Summary: A provision of some independently-filed and manuscript property policies that can sometimes save the day for insureds and/or their insurance representatives permits coverage despite the fact that there has been some inadvertent error in the way the policy has been written. Because there is no standard provision, as such, whether coverage applies will depend on the facts and the specific language in question. As some cases discussed reveal, some insurers are not overly generous in permitting an excusable mistake, particularly when a lot of money is at stake. This kind of provision, nonetheless, can give insureds a better chance at coverage than when no such provision applies.

Topics covered:

Introduction

Reducing the chances of failing to report values

Noncomplying situations—cases

A case in the insured's favor

Impact of omitted property value

Sample errors or omissions provisions

Introduction

It is not unusual today for a policyholder of property insurance to find—usually after a loss—that the property sustaining damage or destruction was (1) not described on the policy or statement of values, (2) its location was shown as a wrong address, (3) listed for the wrong limit of insurance, or (4) covered on a specific rather than blanket basis resulting in a shortage of payable funds. What happens then likely depends on how much money is at stake. When a building or structure is extensively damaged or destroyed and there has been an error in arranging insurance, litigation is likely to follow.

Policyholders generally look to their insurance representatives when a coverage denial by an insurer follows. Whether the blame will stick, however, depends on the facts. For example, in Seago v. Home Ins. of Ill., 373 So.2d 808 (Miss.1979), the policyholder pointed to both the insurer and its agent as being to blame for inadvertently not including a location that was damaged by fire. As it turned out, the fault rested with the policyholder who mistakenly omitted a description of the property in question.

Whether an insurer must honor payment of loss often depends on if the insurance representative is an agent of the insurer or broker of the policyholder. In fact, this is a common defense relied on by insurers in these types of cases. One such case is Black v. Ill. Fair Plan Assn., 409 N.E.2d 549 (Ill. App. Ct. 1980), which involved a dispute where the policy contained the wrong address for a building.

The court held that the insured was not entitled to reformation of the policy because the mistake was unilateral on the part of the insured and the insurance representative and did not involve the insurer. The person who procured the insurance for the insured was considered to be a broker, rather than an agent of the insurer. As a result, the broker's acts and his knowledge of the facts could not be imputed to the insurance company.

In Granite State Ins. Co. v. Bacon, 586 S.W.2d 254 (Ark. Sup. Ct. 1979), it was not the inadvertent omission of a scheduled location on a property policy that generated a dispute but, instead, a mistake in typing a $5,500 limit, rather than $55,000. The insurer blamed the agent for the mistake. The court, however, was of the opinion that negligence had no bearing on the disposition of the case. The basis of whether the insurer was required to pay the loss hinged on the answers to two questions: First, did the agent have the authority to bind the insurer? Second, would the insurer have accepted the increased coverage, if it were desired? Since the agent had authority to bind the insurer, and testimony reflected that the insurer would have written this type of risk, the insurer was required to pay the loss, subject to the payment of an increase in premiums corresponding to the correct amount of coverage.

Reducing the Chances of Failing to Report Values

Some property policies today have built-in provisions that can avoid or at least reduce the arguments generated by the failure to list property where insurance is desired or other reasons. Other policies need to be amended by endorsement if the underwriter is willing.

Some of these provisions are broad enough to include not only the inadvertent omission of a property listing but also an error with the insurance limit. The first and third provisions of the samples at the end of the article show this. The fifth provision appears to be the broadest as it also includes any error or omission in the name of the insured, description, location, or values reported, or even an incorrect deletion. It is likely to take a manuscript provision to obtain the most liberal provision, which is the case dealing with the fifth provision.

The way these provisions read, it is presumed that the error or omission will be reported before something happens. As the cases would have it, however, many of these mistakes are not discovered until after a loss occurs. If that is when an error or omission is discovered, it would appear to still fall within these provisions, since there is no specific limitation to the contrary about when the error or omission must be reported. However, one should not count on this. If the loss is large, the insurer may likely dispute the meaning of the provision.

Some of these provisions, furthermore, require that the error or omission take place at the inception of the policy. If a location is not reported at policy inception, therefore, it presumably should be covered. If, however, an error or omission were to take place during the policy period as, for example, when an insured fails to report the acquisition of new property, this type of provision may not apply to an insured's benefit.

