Care Must Be Taken To Be Sure Surplus Insurance Policies Meet The Consumers’ Needs And Do Not Contain Surprises

On June 30, 2012, Nicole Vinson wrote, Florida’s 3rd DCA Limits a Major Water Loss to $25,000. In her post, Nicole discussed how the Third District Court of Appeal had to decide whether an insurance policy endorsement limitation applied to limit the damages from a substantial water loss event to $25,000. The case was Certain Interested Underwriters at Lloyd’s London v. PITU, Inc., No. 11-2233, 2012 WL 2400869 (Fla. 3d DCA June 27, 2012). Additionally, at play in the case is the fact that Lloyd’s is a surplus lines insurer. Surplus lines insurers do not have the strict form and rate requirements in Florida that admitted insurers must comply with. The surplus lines market is intended to provide coverage that cannot be easily procured in the conventional insurance marketplace. What this means for the consumer, is that extra care must be taken to ensure a surplus insurance policy meets their needs and expectations and does not contain any surprises.

In PITU, Lloyd’s appealed from a declaratory judgment awarding the policyholder $1,240,199.67, plus interest, for water damage sustained following a water pipe rupture. Lloyd’s issued the “all risk” homeowner’s insurance policy to PITU, Inc. During the policy term, a water pipe located in one of the upper stories of the home burst, resulting in extensive water damage to the dwelling and personal property. The policyholder estimated the damage to the dwelling at $907,325.65 and to personal property at $40,236.00. Lloyd’s acknowledged that the water damage was a covered loss under the policy and estimated that loss to be $673,378.28. However, Lloyd’s agreed to pay only $25,000 and relied on a policy endorsement limiting coverage for water damage to that amount.

The trial court had entered judgment in the policyholder’s favor. But the Third District Court of Appeal reversed the trial court’s ruling and held that the policy and endorsement unambiguously limited coverage for the damage sustained to $25,000.

Needless to say, it could likely come as a surprise to find out that the Lloyd’s form only provides $25,000 in coverage for a water loss event when those losses are often one of the most common insurance hazards in Florida. Care should be taken by the insurance consumer and their representatives to ensure adequate coverage that meets their expectations and needs, particularly when in the surplus lines market. Given surplus insurers’ lack of form regulation, their forms can be very different from the insurers in the admitted market.