When I was a young adjuster in 1971, a massive fire burned fromthe 405 Freeway in the San Fernando Valley across the hillsidesuntil it reached the Pacific Ocean in Malibu.

Hundreds of homes and commercial buildings were destroyed downto bare dirt. As an adjuster, settlement with the insureds was easybecause the cost to repair exceeded the policy limits by thousandsof dollars. I would simply write a policy limits check to theinsured and leave knowing he had inadequate funds to rebuild.

Related: Are your adjusters getting propertraining?

The insurer I worked for had conducted a survey of the homes oftheir officers only to find that each corporate officer, allegedlyinsurance professionals, were underinsured in amounts as useless as50% of the true replacement cost of their property. The insurertried to convince its brokers that their insureds were probablyunder insured as well, but the brokers found their customers wereunwilling to pay more for higher limits.

A previous article, “Who has the responsibility to advise insureds aboutpolicy limits” addressed liability limits on automobilepolicies. A reader asked about the rules that apply to homes andcommercial buildings because the reader's company wanted to look atvalues and consider reevaluating the limits.

The primary duty of an insurance agent or broker is to fulfillthe orders presented to the agent or broker by the insured. If iterrs in fulfilling the order, it can be held liable. If it performsthe order as requested, it has no responsibility. InHomestretch Logistical Solutions, Inc. v. Johnson LawrenceWalker Insurance Company [Court of Appeals of Kentucky, 2017WL 729747, NO. 2014-CA-001255-MR (2/24/17)], an insurance agent wassued for doing exactly what it was asked to do by the insured thatresulted — because of the insured's error — in an accident where avehicle was uninsured.

Who sets policy limits for first-party propertypolicies?

A reader asked: “My company is constantly bombarded with agentswho refuse to look at undervalued buildings and the exposures tocoinsurance penalties in the event of a loss.” The agent that doesso can face an E&O exposure for ignoring what appears to beundervalued property as easily as the agent or broker can faceexposure for advising an incorrect limit.

Related: Did an insurance broker have a duty to advisehigher flood limits?

Insurance companies sell to the insured the coverage requested:Carriers have no obligation to force, or even advise the insuredabout the limits of liability of actual cash value or replacementcost value of a property. Most are not sufficiently educated on thecost of repairing or replacing a damaged structure. They rely,therefore, on what the insured tells the agent or broker is thetrue value of the home or commercial structure.

What should the insured do?

The appropriate advice to avoid errors and omissions claims is to servethe client properly and within your expertise. Whether you think aproperty is overvalued or undervalued, it is incumbent on the agentor broker to remind the applicant for insurance to set appropriatelimits to avoid underinsurance or co-insurance penalties, asfollows:

1. It is essential that you, as the insured, select the appropriatepolicy limits.

2. To do so:

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   • Recognize that repair and reconstruction of structures is moreexpensive than new construction.

   • Recognize that you do not need to insure the full value of theproperty since the land is not insured, only the structure.

   • Contact a fire reconstruction contractor to advise you on thecost to replace the structure if it is destroyed by fire.

   • Contact a fair market value appraiser to advise you about theactual cash value of the property.

   • Determine from your suppliers the actual cash value andreplacement value of the contents of your dwelling or commercialstructure.

   • Determine the value of all product on premises.

   • Determine the value of all work in progress.

   • Report those values to your insurer so that appropriate limitscan be established.

Major catastrophes like wildfires, earthquakes, floods andtornados can, and usually do, destroy real and personal property.When an insured loses everything in a catastrophe, he or she callsan insurance agent, insurance broker or insurance company to make aclaim. When the claim is made, the insured is reminded of the limitof liability chosen, only to find it is inadequate to replace thehouse or commercial property.

The insured will be angry and unwilling to accept the fact thatthe inadequate policy limit is due to his or her error. Suits arefiled against the insurance agent/broker and the insurer, only tofind that the court will not cure the insured's mistake.

Analysis

An insurance agency, when asked to insure the contents of aproperty at full replacement cost, was found to have no duty toadvise the insured regarding adequacy of policy limits even if theinsured initially requested full replacement cost coverage inLenz Sales & Service, Inc. v. Wilson Mut. Ins. Co.,[Court of Appeals of Wisconsin, 175 Wis.2d 249, 499 N.W. 2d 229(March 10, 1993)].

Before an agent or broker can be held liable to advise of theappropriate limits of liability, there must be a specialrelationship between the agent or broker and an applicant forinsurance. For a special relationship to exist, the insured mustshow a longstanding relationship; some type of interaction on thequestion of coverage; and the insured's reliance on the expertiseof the insurance agent to the insured's detriment when the limitsare insufficient to repair or replace the property.

Related: 'Special relationships' revisited

Without a special relationship, there is no justification in thelaw to impose the additional burden on insurers that theyanticipate and then counsel their insured on the hypothetical,collateral consequences of the coverage chosen by the insured. In1992, the case of Free v. Republic Ins. Co., [8Cal.App.4th 1726, 11 Cal.Rptr.2d 296 (1992)] the California Courtof Appeal held an agent was involved in a special relationship sothat the agent could be held liable to a client after misinformingthe client that his homeowner's limits were sufficient.

It is imperative, therefore, unless there is a specialrelationship between the insured and the agent, that the insured dowhat is necessary to obtain appropriate coverage, and the agent orbroker refuse to provide advice he or she is not competent togive.

When an insurance agent or broker does exactly what was asked byan insured, any suit will fail because no court will save aplaintiff from its own mistakes. The suits can be avoided byadvising the insured what must be done to select appropriatelimits.

Related: An alarming loss: Does a broker have a duty torecommend higher limits?

Barry Zalma, Esq., CFE, ([email protected]) has practiced law inCalifornia for more than 42 years and now serves as an insuranceconsultant and expert witness specializing in insurance coverage,insurance claims handling, insurance bad faith and insurance fraud.Books in the Zalma Insurance Claims Library, can be found atwww.nationalunderwriter.com/ZalmaLibrary.