Noncomplying Situations—Cases

In Simon v. National Union Ins. Co. of Pittsburgh, 782 N.E.2d 1125 (Mass.App. Ct. 2003), an insured of a blanket property policy attempted to rely on one of these provisions, after a loss, in circumstances where the property was listed on the policy's schedule but without a dollar value or amount. Fire destroyed certain property, which at some time before the loss, was vacant. Less than a month before the fire, however, a trust leased the property in its vacant condition to a limited partnership, which began renovating it for use as a restaurant. Prior to the fire, however, the trust did not notify the insurer of the leasehold arrangement or the renovation work on it.

Prior to the property policy's issuance, the trust had supplied the insurer with a schedule listing twenty-six properties situated in three states. Of special significance was the fact that some but not all of the scheduled properties had an identified dollar value under the heading “real property” and “rents collectible.” For the property in question, however, no dollar value or rent was shown; instead, where these values would have been placed on the schedule, there were simply three dash marks. Other than showing its square footage, this location was described as: “Vacant restaurant to be demolished; it is anticipated [that] land . . . will be developed into condominiums or apts.” At the end of the schedule, there was a total for all stated dollar values for real property, personal property, and rents, which also corresponded with the policy limit, and on which the premium was based.

One of the insured's arguments for coverage was that, since the coverage applied on a blanket basis, the property in question should have been covered since it was listed in the schedule. The insured's second argument dealt with reliance on the policy's unintentional error or omission provision, which reads as follows:

Any unintentional error or omission made by the Insured shall not void or impair the insurance hereunder provided Insured reports such error or omission as soon as reasonably possible after discovery and pays appropriate premium thereon. In the event that [sic] commits an unintentional error the Company's liability shall be limited to the occurrence limit of liability or the amount indicated on the separate errors or omissions limitation . . . whichever is less.

The court did not view this provision as a “saving function,” which in effect would allow the insured to simply report the error to the insurer as soon as possible after the loss (which it did) and, upon payment of an appropriate premium, obtain the desired coverage.

The appellate court, instead, concluded as the lower court did, that such a clause did not permit an insured to obtain insurance coverage for an uncovered loss that has already occurred.

This is not the only case where the courts have not upheld reliance on the unintentional errors or omissions provision after a loss has occurred—where no coverage existed. Among these cases is Wentwood Woodside I LP v. GMAC Commercial Mortgage Corp., 419 F.3d 310 (U.S. Ct. App. 5th Cir. 2005). The undisputed facts of this case established that the insured never purchased excess flood insurance. The court concluded that the E&O provision, which reads identically to the four E&O provision at the end of this article, was inapplicable because it applied only to insured risks. In Titan Indem. Co. v. Hall County, 413 S.E.2d 213 (Ga. Ct. App. 1992), the question before the court was whether the trial court erred in concluding that the unintentional errors endorsement was applicable to the insured's duty under the contract to provide prompt notice of an occurrence that may result in a claim. The unintentional errors or omissions provision reads as follows:

Any error, misstatement or mistake in information given by you to us will not invalidate the insurance provided by this policy unless it was intentional. However, we are entitled to premium based upon the correct information.

The court concluded that the trial court erred because the language of the endorsement, as a whole, did not deal with the insured's obligation to report potential claims. Rather, the E&O endorsement dealt with “the reporting of information relevant to the insurer's assessment of the risk involved in extending coverage.” The court concluded that a failure to provide notice of an accident covered by the policy would not affect the premium due, which the endorsement requires.

Since many property insurance risks require insurance on an excess basis, one question is whether an E&O provision that applies to a primary policy follows through to an excess layer. One such case dealing with this question, among several other issues, is RSUI Indem. Co. v. Benderson Development Co., 2011 WL 32318 (M.D. Fla. Jan. 5, 2011).

The Development Company (named insured) purchased three levels of commercial property insurance for four of its properties all located in Florida. The primary layer, provided by Commonwealth Insurance Company of America (Commonwealth), was written for two years commencing March 2003 with a $5 million limit and a $3 million annual aggregate limit for loss caused by the wind peril (named storms only). The first excess layer was provided by the Hartford Fire Insurance Company, which was effective for the one-year period beginning March 2004. It had a $10 million limit per occurrence for wind losses in excess of the $3 million limit of Commonwealth Insurance Company. The second layer of excess was provided by RSUI Indemnity Company for the one-year period effective in March 2004, subject to a $35 million limit per occurrence in excess of the $13 million provided by the first two layers of commercial property insurance.

