No Tell Motel: How to Escape Errors & Omissions Mousetraps When Insuring Motels
Your client has the gold star of homeowners coverage: special form coverage, replacement cost on dwelling and contents, and inflation guard.
The carrier does its magic at renewal and voila! The coverage limits are increased each year.
By: James Redeker
Your client has the gold star of homeowners coverage: special form coverage, replacement cost on dwelling and contents, and inflation guard. The carrier does its magic at renewal, and voila! The coverage limits are increased each year.
Some of the most memorable jokes we hear are those with an uncomfortable grain of truth at their core. Comedian Henny Youngman once observed that, “A motel is where you give up good dollars for bad quarters.” Anyone who has ever handled an errors & omissions claim involving a motel property is more likely to nod at that joke than laugh.
When viewing these claims as a group, common themes become clear. First, they rarely involve newly constructed buildings. These risks tend to be older, run-down properties that are near or past the end of their useful life. Complicating matters, the owner will not often voluntarily disclose a motel’s poor condition to their agent.
A second common thread is the building will not be occupied by paying guests, usually with good reason. Oftentimes, the property is not habitable. Again, the property owner neglects to mention this to the agent. Instead, they may indicate that there will be some “renovations” taking place, although, of course, the business will remain open throughout.
Additionally, the property owner will be price-conscious. They will not purchase all the recommended coverages you offer and severely underinsure the property. They most likely will insure the property for the amount paid to purchase it, so any significant property loss will result in a substantial coinsurance penalty.
In reality, the property will be in terrible disrepair. It will have zero to a handful of rentable units. Instead of renovations, there will be extensive rebuilding going on that may include new plumbing, electrical, subfloor, and even walls.
Accordingly, a commercial property policy is not the correct coverage. Depending on the extent of the work being done, either a renovation form or a builder’s risk form is required.
The tenants will likely be the owners, their extended family, and sometimes construction workers hired to rebuild the property. Due to the condition of the property, these construction workers have been known to improvise with hot plates and space heaters in their living quarters. We have seen a claim where a total fire loss was caused by a construction worker living on the property. Any property loss sustained will face scrutiny by the carrier under the vacancy provision of the commercial property policy.
The causes of loss for these motels vary from fire to mold to storm damage and even condemnation. Due to the size of these structures, the loss estimates will typically be millions of dollars. While the causes of loss vary, carriers’ coverage determination and resulting lawsuits are always the same. Faced with claims for property loss, business personal property loss, and business interruption, the carrier will take a no-pay or low-pay position due to the actual condition of the property and the policy involved. A suit will be filed, and the agent will be included in the suit under the theory that, if the carrier does not owe the claim, the agent surely owes it for failing to procure the requested coverages.
While these suits are usually defensible, they take time and money to fight. If the loss is caused by storm damage or a broken sprinkler pipe, all old water and mold damage to the property will be included in the property owner’s damages. It is then up to the defense expert to go through each room and determine the cause and age of loss, which is a time-intensive and costly undertaking.
The property owners will solemnly testify that they went to the insurance agent expecting to buy all the coverage required to protect them and their business. They even remember using the phrase “full coverage.” The carrier will be able to point to policy coverages and exclusions to substantiate their position, so the insurance agent will be left trying to deflect the plaintiff’s attack with only their files to shield them from liability.
But how good is that shield? It depends on how diligent the agent was in extracting and documenting information from the customer. Unfortunately, the customer is usually vague or non-committal about the property’s specifics and is not forthcoming with important information the agent and carrier need to properly cover the risk.
The agent should ask to see the property and at least spot-check whether the units are habitable. If there is construction taking place, ascertain whether the parking lot shows any sign of guests. If you are upfront with the carrier on the current condition of the property and see what coverage, if any, they are willing to write, you may determine that the best business decision is to decline to place coverage.
If the customer wishes to purchase only enough coverage to recover what was paid to purchase the property, then the concept and reality of coinsurance must be explained. A single sheet with an explanation of coinsurance should be read to the customer, who should then be required to sign the paper stating they understand coinsurance and still choose not to insure the property to value. It is also a good practice to document communications stating that higher limits are available upon request.
If the motel owner requests business interruption coverage, obtain the information upon which they are basing their request before it is destroyed in a loss event, which will save time in the event of a lawsuit. Business interruption coverage typically is not purchased, but it is often included in the customer’s damages sought from the agent. Offer the coverage and obtain the customer’s signature that they declined to purchase it.
Asking questions and conducting a site inspection will help the agent determine if the customer is misrepresenting the risk. It will also help the agent determine what coverages should be suggested to the customer and requested from the carrier. Better still, encourage the carrier to inspect the property. Numerous signed documents in the customer’s file regarding what coverages were accepted and what coverages were declined builds credibility for the agent.
Jim Redeker is vice president and claims manager at Swiss Re Corporate Solutions and works out of the office in Kansas City, Missouri. Insurance products underwritten by Westport Insurance Corporation, Kansas City, Missouri, a member of Swiss Re.
This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting, or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group (“Swiss Re”) and/or its subsidiaries and/or management and/or shareholders.
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