INSURANCE ADVOCATE - August 1995

INSURANCE LAW REVIEW

Suit Over Guaranteed Replacement Cost Policies Concludes; Total Settlements Reach $8.5 Million

Faced with the possibility of a high-ticket cost for the rebuilding of a "turn-of-the-century" mansion which had been destroyed by fire on July 6, 1990, two insurance companies and two insurance owners. The key to the coverage issue was the issuance of guaranteed replacement cost policies above the liability limit of $800,000.

According to Dennis T. D'Antonio, senior partner of the New York law firm of Weg & Myers, P.C., who represented Pat and Anne Cutaneo, the owners of the mansion, both insurers declined to pay the claim and suit was filed against them and the broker/agent firms. However, prior to the trial defendants Hanover Insurance Company and agent/broker Alpha/Omega, agreed to settle for a total of $4.5 million. The balance of the settlement came after a two-week trial and more than a day of jury deliberations during which time, the jury reached a verdict that the Home Insurance Company was liable for the loss under the policy it had issued.

The jury did not get to finalize the issue of damages and before it did, the Home agreed to settle its dispute for $4 million. During the course of the trial, expert witnesses who testified indicated that the cost of replacing the mansion with "materials of like kind and quality" as called for in the policies, could command from $5 million to $18 million.

The unusual circumstances of this lawsuit involved the destruction of the mansion called "Oakdene" which was located in Mendham, New Jersey, a town west of Morristown in central New Jersey.

The Cutaneos had purchased the 28,000 square foot, 40 plus room house for $900,000 early in 1990 and sought coverage through Alpha/Omega. The policy was issued by The Hanover, with a limit of liability of $800,000. However, it included a guaranteed replacement cost endorsement which provided that, in case of a loss, the carrier, would pay the cost of rebuilding the house with "materials of like kind and quality," regardless of the policy limits.

The Hanover, early on, conducted an inspection of the premises and decided that the residence did not fit its "target market." It requested that Alpha/Omega find a replacement insurer or face cancellation by The Hanover.

D'Antonio said that Alpha/Omega, following this decision by Hanover, made contact with Davis Dorland & Co., another broker. Davis Dorland issued a binder dated June 5, 1990, substituting the Home as the insurer, including the guaranteed replacement cost endorsement. Before the actual physical policy had been issued by the Home, "Oakdene" burned to the ground on July 6, 1990 as the result of a fire accidentally started by a blow torch used by workmen who were undertaking extensive renovations on the mansion.

When the claim was submitted to Hanover, it denied liability, asserting that its policy with the Cutaneos had been canceled. The Home on the other hand denied liability, asserting that its policy had never been issued.

The Cutaneos retained counsel and litigation was commenced.

At trial, D'Antonio said, Hanover was no longer involved because of its decision to settle for $4.5 million. The Home, represented by the New York-based law firm of Mound, Cotton & Wollan, asserted three affirmative defenses. First, it argued that it was not bound on the Cutaneos risk because it never gave written approval, as was allegedly required in its broker agreement with Davis Dorland relating to the binding of coverage. Second, The Home contended that if, in fact, coverage had been bound, it was not on a guaranteed replacement cost basis. Finally, The Home raised the defense of material misrepresentation in the application, arguing that its agreement to provide coverage was based on false underwriting information.

The Home's defense also included an assertion that even if the policy was found to be in force, it's liability was limited to the $900,000 face amount because based on insurance practice, that figure represented the guaranteed replacement value. Refuting that, Mr. D'Antonio argued that the significance of the guaranteed replacement cost, was the gravamen of the issue. He said that in as much as insurers charge additional premium for the endorsement, it would amount to misrepresentation if addition coverage was not being offered. The jury agreed with D'Antonio's position. In the case of the Home, the additional premiums for the endorsement was $216.

Davis Dorland & Co., represented by the firm of Mendes & Mount, defended the allegations of broker's negligence on the grounds that it had orally bound coverage with The Home as was the custom and practice between the two parties, notwithstanding their broker agreement. Furthermore, witnesses from Davis Dorland testified that it would not issue a binder unless coverage had first been orally bound.

No liability was imputed to Davis Dorland in the verdict. D'Antonio said the broker was brought into the suit as an alternate defendant.

At trial, through examination of both The Home's and Davis Dorland's witnesses, Mr. D'Antonio said plaintiffs demonstrated that The Home Insurance Company had in fact bound coverage for their mansion by a "Binder of Insurance," dated June 8, 1990, issued by David Dorland, with an effective date of June 5, 1990. He said that plaintiffs further proved that such coverage was bound on a guaranteed replacement cost basis. The evidence added at trial by The Home was insufficient to support any of its defenses," D'Antonio said.

As a result of the defendant's failure to accept responsibility and admit liability at the time of the fire, 5 years of litigation ensured, concluding with the settlement negotiated by Weg & Myers, P.C. which enabled the policyholder to receive $8.5 million for a home which was purchased for $900,000, D'Antonio said.

Jonathan Lerner, a recent graduate of Brooklyn Law School and Jonathan Abraham, third year law student at Fordham Law School, assisted Mr. D'Antonio at the trial.