On or about August 13, 2004, as a result of Hurricane Charley, the named insured sustained property damage at all four of its locations. Both Commonwealth and Hartford tendered their limits of $13 million. RSUI, however, refused to pay any amount. In February 2009, RSUI filed a complaint seeking a declaratory judgment that there was no coverage under its policy for the damages sought. There were a number of issues, but the one insofar as this subject matter is concerned, was that one of the four locations was not declared on the statement of values.

The named insured maintained that even though that location did not appear on the statement of values or was added by endorsement to the RSUI policy, it still should have been covered in light of the Errors and Omissions clause, which reads as follows:

No inadvertent error, omission or failure in making reports or other data hereunder shall prejudice the Insured's right of recovery, but shall be corrected when discovered. It is further understood and agreed that any error in description of locations, or values of projects insured or to be insured by this policy shall not invalidate or reduce the policy limit of liability, or otherwise prejudice any recover [sic] under this policy.

The insurer responded that the E&O clause would not allow recovery for that location. While its policy “follows form” of the primary Commonwealth policy, the insurer maintained that the E&O clause would not have been incorporated into its policy. The reason, RSUI explained, was that its policy specifically stated that it did not incorporate exclusions, warranties, terms, definitions, and conditions as to limit of liability. The insurer further explained that the E&O clause added a condition to the limit of liability by stating that in certain cases the limit of liability would not be invalidated or reduced when it otherwise might be. Thus, from the insurer's perspective, the E&O clause was exempted and not incorporated into the RSUI insurance policy.

The court agreed with the insurer. In doing so, the court stated that the E&O clause was meant to cover errors in descriptions of locations or values of projects insured or to be insured, and not omissions of entire properties. The location in question, the court said, was an additional location; its omission from the policy was not an error in description or value. Thus, reading the plain language of the E&O clause, the court found that the clause did not provide a basis for covering that location.

It is important to note here that when it comes to “follow form” or “following form” coverage dealing with property insurance, the concept is virtually identical to liability insurance. So, when either one of those two terms are mentioned, one needs to answer the question whether the coverage is on a “pure” or “conditional” follow form basis. It is not too common to see “pure” follow form coverage having to do with either property or liability. When it does apply, the coverage is virtually identical to what coverage follows beneath it. So in the event of any dispute having to do with excess coverage, the underlying policy provisions control. When excess coverage is on a conditional follow form basis, it is the conditions of the excess policy that control in the event of any dispute involving the excess layer.

The excess property coverage written by RSUI, for example, was a conditional excess follow form policy. This difference between “pure” and “conditional” follow form coverage needs to be heeded, because there is a tendency, especially in the insurance community, for people to simply describe excess property and liability insurance as “follow form” without going the extra step and determining whether it is a “pure” or “conditional” form and, of course, the differences are significant.

A Case in the Insured's Favor

When an unintentional error or omission dispute gets to a level of litigation, it is difficult to determine what the outcome is likely to be. In Trident Seafoods Corp. v. Commonwealth Ins. Co., 2012 WL 432864 (W.D. Wash. Feb. 8 2012, the named insured won, which, based on the cases dealing with the E&O provision of property policies, is relatively uncommon.

This was a complicated case with many issues that are not necessary to discuss there. As a matter of interest, however, the named insured secured excess property insurance to cover over a hundred locations, including a fish processing plant in Chignik, Alaska. The named insured acquired primary property coverage for a limit of $5 million from the Lexington Insurance Company, and first layer excess insurance for $5 million from U.S. Fire Insurance Company. It also purchased a second excess layer from Commonwealth for up to another $10 million. For most of the fifteen-year period, Commonwealth's excess policy following the underlying blanket policies.

The disputes in this matter occurred after a fire destroyed one of the ten buildings at the Chignik plant. After the fire, the named insured notified the three insurers and provided documentation suggesting that the total loss exceeded $20 million. Both the primary and first excess insurers each paid $5 million and sought the remaining loss from Commonwealth. The named insured has previously provided a statement of values to the Commonwealth listing the value of the property as $10,567,000. Sometime later, however, the named insured informed this insurer that it had made an unintentional error in the way it had calculated the statement of values. The named insured, in completing the statement of values, did not represent replacement costs. The named insured then had to file suit because the insurer was not going to pay the amount that the named insured had sought.

