How brokers can avoid lawsuits
When property and casualty insurance brokers get sued, inadequate coverage limits and application misstatements tend to be two common denominators, one insurance litigator shared at YBCcon in Toronto last week.
“When errors are made, they seem to follow a certain pattern and therefore [are] quite predictable,” said Gord McGuire, partner at Adair Goldblatt Bieber LLP. “What I notice about the insurance broker negligence cases that come across my desk is that they tend to follow the same patterns and that brokers are making the same errors over and over again.”
One major source of litigation is when clients are underinsured after a loss because their limits are inadequate.
That happens most frequently in property insurance, especially in policies without guaranteed replacement cost (GRC) protection, such as for commercial buildings or seasonal cottages, said McGuire during a session.
In one case, his clients were left underinsured by nearly $500,000 after their cottage burned down.
In 2015, the broker added the cottage to the existing home insurance policy and set the GRC limit for the cottage using software that estimated rebuild costs. But the software also had a disclaimer stating it was not to be used for setting limits. The broker also neglected to inform the clients they had a choice in determining coverage.
Additionally, the policy limit only increased by a couple of percentage points each year, which wasn’t nearly enough to keep up with building prices.
The GRC limit was set at around $400,000. But when the cottage burnt down in 2022, the client learned the cottage was worth about $900,000.
“The clients are left with a half-million-dollar shortfall. And of course, they sue the broker,” McGuire said.
Case law exists to advise brokers on how to best avoid limit inadequacies before they occur.
“First, tell the client that it’s important that they insure to value. Second, tell the client that you are not an expert in determining the rebuild price of their cottage or commercial building. And third, recommend that the client hire somebody who does have that expertise, or at least consult with that person,” said McGuire.
Another common reason brokers get sued is insurance application errors — even unintentional ones.
In one case, a client had purchased a commercial building but had not yet taken possession of it because the sale hadn’t closed. The client told the broker he thought there were sprinklers in the building, but that he wasn’t sure.
The broker made a note on this but relayed this to the underwriter without clarifying it was tentative.
“About three years later, the property suffers a major fire loss. The insurers…go through the underwriting and the application, and they say, ‘Okay, we were told this place had sprinklers, and it does not. So, we are therefore voiding coverage, as we are entitled to [by] law,’” said McGuire.
The law regarding insurance applications specifies that if a broker or client makes a mistake on an insurance application, even if it’s unrelated to the actual loss, the insurer can cancel the policy retroactively, whether the misrepresentation is intentional or not.
To protect themselves from errors and omissions (E&O) claims, McGuire offered brokers a few key tips.
“First, turn your mind to the risks. Second, give the appropriate advice and warnings. Third, document everything. And finally, follow a system every time.”
Even a quick email can shield brokers from litigation. In one case, a broker flagged a low coverage limit to the client who owned a factory. “The client replied, ‘No thanks, we’re good.’” When the factory burned down, and their building limit was too low, they tried to sue their broker.
“That one email…killed the case,” McGuire said.
