Communications and business transactions through email and the internet are pervasive in today’s world. Every major business is fully equipped with computers, and employees increasingly have access to smart phones with business email and internet capability. This ability to instantaneously communicate and transact has significant benefits for businesses: it saves time and expense, and allows transactions to occur in a more expedient manner. The use of email, however, also brings with it the risk of miscommunication and the potential to overlook, or devote inadequate attention to, important communications. Indeed, in many instances, employees are inundated with emails on a daily basis, with high level employees receiving hundreds of emails each day, if not more.
In the insurance context, the speed and volume of email can result in, among other things, unintended changes to and limitations on coverage. For a business that experiences a significant insurance loss, this could mean millions of dollars in lost insurance proceeds. It is, therefore, essential that businesses implement processes to ensure: (1) clear communications with insurance companies and brokers, and proper documentation of such communications; and (2) designation of an employee with sufficient knowledge of the company’s insurance transactions to carefully review all correspondence with insurance companies and brokers.
The consequences of failing to implement the above procedures are demonstrated by a pending case in the United States District Court for the Southern District of New York. In Cammeby’s Management Company, LLC v. Affiliated FM Insurance Company, No. 13-CV-2814 (JSR), Cammeby’s, a real estate management company, which owns an expansive portfolio of real estate properties in New York City, purchased property insurance from Affiliated FM Insurance Company. After one of its properties sustained significant damage due to Superstorm Sandy (“the subject premises”), Cammeby’s attempted to collect on the policy. Unfortunately, Affiliated FM took the position that flood coverage had been reduced from $30 million to $10 million.
According to Cammeby’s summary judgment papers (Affiliated FM and Alliant do not agree with all of these facts), Cammeby’s used an outside insurance and risk consultant to negotiate and approve its property insurance coverage. The consultant procured the insurance coverage at issue through Cammeby’s broker, Alliant. Through a series of emails, Alliant obtained quotations from Affiliated FM and obtained approval from Cammeby’s consultant. Although a vice-president at Cammeby’s also had some involvement in insurance procurement, the consultant was the primary contact for all insurance matters. On June 30, 2011, Affiliated FM bound commercial property coverage for Cammeby’s. The binder included $50 million in flood insurance coverage for most properties, but only $10 million for certain designated properties.
After this agreement was in place, the consultant, through Alliant, sought to increase the flood limits for the designated properties to $30 million. On July 5, 2011, after several email exchanges between Alliant and Affiliated FM and Alliant and the consultant, Affiliated FM issued a revised binder, which increased the flood insurance sublimit on the designated properties from $10 to $30 million.
On July 26, 2011, the consultant emailed to Alliant, inquiring whether, “[i]f requested,” Affiliated FM would cancel the $20 million of additional flood coverage back to the policy’s inception on the subject premises. Alliant relayed this inquiry to Affiliated FM. Misunderstanding that Alliant’s email was solely an inquiry, Affiliated FM emailed its reinsurer regarding cancellation, to which the reinsurer replied “[w]ill cancel effective 7/26/11. Endorsement to follow.” Affiliated FM then emailed Alliant, stating: “I can cancel the 20 x 10 flood eff 7/26 and return the pro rata amount. Endorsement to follow.” Alliant did not relay this email to the consultant.
Shortly thereafter, without instruction, Alliant began directing insurance communications to Cammeby’s vice-president’s secretary. The consultant and vice-president were copied on or forwarded some of these emails, which apparently included discussion of the reduction of the flood insurance coverage. Neither one, however, actually reviewed these emails. They contend that their failure to review was due to the significant volume of emails they received each day and their belief that emails regarding policy changes would not be directed to the secretary. Assuming that authorization was previously given, the secretary, without checking with anyone, confirmed to Alliant that Cammeby’s intended to reduce the flood sublimit.
Three months after coverage was bound, Affiliated FM finally issued the policy, together with three relevant endorsements. On September 27, 2011, Alliant forwarded the documents to the consultant and secretary, along with cover letters which represented that the policy and endorsements were checked for accuracy. Endorsement No. 1, effective July 26, 2011, reduced the policy’s flood sublimit for the designated properties to $10 million. Endorsement No. 3, effective September 13, 2011, stated that the flood sublimit for the designated properties was $30 million. Lacking knowledge that a policy change had been mistakenly authorized by the secretary, the consultant reviewed the endorsements, and read Endorsement No. 3 as increasing the limits stated in Endorsement No. 1. No one at Alliant ever informed the consultant, or anyone else at Cammeby’s, that Endorsement No. 3 did not reflect the coverage Affiliated FM thought it was providing.
On October 29, 2012, Superstorm Sandy made landfall in New York City, causing tremendous damages to the subject premises. On November 1, 2012, Cammeby’s submitted a $30 million claim to Affiliated FM. On November 30, 2012, Affiliated FM issued Endorsement No. 19, which reduced the flood coverage for the designated properties from $30 million to $10 million, retroactive to and with the intent of “correcting” Endorsement No. 3. On December 21, 2012, Affiliated FM issued a partial denial letter, asserting that Endorsement No. 3 was a clerical error and that Cammeby’s was entitled to only $10 million under the policy. Cammeby’s subsequently filed suit against Affiliated FM and Alliant in federal court.
As noted above, Affiliated FM and Alliant do not accept all of these facts as true and are contesting liability. We can, however, learn important lessons from this case. First and foremost, policyholders should have one person responsible for approving all coverage changes. The broker should be instructed that all communications regarding policy changes should go to an identified contact and unless that person confirms a change, no coverage changes should be allowed.
We also see that this litigation arose out of an insufficiently clear email. The consultant thought he was being clear that his request was one for information, not for a change in coverage. Requests for information must be identified clearly as such and should be accompanied by language such as “Please do not change coverage at this time; this is only a request for information.”
This case demonstrates that the policyholder needs to have a knowledgeable person, not just the broker, review the policy when issued to make sure it is correct. There also needs to be a knowledgeable person who will review all endorsements to make sure they are correct. The failure to do so can result in substantial gaps in coverage and expensive litigation.
From the broker’s perspective, this case shows how easily substantial liabilities can arise. By misconstruing the consultant’s email or not recalling that it was only a request for information, Alliant allowed Affiliated FM to reduce the flood coverage by $20 million. Alliant should have immediately corrected Affiliated FM when it received the email advising that the flood coverage was being reduced. Brokers should have policies in place to double check reductions in coverage as it is much easier to correct and backdate a reduction in coverage where the policy provides more coverage than requested, as opposed to an increase in coverage where the policy provides less coverage then requested, especially after a loss.
Finally, these issues are extremely important for both policyholders and brokers. A misstep when they first arise can have irremediable consequences down the road. It is, therefore, important for policyholders to promptly engage coverage counsel to assist in analyzing and addressing these issues. Brokers need to immediately retain counsel to analyze their potential liability and determine if notice must be given under their claims-made errors and omissions policies.
This article was first published on IRMI.com and is reproduced with permission. Copyright 2014, International Risk Management Institute, Inc.