Author: Nancy Germond
An interesting post on LinkedIn by risk management consultant Jack Schwartz, managing director at Davis + Gilbert Risk Management, caught my attention. The issue, according to Schwartz is that insurers are increasing the number of warranties placed on property policies, whether these are location-specific policies or smaller scheduled locations.
What are Representations Versus Warranties?
A representation is a statement made at the time of the application, either written or oral. For example, the insured may state no losses have occurred in the past five years. It is harder to void a policy or deny a claim based on a misrepresentation.
Warranties, on the other hand, are statements that could render the policy void even if they are not material to the loss. For example, a frequent warranty found in property policies is that no aluminum wiring is present in the building. If a burglary occurs, that warranty may not be relevant to the loss, but could still void coverage. According to the CPCU 530 text, “The law presumes warranties to be material, and their breach makes the contract voidable…. Warranties require strict compliance."
According to Schwartz, “Insured should scrutinize quotes with greater detail since coverage restrictions and limitations are increasingly being added, particularly on location-specific policies…" Each quote may contain different warranties on each individual property, Schwartz warns.
Additionally, underwriting scrutiny on renewals and new business is increasing. While agents often urge their clients to read the forms, agents open themselves to an errors & omissions claim if they fail to warn their clients of these warranties. Schwartz recommends both written and verbal warnings regarding warranties since so few insureds take the time to read their policies.
“Most policyholders lack the time, patience, or interest to actually review [their policies]," Schwarz added.
Replies to Schwartz' Post
Some of the comments by agents to this LinkedIn post include the following.
- “I just received a renewal today with a list of ten different warranties, yes, ten! I did … discuss with the insured before binding coverage. Buyer beware!"
- “You know where they'll get coverage? The E&O policy!"
What are Typical Warranties?
There are a variety of warranties, sometimes referred to as “safeguards."
- Ansul systems or automatic fire suppression systems in restaurants
- Fending or onsite security on new construction or builders' risk policies
- Burglar alarms
- Sprinkler systems for fire suppression
- Video systems with recording
- Security services including on-site guards
- Electrical warranties
- Post-work fire watch protocols
- A warranty that any subcontractor will furnish a certificate of insurance to the contractor
When landlords are responsible for warranties in their tenants' locations, problems can arise. The linked article in IA Magazine outlines some of these challenges and possible solutions.
Where are Warranties Found in the Coverage?
Insurers often locate warranties in the exclusions of the policy, or by endorsement.
Some Cautionary Words to Agents
Schwartz has a few suggestions for agents offering property coverage. “Do your due diligence and explain and document to your clients any warranties."
Schwartz warns agents that failing to disclose a warranty “In pursuit of the sale" will create an E&O exposure should a loss impacted by a warranty occur.
The commercial property market is as challenging today as many long-term agents have ever encountered. The definition of catastrophes has expanded – hurricane, wildfires, freezes, civil unrest have caused billions in losses the past few years. Ohio and Indiana now have wind and hail deductibles according to one broker. This hard market outpaces post-Katrina, and we are in a challenging market.
In the words of Bill Wilson, “If you can avoid a protective safeguards endorsement without sacrificing a premium discount, that may save your insured an unexpected and inexplicable loss."
While insurers used to offer warranties to reduce premiums, today they are more frequently “must haves" to bind coverage, according to Schwartz.
Schwartz pointed out a 2023 court decision on point.
"IAn interesting ruling ... by the Michigan Court of Appeals in 23771 Blackstone LLC v. Conifer Insurance Co. sheds light on whether coverage will apply after a carrier inspects the insured property, discovers it is not compliant with a condition precedent, and does not react or say anything to the insured about the noncompliant policy condition.
"The owner of a building that housed a marijuana growing operation was damaged by fire and the property insurer denied coverage because the structure did not have an automatic extinguishing system (AES) as required by its policy. The business argued it was entitled to coverage because the insurer was aware that the property did not have such a system, as indicated in multiple inspection reports that it had received. The trial court (affirmed by the court of appeals) ruled, however, that the insurer was nevertheless not obligated to provide coverage because the 'mere fact that defendant and plaintiff may have been aware that the property did not have an AES does not establish that parties mutually understood and agreed that an AES was not required as a condition of coverage.'
"As perhaps expected, the court leaned on the policy wording, which "unambiguously required that the property have an AES as a condition of coverage, and there is no evidence that defendant ever intended or agreed that an AES was not necessary," according to Schwartz.
"It's always best to assume that the policy wording trumps anything to the contrary, but it would be interesting to know if the insured was aware of the AES condition. Conversely, it is possible the court would have ruled differently if the carrier would have inspected prior to binding of the policy and known of the lack of an AES beforehand. An argument could then have been put forth that the coverage was illusory," Schwartz recommended.
Today, most insurance consumers try to cut costs. Sacrificing protection for a reduced premium has its pros and cons. That is one of the biggest challenges for today's agent – getting the time you need with clients and potential clients to sell on value, not price.
First published: August 12, 2022
Updated: November 21, 2023