Order and Bind Insurance Before the Loss—Commercial Policy Covers Water Damage Under Drain Backup Endorsement

I can only imagine that the owner of Opera Block Properties was a student of weather when ordering drain backup coverage—the day before drains backed up. This post highlights an agent’s binding authority under Michigan law and discusses important insurance principles concerning the “completed-loss” and “loss-in-progress” doctrines.

On February 5, 2019, Opera Block’s owner, Timothy Fuller, met with Auto-Owners’ agent, Lydia McCauley, and requested the “best possible coverage” for Opera Block’s buildings, including adding a “premier, property-plus endorsement” that provided $50,000 in coverage for drain backups per location. McCauley, who had binding authority from Auto-Owners, agreed to the coverage changes requested by Fuller during their February 5th meeting. Both Fuller and McCauley testified they thought the requested changes became effective that day. The drain backup losses in Opera Block’s building basements did not begin until the early morning hours of February 6, 2019, after McCauley bound the coverage changes.

Auto-owners denied coverage. Auto-Owners argued the losses were complete before its agent, Lydia McCauley, formally submitted the request to change Opera Block’s coverage on February 6, 2019. Therefore, the completed-loss doctrine applied to preclude coverage for losses that had already occurred before the policy was changed. Auto-Owners further maintained the loss-in-progress doctrine defeated Opera Block’s claim because the losses had already begun or were in progress before McCauley formally requested the coverage changes on February 6, 2019.

The court discussed these two doctrines which Auto-Owners relied upon:

‘Insurance policies are contracts to indemnify against contingent losses.’ … Generally, a party cannot purchase insurance for a contingency that has already occurred; the contingency must be unknown at the time the parties enter into the insurance agreement. … It is also contrary to public policy to allow an insurance agent to bind an insurance company to insure a loss that has already occurred. …Accordingly, a ‘completed loss’ cannot be covered ‘under an after-acquired insurance policy…’

The loss-in-progress doctrine recognizes that, once a loss is in progress, ‘the event is no longer fortuitous and the risk has also been realized.’

…

The loss-in-progress doctrine ‘has its roots in the prevention of fraud.’… An insurer may assert the loss-in-progress doctrine as an affirmative defense to coverage. See Koppers Co, Inc v Aetna Cas. & Surety Co., 98 F.3d 1440, 1446-1447 (3rd Cir. 1996) (a loss must be fortuitous—not expected—to be insurable; the insurer bears the burden to prove the insured knew about the loss or expected it to occur before procuring the insurance). 1

The court disagreed with Auto-Owners because the facts did not support either doctrine:

The evidence did not permit an inference that the loss had already occurred on February 5, 2019, or that it was in progress. Even assuming that Fuller might have been on notice of the possibility that the little bit of water he found on February 5, 2019 came from the drains, the evidence demonstrated it was not a significant amount of water, and Fuller was able to remedy it immediately. On these facts, there was no dispute that the loss at issue had not yet begun on February 5, 2019. Consequently, on the evidence presented at the summary-disposition phase, it was undisputed that the loss at issue occurred, or was in the process of occurring—at the earliest—on February 6, 2019 at 3:49 a.m. It was also undisputed that Opera Block knew the loss was occurring at the time. 2

The fact that McCauley did not formally submit the coverage change request to Auto-Owners until February 6th did not negate that she had already bound coverage effective February 5th. The court determined the formal submission was just a technicality since McCauley had binding authority. Auto-Owners agreed to provide McCauley with binding authority on its behalf.

Although Kiebler Insurance was an independent insurance agent that sold insurance policies for various insurers, it is undisputed that Auto-Owners entered into an agency agreement with Kiebler Insurance. The agreement gave Kiebler Insurance the ‘authority to receive applications for contracts of insurance written by [Auto-Owners] and to bind coverage[,]’ subject only to certain limitations not relevant here. McCauley testified she had the authority to bind Auto-Owners, and Auto-Owners’s own commercial underwriter, Geoffrey Mack, also agreed that McCauley had binding authority. Mack stated that binding authority gave the agent the ability to ‘place coverage with [Auto-Owners] prior to [Auto-Owners] reviewing it.’ Accordingly, it was undisputed that, as an independent insurance agent, McCauley—acting on behalf of Kiebler Insurance—was Opera Block’s agent for procuring insurance, but was also an Auto-Owners limited agent by virtue of her authority to bind it to an insurance agreement without first obtaining its permission. 3

Applying the status of McCauley as having binding authority for Auto-Owners, the court then applied these facts to show that the “meeting of the minds” to bind the coverage took place before the loss:

The evidence shows that Fuller and McCauley had a meeting of the minds on the changes to Opera Block’s coverage during their morning meeting on February 5, 2019, in which they discussed specific coverage changes. McCauley testified that Fuller wanted the best possible coverage, and she felt the ‘premier property-plus endorsement’ would satisfy this request. Fuller confirmed McCauley identified a ‘super duper’ endorsement that would give him the extra coverage he wanted, including $50,000 in drain-backup coverage. Fuller also testified that, when he left McCauley that morning, he felt he had effected a coverage change, ‘[a]nd it was [his] understanding that they provided [him] as much and the best coverage that was possible,’ which included $50,000 in water-backup coverage. Moreover, McCauley suggested that she too felt the meeting ended with a change in coverage:

Q. And from your perspective, when as—again, as an Auto-Owners-appointed agent and producer, from your perspective, when Mr. Fuller left your office on February 5, 2019, he had—that change request from your perspective was effective, was active, right?

A. Yes. 4

This case is a close call because of the timing of the loss and the facts regarding the requested change and binding agreement. It is important to note that while the insurance agent was technically an independent agent, Auto-Owners had a contract that provided the agency with binding authority. Without that authority, the timing may have been delayed enough that a loss was in progress or had occurred, preventing coverage.

There is a second part of the case involving insurance agent negligence under Michigan law, which will be discussed in a future post. We previously discussed the loss in progress doctrine in The Loss in Progress Doctrine: Deconstructing the All-risk Policy.

Thought For The Day

Better three hours too soon than a minute too late.
—William Shakespeare

1 Opera Block Properties v. Auto-Owners Ins. Co., No. 365213, — N.W.3d —, 2024 WL 3907171, *3 (Mich. App. Aug. 22, 2024).
2 Id. at *4.
3 Id. at *5.
4 Id. at *6.