Risk Management - Expect the Unexpected (excerpted)

Vacant property, simply stated, is an easy target for thieves. In light of this fact, one might not expect an insurer that provided coverage on a vacant property to deny a claim for damage that occurred when the property was occupied.

(In one case)…the owner of a restaurant closed the business and let her insurance policy lapse. The mortgage holder, however, demanded that the owner obtain property insurance in a sufficient amount to pay the $92,000 outstanding debt.

Accordingly, the owner applied for a six-month policy with a limit sufficient to meet the balance of the mortgage. On the application, the owner represented that the restaurant was "closed for the season."

…the restaurant owner's broker arranged coverage through Lloyd's of London…The policy's declarations page described the covered property as a "vacant restaurant."

Accompanying the policy was a letter from the producer stating that if the insured decided to reopen the restaurant, she would be required to notify the producer so he could make the necessary changes to the policy. The restaurant owner did not read the policy or the producer's letter.

The policy covered property damage resulting from fire, with several pages of exclusions and limitations, but none stating that the reopening of the business would void the coverage.

Unbeknownst to the producer and the insurer, the owner reopened the restaurant, only to find that a plumbing leak had soaked the carpeting. To rid the carpeting of water, the owner tried to dry it with a kerosene heater. The heater caused a fire that resulted in damage to the restaurant that exceeded the policy limit.

Lloyd's denied the claim, contending that the policy provided coverage only while the restaurant remained vacant and that the owner had intentionally concealed a known, material fact both at the time she applied for insurance and at the time of loss; namely, that she had intended to reopen the restaurant and that she actually did so.

When the restaurant owner filed suit, Lloyd's presented a multitude of arguments to support its denial of coverage, but the court rejected all of them. On appeal, the Vermont Supreme Court left undisturbed the decision of the lower court, which held: (1) that the policy was ambiguous as to whether coverage would have continued had the restaurant reopened, (2) that the restaurant owner had not concealed from Lloyd's that she had reopened the restaurant, and (3) that neither party had acted in bad faith.

No matter how reputable a provider of insurance may appear to be, even those that have long-standing experience and are able to write many coverages often not otherwise available, producers must deal with them at arm's length. Producers must anticipate that insurers will raise arguments similar to those presented in the case cited above; and producers must be aware that, in the event of a lawsuit, they may be blamed along with the insurer.