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Perhaps you are not familiar with the Named Stormed Deductible in insurance policies for commercial operations. If so it might be a good time to visit this issue. The broker in a lawsuit called Wakefern Foods v BWD Group, LLC probably wishes it had a better grasp of this policy provision before it sold an ill-fated insurance policy to its customer, Wakefern Foods.
This insurance provision seems to be an insurance industry response to global warming, and the near guarantee that parts of the county that used to be immune from many named storm impacts may no longer be. The Deductible may not be very prominently placed in an insurance policy but it can sizably reduce an insurance policy payout when a named storm, which is nothing more than a storm that has a name, causes significant damage. In the Wakefern case that Deductible amounted to a $24 million loss.
The lawsuit was filed after Super Storm Sandy, a storm with a name. Wakefern operates ShopRite grocery stores throughout New Jersey and other states and suffered major damage following the storm, with some stores losing all of their food inventory.
While the company did receive millions of dollars in insurance proceeds, $24 million was not paid because the policy contained this Named Storm Deductible. That came as a huge surprise to Wakefern Foods, and apparently also to the broker who placed the coverage and may itself have failed to appreciate the Deductible’s potential impact.
At trial a jury found that there was malpractice committed by the broker and awarded nearly $12 million. The appeals court upheld the lower court’s verdict.
The appeal raised numerous issues relating to allocation of liability and the adequacy of certain jury instructions, all of which were rejected by the court. However, considerable focus was placed on this Deductible and the extent to which the broker red flagged it when it recommended that its customer purchase the policy.
The appeals court affirmed the lower courts finding that the broker committed negligence by not explaining what this Named Storm Deductible meant to Wakefern at the time the insurance policy was purchased. Specifically, the broker had a responsibility to explain that this Deductible could have a sizable impact on a potential insurance recovery and that alternative insurance products may have been available which did not contain this hefty and slightly obtuse Deductible.
This responsibility ultimately relates to the obligation of a commercial insurance broker in general. Commercial brokers are not mere order takers. They have a duty to comprehend a client’s potential insurable risks and to explain whether a policy being offered will adequately guard against those risks. It is a responsibility to provide advice, not just take orders, and that is the responsibility that the courts found was not fully satisfied in the Wakefern case.
In the past, our law firm has seen cases where companies have likewise asserted that their insurance broker did not explain or even identify important insurance exclusions. This includes a failure to explain to a client what the potential impact of an exclusion might be and what options might be available for addressing this impact. Apparently in certain instances brokers themselves may not fully understand this information. Worse yet, in others they may fear that an in depth policy review may scare away a potential client resulting in no sale and no commission.
In the area of environmental law, many homeowner and commercial policies exclude coverage for hazardous releases such as spills and leaks. It is still surprising how often these significant coverage exclusions are not mentioned by brokers or at best are glossed over when coverage options are being presented.
Time will only tell whether the Wakefern case will change some of these practices. Insurance clients rely greatly on their insurance broker’s wisdom and experience. Those selling insurance must explain not only a prospective insurance policy’s benefits, but also policy exclusions and abnormal deductibles and exactly what the potential impacts of those policy provisions might be.
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