GRC coverage mix-up lands brokerage in hot water with regulator

Editor’s Note:  An earlier version of this story incorrectly referred to Keith Jordan as a broker who had been found in violation of the Council’s Code of Conduct. In fact, Jordan was the operating agent for HUB at the time of Council’s investigation and was in no way impugned by the fact situation outlined in the council’s decision. Council found that the agency (HUB International Manitoba), not Jordan, violated the code for a lack of oversight. The story below has been corrected and Canadian Underwriter unreservedly apologizes to Keith Jordan for the error.

The General Insurance Council of Manitoba found that HUB International Manitoba violated Code of Conduct rules based on the brokerage’s role in a coverage mix-up.

The broker regulator issued a $1,000 fine for the violation.

An actual cash valuation had been substituted for guaranteed replacement (GRC) cost in coverage for a “seasonal dwelling” encompassing a house, barn and a garage. Council found that the agency had not performed an adequate underwriting review of a file they had acquired after acquiring a business from an agency HUB had purchased.

The multiple misunderstandings on the file started in January 2009, when a client (not named in the decision) was represented by an agency that was later acquired by HUB International. The client had completed the insurance company’s application showing replacement cost on his house, barn and garage. The application indicated personal outbuildings coverage of $28,400 with Guaranteed Replacement Cost (GRC).

Under GRC coverage, even if the damage exceeds the limits on the policy, the insurance company is nevertheless obliged to replace or rebuild the property fully without any deduction for depreciation. Actual cash valuation, on the other hand, is computed by subtracting depreciation from replacement cost.

When the insurance company issued the policy, the agency’s client was made aware that it was not a farm policy, but rather a homeowner’s policy. The broker at the agency told the client that this was because the insurer did not know how to classify a barn and a three-car garage.

The policy stated $40,000 in coverage for ‘Seasonal Dwellings,’ although the client advised that he did not have seasonal dwellings. The client was told that between the two values provided on the declaration for “seasonal,” there was enough coverage. There was no contents coverage for the “seasonal” dwellings.

Four and a half years later, HUB bought the agency representing the client; after the acquisition, the agency mailed a letter to the client recommending a review of the policy and wordings—and that coverage be upgraded from broad to comprehensive coverage. The letter did not mention that the “seasonal” coverage was on the basis of “actual cash value” and not guaranteed replacement cost. Nor did the letter say there was no coverage for contents under the seasonal dwelling.

A month after the client changed from a broad to comprehensive coverage, a fire affected the seasonal outbuildings. Despite being reassured that the client had GRC coverage, the insurer’s initial position after the fire was that there was one building under the policy, depreciated and no contents coverage as it was seasonal.

Manitoba Council noted that since the policy had been amended from a broad to a comprehensive form, limited contents on a replacement cost had become available.

“Cover which applied due to the amendment from the broad to the comprehensive form just immediate to the loss was fortuitous rather than planned, otherwise the complainant would have suffered a greater loss,” the council wrote in its decision, adding that HUB should have done a complete review of the file after acquiring the brokerage approximately a year and a half before the fire.