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February 11, 2011
Court unmoved by suit over underinsured home
Special to the Journal

How do you know if you have enough insurance coverage?

One simple way is by asking your insurance agent. But if you go this route, make sure you keep asking questions until you receive specific answers. Because as two long-time State Farm insureds recently learned, an insurance agent usually owes no duty to affirmatively advise you about the adequacy of your insurance coverage.

The Case of the Woefully Underinsured Abode hails from Goldendale, which is where Richard and Mary Lou McClammy first bought a home in 1994. That same year, they purchased a homeowner's policy from Robert Cole, a local agent for State Farm Fire & Casualty Co.

When the McClammys bought a new house in 1995, they kept their business with State Farm. After Cole gave them three quotes ranging from $195,000 to $225,000 in coverage, they opted for a $200,000 “replacement cost” policy. Like most homeowner's policies, the coverage increased with construction costs and inflation.

Not long after this transaction, Cole retired and State Farm appointed his son, Michael, as his replacement. The McClammys loyally stayed with the agency, also buying several car insurance policies, an umbrella policy, and a liability policy for their business.

Over time, the McClammys gradually improved their home. They replaced a pellet stove with a propane stove in 1995, installed skylights in 1999, replaced the roof in 2000, and added a sunroom and remodeled the kitchen in 2000 or 2001.

If they read their fine print, the McClammys knew they were supposed to keep State Farm current about any major improvements to their home. Instead, Richard McClammy didn't say anything to Cole about their remodeling and addition until May 2004, which is when he went to the agent's office to discuss a recent large premium hike.

Uncomfortable with the amount of their coverage, McClammy told Cole about their improvements and suggested that he go inspect the house. The agent apparently didn't commit one way or the other. But in a follow-up email, Cole suggested that the coverage on the house — then just over $275,000 — could be reduced to about $240,000 and “still stay within an estimated 100% to value.”

In October 2004, Mr. McClammy returned to the agency to discuss a water damage claim. He again told Cole about their improvements, and again asked him to go out and evaluate their coverage. Focusing on the water damage claim, the agent was noncommittal and said they could “do that later.” McClammy never asked Cole during this meeting (or at any other time) to raise the limits on his homeowner's coverage.

Six months later, a fire completely destroyed the McClammys' home. A contractor estimated that it would cost $580,000 to rebuild a similar house. But according to State Farm, its liability under the replacement cost policy was capped at $367,000.

Given this huge shortfall, the McClammys later sued State Farm and its agent for damages in Klickitat County Superior Court. The defendants were liable for the $213,000 difference, the suit claimed, because Cole had negligently failed to ensure that the McClammys were adequately covered.

But the insureds faced a steep uphill battle.

Under Washington law, absent a “special relationship” between the insurance agent and the insured, the agent ordinarily owes no duty to advise the insureds that they should increase their coverage. Relying on this general rule, the trial court granted a defense motion for summary judgment and dismissed the McClammys' claims.

In the ensuing appeal, the McClammys argued that they had a “special relationship” with Cole, and that their suit was wrongly dropped. But a Washington appeals court recently said ix-nay.

The “special relationship” exception doesn't apply, said the court, unless three circumstances are present. First, there must be a “long-standing relationship” between the insurance agent and the insured. Second, there must be “some type of interaction on the question of coverage.” And third, the insured must rely on the agent's expertise to his or her detriment.

The appeals court agreed that the relationship between the McClammys and Cole had been long-standing.

The court also acknowledged that there had been “interaction” between Richard McClammy and Cole — specifically, the two meetings in May and October 2004.

But on each occasion, the court emphasized, McClammy never requested advice about whether he and his wife should increase their homeowner's coverage, and Cole never gave any such advice. Instead, the first discussion arose from the McClammys' concern over the recent premium hike — not the amount of their replacement cost coverage — while the second focused on the water damage claim.

In short, the appeals court ultimately said the level of interaction between the insureds and their agent was insufficient to establish a “special relationship.”

As a consequence, the McClammys' suit against State Farm and their agent, just like their house, went down in flames.