Don't change a policy: You can't serve two masters

The lease provided that "[t]he proceeds of such insurance shall be used for the repair or replacement of the property so insured." 110 Wyman is owned by Swervo Development Corp., which in turn is owned by Nedal Abdul-Hajj. Both Davison and Abdul-Hajj are clients of respondent Ross Nesbit, a corporation that owns and operates respondent Paulet/Slater Inc. (PSI).

From its inception, H&E purchased insurance for Quest from PSI. In October 2004, Dana Privette became the insurance agent responsible for H&E's account. Privette, an employee of Ross Nesbit, subsequently procured insurance policies for H&E from Western Heritage Insurance Co. (Western) which provided, among other things, "building and personal property coverage," and "business income (and extra expense) coverage." The building and personal property coverage included claims for damages to additions to the leasehold, indoor and outdoor fixtures, permanently installed machinery and equipment, personal property such as floor coverings, and appliances used for refrigerating, ventilating, cooking, dishwashing, or laundering. The business income (and extra expense) coverage included claims for lost net income and continuing normal operating expenses such as payroll and rent.

On July 31, 2006, a fire occurred on the roof and upper floors of the Wyman Building. A water pipe burst during efforts to extinguish the fire, resulting in substantial water damage to the building, including the Quest premises. H&E subsequently submitted claims to Western as a result of the fire and pursuant to its commercial property policy. Shortly thereafter, on Aug. 3, 2006, Western issued an initial payment of $50,000 to H&E pursuant to the business and personal property coverage contained in the commercial insurance policy.

At the time of the loss, 110 Wyman was not identified as having any interest in the property insurance policy purchased by H&E from Western. But after the fire, Abdul-Hajj contacted Privette in early August 2006 and requested that 110 Wyman be added as a co-payee additional insured in connection with H&E's insurance policy. Abdul-Hajj's request was based on his understanding that the lease agreement required that 110 Wyman, as landlord, be named as an additional insured on H&E's policy. Abdul-Hajj wanted to ensure that as the landlord, 110 Wyman had some control over what was done with the funds issued for repair of the Quest premises.

On Aug. 9, 2006, Western, at Privette's direction, issued Endorsement 2, which added 110 Wyman as a co-payee additional insured on the policy by endorsement. Western subsequently issued Endorsement 3 on Sept. 13, 2006, amending the previously issued Endorsement 2 to identify 110 Wyman as landlord of the property rather than a mortgagee. Privette never informed Davison of the amendments to H&E's policy, nor did Davison ever authorize Privette to add 110 Wyman as either a mortgagee or a landlord to H&E's policy.

After issuing Endorsement 3, Western advanced to H&E a check for $53,136.39 under the business income and extra expense coverage. Meanwhile, upon learning of the addition of 110 Wyman to H&E's policy, Davison complained to Privette about the unauthorized changes Privette made to H&E's insurance policy. Western subsequently issued Endorsement 4 on Sept. 18, 2006, voiding Endorsements 2 and 3 and removing 110 Wyman from H&E's insurance policy.

Despite the issuance of Endorsement 4, 110 Wyman alleged that it was entitled to the insurance proceeds and demanded that any further checks issued by Western be made jointly payable to 110 Wyman and the Quest nightclub.

In December 2006, 110 Wyman filed an eviction action against H&E based upon H&E's failure to pay rent in a timely manner. The district court issued an order on December 15, 2006 compelling H&E to pay 110 Wyman $36,092.10 in outstanding rent by Dec. 20, 2006, or face eviction. Despite being issued the check from Western for $53,136.39 as an advance on its business loss coverage, Davison decided not to pay the outstanding rent. According to Davison, he was advised by Western's independent adjuster Bill Conrad not to pay the outstanding rent because the matter regarding payment of insurance proceeds was unresolved. When H&E failed to make the requisite payment, H&E was evicted from the Wyman Building on Dec. 22, 2006.

Litigation between H&E and 110 Wyman eventually settled after the district court found that 110 Wyman was not a named insured, additional insured, loss payee or mortgagee under the policy and therefore had no basis to recover directly from Western.

H&E then sued the agents who moved for summary judgment, arguing that H & E could not establish that the wrongful issuance of the endorsements listing 110 Wyman as a payee caused appellants any damages. The district court granted the motion, finding that the "record unequivocally shows that [Western's] delay in processing the insurance claim was unrelated to Endorsements 2 and 3″; rather, Western's decision to delay further payment pending its investigation was based upon its understanding that 110 Wyman's claim for the insurance proceeds arose out of the terms of the lease agreement between 110 Wyman and H&E. Thus, the district court concluded that appellants "cannot establish a causal connection between the issuance of Endorsements 2 and 3 and the failure of [appellants'] business."

TRIAL BY JURY

The court noted that the lease agreement may have been a factor in Western's decision to delay payment of the insurance proceeds. Indeed, a fact finder may ultimately determine that the lease agreement may have been the only factor in the decision. But the evidence in the record before the court was not conclusive of that issue.

If the endorsements had not been issued, 110 Wyman may not have threatened litigation with Western because any claim to the insurance proceeds would have been against H&E pursuant to the terms of the lease agreement. We also note that Western's position that 110 Wyman was not entitled to insurance proceeds based upon the issuance of Endorsement 4 is not dispositive of the issue.

The ultimate damages claimed by appellants include the inability to rebuild and remodel the nightclub, activities that would have been facilitated by payment of the proceeds of the building and personal property coverage that Western withheld. The record reflects that at the time of the December eviction proceedings, Western was delaying payment of these proceeds. In light of this delay, the amount of the insurance proceeds to be paid to appellants was unclear. In fact, appellants were unsure whether the insurance proceeds would be paid at all. The uncertainty involving the insurance payments under the building and personal property coverage was the alleged damage sustained by appellants because without the knowledge that appellants would have the necessary funds available to rebuild the nightclub, further action, such as payment of rent, was put on hold by appellants to curb the risk of additional loss. Consequently, the delay in payment of the insurance proceeds payable under the building and personal property coverage would have been the proximate cause of the alleged damages claimed by appellants. Appellants have presented evidence that creates an issue of material fact as to whether Privette's conduct was the first domino in an unbroken chain of events that lead to appellants' alleged damages. This is a question to be resolved by the trier of fact.

This case should be a warning to all insurance agents, brokers and insurers: Don't change a policy unless all insureds agree to the change.