Sublimit Left Out of Policy, But Liberty Mutual Firm Avoids Huge Payout Anyway

July 17, 2023

What happens when an insurance carrier, its underwriter, a broker and the insured all forget to make sure a sublimit endorsement on wind-driven rain losses is included in a multimillion dollar property policy?

In the case of a Liberty Mutual subsidiary, the underwriter was reprimanded and stripped of his authority; the broker, J. Smith Lanier & Co., was sued by the client, RPG Hospitality LLC, owner of a DoubleTree Hotel in North Carolina; and after a storm hit, the hotel company ended up tearing down part of the damaged building and undertook millions in renovations, thinking it was covered for the work.

But Liberty Mutual’s excess and surplus lines unit, Ironshore Specialty Insurance Co., won a reprieve and is off the hook for a $26 million judgment against it, thanks to a favorable Georgia Court of Appeals decision handed down in June.

“Construing this wind-driven rain endorsement to not have any applicable sublimit would essentially render the entire wind-driven rain endorsement, a provision that the parties separately signed and agreed upon, completely meaningless,” Judge Yvette Miller wrote in the June 16 opinion.

The story begins in 2017, when RPG hired J. Smith Lanier to secure a commercial policy for its upscale riverfront hotel in New Bern, North Carolina.

The Georgia-based Lanier, now part of MarshMcLennan, has been called one of the largest privately held insurance brokerages in the country. It found coverage for the hotel through Liberty Mutual. The next year, Liberty Mutual acquired Ironshore, and the policy was switched to Ironshore at renewal, the court opinion explained.

The policy limits were for $26.2 million with a $250,000 sub-limit on wind-driven rain damage, according to the quote. RPG agreed to the terms and the broker accepted the policy on RPG’s behalf.

The policy’s section on wind-driven rain stated: “Subject to the terms and conditions of the policy and the applicable sublimit of liability, this policy provides coverage for direct physical loss or damage to the interior of any building or structure, or the property inside the building or structure caused by wind-driven rain.”

The problem was that the actual sublimit endorsement document was never included in the policy binder provided to the hotel company.

“Ironshore’s underwriter could not remember whether he had reviewed the policy at the time it was issued, he could not recall asking any other individual to review it, and no one else at Ironshore apparently reviewed the policy,” Judge Miller wrote.

RPG, J. Smith Lanier, and R-T Specialty, a wholesale distributor, all reviewed the policy around the time it was issued, but none of them seemed to notice the omission. In June 2018, an audit by Ironshore’s senior vice president discovered that the sublimit documents were missing from the policy. But the carrier did not inform RPG and instead focused on getting it right in the future, the court noted.

Three months later, Hurricane Florence slammed the North Carolina coast as a Category 4 storm, causing an estimated $24 billion in damage to the region and significant losses to the RPG hotel property. An Ironshore adjuster visited the hotel and witnessed the repair work that was already underway. The insurer went so far as to approve the demolition of parts of the hotel, along with extensive mitigation work that cost millions of dollars, the court explained.

RPG’s own adjuster was the one that explained to the hospitality firm that the policy was missing certain documents. And a week after the storm, Ironshore finally sent some of those documents–but still not the sublimit endorsement. Three weeks later, Ironshore attempted to add a sublimit.

RPG officials refused to accept it. Ironshore refused to accept any further claims on the Double Tree Hotel property.

Both sides went to court.

The trial judge in Georgia concluded that the policy provided up to its limits, $26.2 million, because it did not include any sublimit endorsement. The judge also ruled against Ironshore’s contention that it should be allowed to re-do the policy — with the endorsement.

But the appellate court found some wiggle room for the insurance company. Georgia’s rules of contract interpretation require the court to look at the circumstances and the “contract in whole:” The RPG policy clearly references the sublimit endorsement, along with the statement that the most Ironshore would pay for wind-driven rain is the sublimit. Without that, the policy is “manifestly incomplete,” the judges said.