I promise not to discuss COVID-19 in detail in this post. The recent deluge of hot legal takes about the pandemic may be making a lot of people sicker than the virus itself. So, let’s talk about a different, earlier disaster.
Believe it or not, eight years after the winds of Hurricane Sandy struck New Jersey, they’re still blowing through the state’s court system. Recently, the Appellate Division upheld a multimillion-dollar verdict against an insurance brokerage for failing to provide proper advice about storm coverage in advance of Sandy. And while I just promised not to focus on you-know-what, the truth is that after any disaster, when businesses learn they have no coverage, insurance professionals have a great big bullseye on their backs. So, I expect a wave of broker liability litigation relating to the pandemic, starting with “I didn’t know we had a virus exclusion.”
The recent Sandy decision is Wakefern Food Corp. v. Lexington Insurance Company, which you can access here. The Wakefern facts are straightforward. Wakefern owns Shop-Rite supermarkets. The organization hired two brokers, BWD Group and The Associated Agencies, to help with risk management advice and coverage interpretation, and to place appropriate policies.
To save money, Wakefern wanted to keep the deductibles low under its property policies. But when renewal time rolled around in 2012, Wakefern’s then-carrier, Affiliated FM, offered coverage that involved an increased premium, and an increased per-location deductible (from $10,000 to $100,000), based on Wakefern’s loss experience. The Wakefern people asked the brokers to get other quotes.
Ultimately, Wakefern’s brokers offered two choices. First, the renewal with Affiliated FM at a cost of $5.8M. Second, a program through Lexington (AIG) at a cost of $4.6M.
Wakefern selected the less expensive option, through AIG.
Unfortunately, unlike the Affiliated FM program, the AIG program had a “Named Storm Deductible” of 2% of the total insured value of each location. When the policies were bound, the brokers didn’t explain the significance of the named storm deductible, or how it worked. Since Sandy was a named storm, I think you can see where this is going.
A word here about named storm deductibles. The difference between a regular deductible and a named storm deductible is that regular deductibles are usually a flat rate in dollars (as in, “$10,000 per occurrence deductible”) while a named storm deductible is expressed as a percentage of the risk value. This usually makes for a higher deductible should a loss happen, but the tradeoff is that the policyholder gets a more affordable policy. Of course, sometimes you get what you pay for…
There’s an old saying in baseball that when you’re not ready in the field, the ball will always find you. About a month after the coverage was placed, Sandy hit, with devastating results. 150 Wakefern stores were impacted. Many lost all their merchandise.
Wakefern submitted a claim to AIG for $55.4 million in losses. AIG paid only $24 million, because of the reductions caused by the named storm deductible. Wakefern was unhappy, and sued AIG and the brokers. AIG and Associated settled with Wakefern, but BWD elected to roll the dice with a jury. Unfortunately for BWD, the jury sided with Wakefern on the issue of BWD’s professional negligence, returning a plaintiff’s verdict of almost $11 million, plus over a million dollars in interest.
Both sides appealed, raising various legal issues. In this post, I’m focusing only on the issue of BWD’s liability. Basically, BWD argued that its conduct was not the “proximate cause” of any harm suffered by Wakefern, because, for example, Wakefern had produced no evidence showing that another carrier would’ve paid more on the claim than the $27 million paid by AIG. (Nonlawyers: “Proximate cause” means that someone’s negligent conduct was a “substantial contributing factor” in causing damages.)
The Court rejected BWD’s argument, writing: “BWD’s argument ignores Wakefern’s main contention, i.e., that the availability of a better policy was not explored by [Wakefern] because the information BWD supplied was incomplete. Moreover, BWD never accurately explained the ramifications of the NSD. Therefore, before they bound the [AIG] policy, Wakefern’s executives did not understand the application of the NSD would result in a deductible of $24 million.”
Drilling down on the specifics, the Court held that Wakefern had proven the following facts through expert testimony: “BWD’s contract required it to provide professional assistance and interpretation of policy terms; BWD did not meet the standard of care; when BWD procured insurance in 2012, it focused almost entirely on price and ignored other factors; BWD should have given a full explanation of the NSD; the missing information represented a deviation from the broker’s standard of care; BWD did not explain the differences between the expiring Affiliated policy and the Lexington policy; up until 2012, Wakefern did not have an insurance policy with an NSD so BWD was required to explain this deductible; and BWD failed to follow up with other insurance carriers who provided an initial quote.”
A few observations about this case.
First, given the disaster that is our litigation system, I think most cases should settle. As an outside observer, I obviously don’t know what settlement discussions took place before this trial. There’s an old saying that “some cases just have to be tried.” I don’t believe that. Risk assessment may be complex, but it’s doable in every case, through the use of focus groups and other techniques. There is, really, no case that has to be tried. There are, however, professionals (lawyers, insurance adjusters, and clients alike) who fall in love with their own story, can’t be budged, and end up having to take unpleasant medicine. I’m not saying that happened here. I’m just saying it’s something we all have to look out for.
Second, the contract between BWD and Wakefern specifically obligated BWD to interpret and explain coverage provisions. Yet BWD waited until the day before Sandy struck to alert Wakefern of the significance of the named storm deductible. Failing to abide by clear contractual obligations in a timely way will always have an impact on a jury. Know what’s required by your contract.
Third, it’s a good idea to have coverage counsel review your program from time to time. Seemingly inconsequential provisions, or so-called “boilerplate” language, can come back to bite you. Given the often incomprehensible maze contained in many policies, even experienced counsel may not be able to identify every potential issue…but you might be able to avoid expensive litigation if you do everything possible to flag the main issues ahead of time.
By the way, lead trial counsel for Wakefern was Sheri Pastor at McCarter & English, a top-notch insurance coverage litigator who did her usual great work.