obligation to force, or even advise the insured about the limits of liability of actual
cash value or replacement cost value of a
property. Most are not sufficiently educated on the cost of repairing or replacing
a damaged structure. They rely, therefore,
on what the insured tells the agent or broker is the true value of the home or commercial structure.
What should the insured do?
The appropriate advice to avoid errors
and omissions claims is to serve the client properly and within your expertise.
Whether you think a property is overvalued or undervalued, it is incumbent on
the agent or broker to remind the applicant for insurance to set appropriate limits to avoid underinsurance or co-insur-ance penalties, as follows:
1. It is essential that you, as the insured,
select the appropriate policy limits.
2. To do so:
• Recognize that repair and reconstruc-
tion of structures is more expensive
than new construction.
• Recognize that you do not need to
insure the full value of the property
since the land is not insured, only the
•Contact a fire reconstruction contractor to advise you on the cost to
replace the structure if it is destroyed
• Contact a fair market value appraiser
to advise you about the actual cash
value of the property.
• Determine from your suppliers the
actual cash value and replacement
value of the contents of your dwelling
or commercial structure.
• Determine the value of all product on
• Determine the value of all work in
• Report those values to your insurer
so that appropriate limits can be established.
Major catastrophes like wildfires,
earthquakes, floods and tornados can,
and usually do, destroy real and personal
property. When an insured loses every-
thing in a catastrophe, he or she calls an
insurance agent, insurance broker or in-
surance company to make a claim. When
the claim is made, the insured is remind-
ed of the limit of liability chosen, only to
find it is inadequate to replace the house
or commercial property. The insured will
be angry and unwilling to accept the fact
that the inadequate policy limit is due to
his or her error. Suits are filed against the
insurance agent/broker and the insurer,
only to find that the court will not cure
the insured’s mistake.
An insurance agency, when asked to
insure the contents of a property at full
replacement cost, was found to have no
duty to advise the insured regarding adequacy of policy limits even if the insured
initially requested full replacement cost
coverage in Lenz Sales & Service, Inc. v.
Wilson Mut. Ins. Co., [Court of Appeals
of Wisconsin, 175 Wis.2d 249, 499 N.W.
2d 229 (March 10, 1993)].
Before an agent or broker can be held
liable to advise of the appropriate limits
of liability, there must be a special relationship between the agent or broker
and an applicant for insurance. For a
special relationship to exist, the insured
must show a longstanding relationship;
some type of interaction on the question
of coverage; and the insured’s reliance
on the expertise of the insurance agent
to the insured’s detriment when the limits are insufficient to repair or replace
Without a special relationship, there is
no justification in the law to impose the
additional burden on insurers that they
anticipate and then counsel their insured
on the hypothetical, collateral consequences of the coverage chosen by the insured. In 1992, the case of Free v. Republic Ins. Co., [ 8 Cal.App.4th 1726, 11 Cal.
Rptr.2d 296 (1992)] the California Court
of Appeal held an agent was involved in
a special relationship so that the agent
could be held liable to a client after misinforming the client that his homeowner’s
limits were sufficient.
It is imperative, therefore, unless there
is a special relationship between the insured and the agent, that the insured do
what is necessary to obtain appropriate
coverage, and the agent or broker refuse
to provide advice he or she is not competent to give.
When an insurance agent or broker
does exactly what was asked by an insured, any suit will fail because no court
will save a plaintiff from its own mistakes.
The suits can be avoided by advising the
insured what must be done to select appropriate limits.
Barry Zalma, Esq., CFE, (zalma@zalma.
com) has practiced law in California for
more than 42 years and now serves as an
insurance consultant and expert witness
specializing in insurance coverage,
insurance claims handling, insurance bad
faith and insurance fraud. Books in the
Zalma Insurance Claims Library, can be
found at www.nationalunderwriter.com/
It is imperative that the insured
do what is necessary to obtain
appropriate coverage, and the agent
or broker refuse to provide advice he
or she is not competent to give.