Broker Responsible For Building Owner’s $2.2 Million Property Damage Loss For Failing To Procure Proper Insurance

An Appellate Court of Illinois, applying Illinois law, held that a broker committed negligence by failing to procure insurance coverage for the policyholder’s building. The policyholder requested that the broker buy insurance for a vacant building. Instead of buying insurance that would have covered property damage to a vacant building, the broker bought insurance that excluded coverage for a building that was vacant for longer than 60 days. A jury returned a $2.2 million verdict in favor of the policyholder, which was upheld on appeal.

Brothers Holding Company (Brothers) purchased a building in 2007, which had been vacant since 2005. The owners of Brothers initially intended to open a cooking venture in a small portion of the building, which never materialized. In 2007, Brothers engaged an insurance broker to obtain a policy which provided coverage for the vacant building. Such coverage was obtained by the broker with effective dates of August 2007 to February 2008. When the insurance came up for renewal, Brothers notified the broker that it wanted “replacement cost” insurance for the building. Brothers also advised the broker that the building would remain largely vacant, with possibly only 12% of the building occupied by the cooking venture. The broker submitted an application to Hartford Insurance Company (Hartford) representing that the building was 40% occupied. Hartford issued a business owner’s policy, effective February 2008 through February 2009. In March 2008, Hartford determined that there were no business operations at the site and cancelled the policy effective June 2008.

In June 2008, the broker submitted an application to Peerless Indemnity Insurance Company (Peerless) for coverage on the building in the amount of $2.25 million in “replacement cost” coverage. The application erroneously stated, among other things, that the building was 100% owner-occupied. Based on the application, Peerless issued a policy effective June 2008 to June 2009, providing replacement cost coverage for losses due to theft from vandalism to the building. However, the policy also contained a “vacancy provision,” barring coverage for any damage if the building had been vacant for more than 60 consecutive days prior to the loss. Brothers received a copy of the policy, but only “skimmed it.” The Peerless policy was automatically renewed for the period June 2009 to June 2010.

In December 2009, individuals broke into the building, vandalized it, and caused severe damage to the building structure. Brothers estimated that the damage to the property totaled approximately $2.2 million. Peerless ultimately denied the claim, based upon the “vacancy provision,” because the building had been vacant for more than 60 days.

Brothers sued its broker for breach of contract and negligence. The jury returned a verdict for Brothers of approximately $2.2 million. The appellate court rejected several arguments raised by the broker and upheld the jury’s verdict. First, the appellate court rejected the broker’s argument that the parties never agreed upon the type of policy the broker was to obtain: “[T]here is no dispute that the building stood vacant…that [the broker was] made aware of this fact, and told to obtain insurance for a vacant building….” The appellate court also rejected the broker’s argument that it could not be held liable, because Brothers had a copy of the initial Peerless policy which contained the “vacancy provision”: “[W]hile Illinois law does place a burden on the insured to know its needs for coverage and the contents of its policies…this does not absolve the broker, who has been retained and compensated for his or her particular expertise in coverage, from the duty to competently carry out the explicit requests of the insured. [T]here was overwhelming evidence in this case that the plaintiffs submitted the application to Peerless seeking a BOP for a building that was 100% occupied, when in fact, they had been told by [Brothers] that he required just the opposite, a policy ensuring protection for a vacant building with no business operations.”

The broker also argued that Brothers could not recover damages under the “replacement cost” method, as compared to the “actual cost” method, because the plaintiff did not actually make repairs to the building. While the “replacement cost” was approximately $2.2 million, the broker estimated the “actual cost” to be substantially less. The appellate court rejected this argument, finding that there was evidence the plaintiff would have rebuilt the plant, but could not afford to do so based on Peerless’ denial of coverage. Brothers Future Holdings, LLC v. Indiana Ins. Co., et al., Case No. 11L003598 (Ill. App. Ct. May 1, 2015).