Brokers, not insurers, advise clients of valuation changes

An insurer does not displace the role of the broker if the insurer conducts its own independent replacement cost valuation (RCV) and comes up with a different number than the broker submits, the Ontario Superior Court confirmed Tuesday.

It remains the responsibility of the brokerage to inform the client about the change in valuation to make sure the property is not underinsured. An insurer’s obligation stops at telling the broker about the different RCV; the broker then takes that up with the client, the court ruled in Stewart et. al. v Bay of Quinte Mutual Insurance et. al.

“I find that there was no duty of care between the [claimant] and [the insurer] because it is clear that the [claimant] did not rely on anything that the [insurer] did in its calculation of the RCV,” Ontario Superior Court Justice Patrick Hurley ruled. “He [the claimant] relied solely on [his brokerage] Whitley [Doug Whitley Insurance Brokers]….

“I also find the [insurer] did not, as claimed by the [claimant], supplant Whitley in doing what a broker is supposed to do — properly advise a person about their insurance needs. The [insurer] had no authority to change the RCV nor did it attempt to do so. It communicated its calculation of the RCV to Whitley after the inspection and left it up to the broker to notify its client.”

Whitley was not named as a party in the suit, nor did the court make any findings specific to the brokerage in this case. The court was asked to decide more generally on whether an insurer has any responsibility for communicating its independent RCV calculation to the client. The court found a brokerage has that duty of care to its client, not the insurer.

Related: What can go wrong if ‘actual cash value’ is not clearly defined in a property policy

The case was complex and dealt primarily with disputes over actual cash value and replacement cost values, and what is the process for determining disputes over the numbers. But one important aspect of the case dealt with whether insurers owe a duty of care to consumers if their independent valuations differ from the values represented to them by the consumers through their brokers.

Dennis Lynch bought a property in June 2010 for $165,000. He purchased insurance for it from the named defendant in the case, Bay of Quinte Mutual Insurance Company (BOQ). He purchased the coverage through a broker, Doug Whitley Insurance Brokers Ltd. (Whitley was not a party to the case.)

To finance the purchase, Lynch secured a mortgage from the Royal Bank of Canada, which required an appraisal. Prince Edward Appraisal Services Limited estimated the value of the property was between $149,000 and $177,000. The estimated replacement cost was $177,700.

Accounting for adjustments, the brokerage submitted an insurance application for the property to BOQ, listing the replacement cost coverage as $220,071.

The amount for personal property insurance coverage was based on the RCV of the dwelling – it was automatically 50%. There was no separate valuation for it.

BOQ sent out its own loss prevention officer to inspect the property on June 28, 2010. The officer completed a document entitled “Inspection Checklist” and prepared a sketch of the house and a detached garage. He gave these documents to another BOQ employee who inputted the information into a software program called RSMeans Costworks Valuator Manual, which calculated the RCV for the new dwelling to be $206,000.

The court states BOQ advised Whitley of this and indicated to the broker that, when the policy came up for renewal, the new RCV would be this amount. Lynch contends this was not communicated to him. (The court made no finding on this point.)

On Feb. 26, 2011, Lynch’s new home was severely damaged by fire. BOQ paid the policy limit of $220,000 for the building loss and $60,000 for the contents. Based on 50% of the RCV, the policy limit for the contents was $111,000.

Lynch sued his insurer, claiming, among other things, that he was underinsured for the contents of the house. The court ruled that if an error had been made in the RCV calculation, the brokerage has the duty of care to the client, not the insurer. The insurer was merely independently checking the RCV to determine whether it met its underwriting guidelines to provide coverage.

“If the insurer decides, after the policy has been issued, to inspect the insured property and do its own calculation of RCV, it should communicate any material findings to the broker so that the broker can review them with their client,” the court ruled. “In this case, that is what BOQ did. This is, in my view, the appropriate standard of care for an insurer that issues a policy to an insured who has retained a broker.”

The upshot of the case was that BOQ owed Lynch’s estate $51,000, which, in addition to the original $60,000 payment, represented the balance of the $111,000 limit on contents (half of the building’s RCV of $220,000).

The court found the insurer did not owe an additional $23,000 related to the independent RCV calculation, since the insurer fulfilled its duty of care to advise the brokerage of the change (and did not owe a duty of care to advise the client, which is the broker’s role).

Feature photo courtesy of iStock.com/Paperkites