subject policy.
Kendall South sued Insurance Nation for negligent failure to procure the requested coverage and asserted Insurance Nation’s agent breached his duty to explain that the coinsurance policy would prevent Kendall South from obtaining $100,000 worth of coverage, despite its clear instructions that it sought a policy that provided that amount of coverage.
Defendant Insurance Nation moved to dismiss, for the fourth time, arguing Kendall South failed to state a claim. Specifically, Insurance Nation argued it explained its policy, including the coinsurance requirements, to Kendall South in the same way it always explained similar policies to its customers; Insurance Nation met its duty to Kendall South when it procured and explained the subject policy, and Kendall South’s complaint was an attempt to manufacture a broker’s liability claim against Insurance Nation. The trial court granted Insurance Nation’s motion, but the Third District Court of Appeals reversed.
The Third District Court of Appeals held that Kendall South sufficiently stated a cause of action for negligent procurement of insurance. Because Kendall South informed the agent that (1) the physical contents of the subject property and the improvements thereon are valued in excess of $100,000, and (2) it wanted to procure just $100,000 worth of coverage for the contents and improvements, the agent had a duty to explain the coinsurance clause in the subject policy to Kendall South and to explain that different coverage was required to meet Kendall South’s expectations. In its complaint, Kendall South alleged that the agent breached his duty when he failed to advise Kendall South that the procured policy was inadequate to address its expressed insurance needs.
Importantly, the court clarified that it was not holding that an agent has a duty to value the contents or improvements of the subject property or that an agent has a general duty to explain a coinsurance clause; rather, the court emphasized that there may be liability for negligent procurement when an agent fails to explain a coverage provision that may result in less coverage than the amount specifically requested by an insured.
Takeaway: When an insured alleges that it specifically informed an agent of its insurance needs, and the agent agrees to procure a policy that meets the insured’s expressed needs, an agent needs to either (i) obtain a policy that meets those needs or (ii) to explain the provisions of the policy and that a different coverage might be needed if the procured policy does not meet the expressed needs. If, in such a situation, an agent fails to do both, an insured can possibly state a cause of action against their insurer for negligent procurement—this is the case even where, as here, an insured has renewed its policy and had ample opportunities to read the policy and acknowledge a potentially problematic coinsurance clause.