In the issue regarding the E&O cause, there was no dispute regarding coverage for the loss

sustained. The dispute was over the amount of insurance, and with the question whether this clause was limited to errors and omissions identified and corrected before a loss occurred. The E&O clause and its three conditions read as follows:

Any unintentional error or omission made by the Insured shall not void or impair the insurance hereunder provided the insured reports such error or omission as soon as reasonably possible after discovery and pay appropriate premium thereon.

The conditions are

(1)the misstatement was unintended;

(2)the insured must report the error reasonably promptly; and

(3)pay the additional premium.

The named insured argued that the E&O clause was not limited to errors or omissions discovered pre-loss. The insurer, on the other hand, argued that public policy prohibited claimants from purchasing insurance after a loss, and the named insured had failed to report any error or omission as soon as reasonably possible after discovery. During oral argument, the insurer maintained that based on relevant public policy, the court should have considered the principle of fortuity or the known risk principle, stating, “The known risk defense is premised on the principle that an insured cannot collect on an insurance claim for the loss that the insured subjectively knew would occur at the time the insurance was purchased.” As it turned out, however, the insurer conceded that there was no claim for a loss that the named insured subjectively knew would occur when it purchased the insurance. The insurer also cited a number of court decisions but, from the court's perspective, none of them were on point.

The U.S. District Court concluded that the trial court erred because the language of the E&O clause, as a whole, did not deal with the insured's obligation to report potential claims. Instead, the E&O clause dealt with “the reporting of information relevant to the insurer's assessment to the risk involved in extending coverage.”

Impact of Omitted Property Value

What remains for consideration is what impact omitted property value might have in relation to the amount payable and the additional premium owed. The fact that an insurer may be required to pay a loss does not necessarily end the matter. It would appear that the insurer could take into consideration extenuating factors, such as any applicable coinsurance provision or deductible. Determining the premium, on the other hand, may require a new calculation of average rates, particularly since many of these types of risks are likely to be on a blanket basis.

Another concern deals with those situations where one of these unintentional error or omission provisions or endorsements conflicts with certain coverage extensions. Many property forms include coverage extensions limited to certain specific time periods within which the insured must notify insurers regarding, for example, newly acquired properties, buildings under construction, and vacant or unoccupied buildings or structures. What remains open to question is whether an insured could rely on an unintentional error or omission provision following expiration of one or more such coverage extensions of a form where the failure to declare a location or condition is totally honest.

Suppose the omitted location where a loss occurs also was subject to a protective safeguard provision, and the loss could have been prevented or reduced had the sprinklers or other alarms been functional at the time of loss. Obviously, much will depend on the facts and the provision in question. With one of these unintentional error or omission provisions applicable, the insured may at least have some leverage not otherwise available.

Sample Errors or Omissions Provisions

1.Errors and Omissions—Property Policy

The Insured hereunder is not to be prejudiced by any unintentional and/or inadvertent omission, error, incorrect valuation or incorrect description of the interest, risk or property, etc., provided notice is given as soon as practicable upon discovery of any such error or omission.

2.Errors or Omissions—Property Policy

You will not be penalized because of any unintentional error or omission you make in the listing or describing a “premises or location” to be covered under this Coverage Form.

“Premises and Location” means any building, yard, dock, wharf, pier, bulkhead or any group of such properties which are bounded on all sides by public roads, open waterways, or open land space each of which shall be not less than 50 feet wide. But when a bridge or tunnel crosses such road, waterway or open space, no such separation shall apply within the meaning of this definition.

3.Inadvertent Error or Omission in Reporting—Excess Property Policy

It is agreed that this insurance shall not be prejudiced by any inadvertent omission in reporting hereunder or unintentional error in amount, if prompt notice be given this Company as soon as said omission or error becomes know and deficiency of premium, if any, be made good.

4. Errors or Omissions—Manuscript Policy

Any unintentional error or omission made by the Insured shall not void or impair the insurance hereunder provided the Insured reports such error or omission as soon as reasonably possible after discovery.

5.Errors and Omissions—Manuscript Property Policy

Any error and/or omission in the name of the Insured and/or the description, location or values reported or incorrect deletion shall not void or impair the insurance hereunder provided the Insured reports such error, omission or deletion as soon as practicable after discovery. Addition or return premium shall be calculated at an appropriate basis as required.