I promise not to discuss COVID-19 in detail in this post. The latest deluge of heated legal action around the pandemic may make many more people sicker than the virus itself. So, let’s talk about a different past disaster.
Believe it or not, eight years after Hurricane Sandy’s winds hit New Jersey, they’re still drowning in the state’s court system. Recently, the Appeals Chamber upheld a multimillion-dollar ruling against an insurance brokerage for failing to provide proper advice about storm coverage before Sandy. And while I just promised not to focus on what you know, the truth is that after any disaster, when companies learn they don’t have coverage, insurance professionals have a huge point of interest on their back. So, I’m expecting a flurry of mediator liability lawsuits related to the pandemic, starting with “I didn’t know we had a virus exclusion.”
Sandy’s final decision is Wakefern Food Corp. v. Lexington Insurance Companywhich you can access over here. The wkvern The facts are straightforward. Wakefern owns Shop-Rite supermarkets. The organization has hired two brokers, BWD Group and Associated Agencies, to help advise on risk management, explain coverage, and establish appropriate policies.
To save money, Wakefern wanted to keep discounts low under their proprietary policies. But when renewal time began in 2012, then-affiliated FM affiliate Wakefern offered coverage that included an increased premium, and a deductible increase per location (from $10,000 to $100,000), based on Wakefern’s loss experience. The people of Wakefern asked brokers for other quotes.
In the end, Wakefern brokers offered two options. First, the renewal with Affiliated FM at a cost of $5.8 million. Second, a program through Lexington Corporation (AIG) at a cost of $4.6 million.
Wakefern chose the least expensive option, by AIG.
Unfortunately, unlike the FM affiliate program, AIG had a “named storm deductible” of 2% of each site’s total insured value. When the policies were binding, brokers did not explain the significance of the named storm discount, or how it works. Since Sandy was a definite storm, I think you can see where this is headed.
A word here about the so-called storm discounts. The difference between a regular discount and a named storm discount is that regular discounts are usually a flat dollar rate (as in “$10,000 per time deductible”) while the named storm discount is expressed as a percentage of the risk value. This usually results in a higher deductible in the event of a loss, but the trade-off is that the policyholder gets an affordable policy. Of course, sometimes you get what you pay for…
There’s a saying in baseball that when you’re not ready on the field, the ball will always find you. About a month after the coverage went live, Sandy had devastating results. 150 stores in Wakefern were affected. Many lost all their goods.
Wakefern has filed a claim with AIG for $55.4 million in losses. AIG paid only $24 million, due to the cuts caused by the specific storm of the discount. Wakefern was not happy, and sued AIG and the brokers. AIG and Associated settled with Wakefern, but BWD chose to roll the dice with a jury. Unfortunately for BWD, the jury sided with Wakefern on the issue of BWD’s professional negligence, returning the plaintiff’s ruling about $11 million, plus more than $1 million in interest.
The two sides resumed, and raised various legal issues. In this post, I focus solely on the issue of BWD liability. Essentially, BWD argued that its behavior was not the “direct cause” of any damage Wakefern suffered, because, for example, Wakefern provided no evidence that another carrier would have paid more in the claim than the $27 million paid by AIG. (Non-lawyers: “direct cause” means that someone’s negligent behavior was a “material contributing factor” to causing the damages.)
The court dismissed BWD’s argument, writing: “BWD’s argument ignores Wakefern’s main argument, that the availability of a better policy has not been explored by [Wakefern] Because the information provided by BWD was incomplete. Furthermore, BWD has never accurately explained the implications of NSD. So, before they tied [AIG] Policy, Wakefern executives did not understand that NSD application would result in a $24 million deduction.”
Detailing in detail, the court held that Wakefern had established the following facts through expert testimony: “BWD’s contract required her to provide professional assistance and interpret policy terms; BWD did not meet the Standard of Care; when BWD bought insurance in 2012, it focused almost entirely on price and ignored Other factors; BWD must provide a full explanation of the NSD; Missing information represents a deviation from the broker’s level of care; BWD did not explain the differences between the Expired Affiliates Policy and the Lexington Policy; Until 2012, Wakefern did not have an insurance policy with NSD so BWD was required explain this discount; and BWD failed to follow up with other insurers that submitted an initial quote.”
Some notes on this issue.
First, given the disaster that our litigation system represents, I think most cases should be settled. As an outside observer, I clearly do not know what settlement discussions took place prior to this trial. There is an old saying that “some cases have to be tried”. I do not believe that. Risk assessment may be complex, but is doable in each case, through the use of focus groups and other methods. There is, in fact, no such case she has to be tired. However, there are professionals (lawyers, insurance experts, and clients alike) who fall in love with their own story, can’t budge on it, and end up on annoying drugs. I’m not saying that this happened here. I’m just saying it’s something we all have to look for.
Second, the contract between BWD and Wakefern specifically obligated BWD to interpret and explain the coverage provisions. However, BWD waited until the day before Sandy struck to alert Wakefern of the importance of the named storm’s opponent. Failure to comply with clear contractual obligations in a timely manner will always have an impact on the jury. Know what is required under your contract.
Third, it is a good idea to have your coverage counselor review your program from time to time. Seemingly irrational judgments, or what’s called “normative” language, can come back to piss you off. Due to the often poorly understood maze built into many policies, even experienced advisors may not be able to identify every potential issue…but you may be able to avoid costly litigation if you do everything you can to report Main issues early.
Incidentally, he was Wakefern’s chief trial attorney Sherry Pastor at McCarter & English, a top-tier insurance coverage attorney who has done her usual wonderful job.