Q In an owner-occupied building, what is the coverage under a homeowners form for water damage to the dwelling from a waterbed that has leaked? Our companies are saying no coverage in most states for owner-occupied dwellings, but there is coverage for tenant-occupied dwellings.
One company has said it would pay, classifying the waterbed as a domestic appliance. Can you research this as to how to properly cover?
--SAMUEL J. POTTER, Jay S. Potter Agency, Canandaigua, New York
Diana Kowatch, CPCU, AU, AAM, CPIW, with over 20 years' experience in the insurance industry, is editor in chief of Technical and Educational Products for The Rough Notes Company. She provides the responses for all the questions this month.
A There is more than one issue involved, so we will start first with the issue of whether or not a waterbed is an appliance. Webster's Dictionary defines an appliance as "an instrument, device, a piece of household equipment (as a stove, toaster, or vacuum cleaner) operated by gas or electricity." Does a waterbed meet that definition? That is somewhat ambiguous. It is a device or instrument for sleeping. The heating unit is run by a power supply--most often electricity. Arguments could be supported either way. Unfortunately, the word appliance is not defined in the insurance contract and is left up to the interpretation of the courts.
In one applicable court case in Florida, the court held a waterbed to be furniture and not an appliance (after overturning the decision of a lower court).
An insured's waterbed broke while being filled, causing considerable water damage to other property to which the policy applied. The claim made under policy coverage for "accidental discharge or overflow of water...from within a household appliance" was denied by the insurer. In the course of legal action, the insurer appealed a trial court determination that the waterbed was an appliance and that coverage was applicable.
The appeal court expressed the opinion that a waterbed was not a household appliance but, rather, an item of furniture. It found the common understanding of "household appliance" to be "a household device that does work or performs a task, such as a washer, dryer, vacuum cleaner or toaster."
In response to the insured's emphasis on the fact that the leak was generated from the plumbing system, discharges from which were covered, it was clear that "the leak emanated from the waterbed itself, which is not a part of the plumbing system."
The trial court judgment was reversed in favor of the insurance company and against the insured. (West American Ins. Co., Appellant v. Lowrie, Appellee. Florida District Court of Appeal, Third District. No. 91-2975. June 9, 1992. CCH 1992 Fire and Casualty Cases, Paragraph 3751.)
The next issue is coverage. Based upon the above court case, since the waterbed is furniture and not an appliance, the leakage would be covered only if it resulted from a direct physical damage covered cause of loss. If the neighbors' child pokes a small hole in the mattress causing the leak, there would probably be coverage since vandalism or malicious mischief is a covered cause of loss. There would also be protection if the heating unit caused a fire by overheating, resulting in a leak.
If the leak is a result of wear, tear, deterioration, inherent vice, latent defect, or animal claws/teeth, there would not be coverage--these are all excluded perils.
Many insurers have addressed the waterbed issue by developing company-specific waterbed endorsements that can be purchased for an additional premium. These endorsements will provide some degree of waterbed leakage coverage. Check with your various insurers to see who does and does not have these endorsements available. Also check carefully both the cost and extent of coverage. As the waterbed endorsements are non-standard, varying degrees of coverage and exclusions are available; so be sure to review and understand each endorsement prior to selling.
Q Can you provide me with a guideline to follow to make sure that my agency is adequately covered in the event of an E&O claim? How can I be sure that we have the proper amount of coverage?
The following is provided by Curt Pearsall, CPCU, AIAF, Utica National Insurance Group. It originally appeared in Indiana Insurance News.
A There is no magical formula that will calculate for you the proper limit of liability for your agency. However, I can shed some light on the issue.
In my eight-plus years as the manager of the Utica E&O Division, I have seen a number of articles that provide some advice and guidance on selecting the right limit. Typically, the advice is that you should buy an E&O limit equal to the largest limit (property or liability) of any policy written by your agency. Using this line of thinking, if you insure a contractor and write a $1 million CGL policy, then $1 million is the right limit to buy for your E&O.
Unfortunately, this statement is far from correct.
To properly analyze this situation, it is appropriate to examine some claims statistics. In 1995 and a number of years prior, the number one cause of E&O claims was the failure to obtain the proper coverage. In 1995, 51% of all E&O claims was due to what the agent failed to provide, not due to what the agent did provide. Thus, when considering what limits you should carry on your E&O policy, there is no great correlation between the limits you carry for your clients and the maximum or likely size of an E&O claim.
A typical example is an agent who makes it a practice to have all of his/her clients insured at $500,000 on their personal auto policies, but who has no similar practice for umbrellas. When an accident occurs and the liability exceeds the $500,000 limit, the client will try to prove that (s)he would have purchased the umbrella policy had (s)he simply known about it!
Interestingly enough, the number two cause of E&O claims is failure to place coverage after agreeing to it. In 1995, this accounted for 12% of all claims.
Thus, the top two "reasons" for E&O claims do not have much to do with the coverage you provide for your clients. Is the limit you provide totally insignificant? No. Some E&O claims may be impacted by the amount of coverage you have placed for your client. For your benefit, here are the next four leading causes of E&O claims:
* Failure to give proper advice--7%
* Failure to notify of cancellation--5%
* Failure to renew or service policies--5%
* Delay in forwarding underwriting or claim information--4%
What limit, then, should you purchase? This is obviously a personal decision and should take into consideration such things as price exposure, financial wherewithal, litigious climate, volatility of classes of business written, etc. On a countrywide basis, the limit of liability chosen by almost 12,000 policyholders continues to rise and is now just short of $1.3 million. Actual loss payments in excess of $1 million are not unheard of.
Another factor to consider is the aggregate limit. Typically, E&O policies are issued on a split basis--one limit for each loss and another limit for all losses during that policy period. It is wise to purchase an aggregate limit of three times the per-loss limit, if the company offers it.
When buying your E&O coverage, ask the carrier to provide you with a number of limit options. You will find that the additional premium to increase your limit is not as much as you may think and at the time of a claim it will be money well spent.
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