This insurance coverage story begins like any other: an insurance company (Ironshore Specialty) issued a business insurance policy to a North Carolina hotel (RPG Hospitality). The policy provided coverage for wind-driven rain, but the most Ironshore would pay for such a claim was “the Wind Driven Rain Sub-Limit of Liability shown in the Sub-Limit Provision Endorsement.” However, the Ironshore policy contained no Sub-Limit Provision Endorsement. Ironshore testified that it left the endorsement out of the policy by mistake; RPG contended that it was intentionally omitted. After Hurricane Florence struck the insured hotel, causing severe damage, RPG tendered a claim and enlisted the assistance of an Ironshore adjuster in coordinating the demolition and repair work. The Ironshore adjuster, aware that the policy did not contain the relevant sub-limit endorsement, approved the work, which exceeded the purported sub-limit by millions of dollars. When Ironshore refused to pay, a lawsuit followed.

What caused the disconnect? In March 2018, Ironshore, a new insurer to RPG, issued a policy with a Wind Driven Rain Endorsement that added coverage for wind-driven rain losses where the form policy would have otherwise limited coverage. The endorsement provided:

Subject to the terms and conditions of the Policy and the applicable Sub-Limit 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.

Wind Driven Rain means rain, snow, sand or dust pressing on or flowing or seeping through the roofs, doors, windows, or other openings of the building or structure.

The most we will pay for loss or damage caused by Wind Driven Rain is the Wind Driven Rain Sub-Limit of Liability shown in the Sub-Limit Provision Endorsement.

Yet the policy, as issued by Ironshore, contained no Sub-Limit Provision Endorsement. The binder^[1] referenced the endorsement, but the underwriter left it out when they compiled the policy forms. Another underwriter took over the account, but he did not review the policy before issuance.

Three months later, Ironshore’s senior vice president audited the as-issued policy. The SVP discovered that “none of the binder sublimits made it onto the policy,” determined that neither underwriter conducted a “form/policy review,” and recommended that the “booking needs to be corrected and sublimits added to the policy.” But that never happened. Ironshore did not inform RPG about the omission, nor did it do anything to “correct” the policy. Instead, Ironshore’s internal emails showed that it wanted to focus on “going forward” and “getting it right” in the future.

Hurricane Florence slammed into North Carolina in September 2018, wreaking havoc on coastal properties, including RPG’s hotel. Under the guidance and approval of Ironshore’s adjuster, RPG began immediate repairs and damage mitigation efforts. Ironshore agreed to RPG’s requests to demolish certain areas of the hotel and to mitigation work that ultimately amounted to millions of dollars.

But instead of paying for the repairs and mitigation work, Ironshore informed RPG – for the first time – that the policy omitted certain endorsements. Ironshore sent RPG the purportedly missing endorsements to RPG, but the crucial Sub-Limit Provision Endorsement was again not included. It was not until October 10, 2018 – over three weeks after the hurricane – that Ironshore provided RPG with the sub-limit endorsement. In the meantime, Ironshore’s adjuster conceded that omission of that endorsement might have falsely given RPG “the perception of full limits” for wind-driven rain damage.

RPG testified that it had indeed gotten the “perception of full limits” and relied on it, undertaking millions of dollars of restoration work. RPG’s senior vice president of operations testified that, had RPG known that Ironshore might cap coverage, it would have acted differently. For instance, RPG would have filed for bankruptcy or “start[ed] over with one or both of the hotel buildings rather than performing immediate and expensive mitigation work.”

The parties moved for summary judgment. The trial court (1) found that coverage for wind driven rain was not sub-limited because, while the policy referred to a sub-limit endorsement, it did not actually include any such endorsement; and (2) dismissed Ironshore’s counterclaim for equitable reformation of the policy to include the sublimit. The Georgia Court of Appeals reversed in part, finding genuine issues of material fact remained as to whether the sublimit applied. However, the court  affirmed dismissal of the counterclaim for policy reformation, finding that claim improper where there was evidence of the insurer’s negligence in failing to review the policy before issuing it to RPG.

Holding 1: Fact issues remain as to the contents of the contract as written.

Georgia policy interpretation has three steps:

First, the trial court must decide whether the language is clear and unambiguous. If it is, the court simply enforces the contract according to its clear terms; the contract alone is looked to for its meaning.

Next, if the contract is ambiguous in some respect, the court must apply the rules of contract construction to resolve the ambiguity.

Finally, if the ambiguity remains after applying the rules of construction, the issue of what the ambiguous language means and what the parties intended must be resolved by a jury.

Ironshore Specialty Ins. Co. v. RPG Hosp., LLC, No. A23A0047, 2023 WL 4041305, at *3 (Ga. Ct. App. June 16, 2023).

In the court’s estimation, Ironshore’s policy failed step one. The policy did not contain a Sub-Limit Provision Endorsement even though it said it did.

Step two’s contract construction rules didn’t help with the ambiguity, according to the court. The rule that insurance policies should be construed in favor the insured’s favor apparently negated by rule that a “construction which will uphold a contract in whole and in every part is to be preferred,” OCGA § 13-2-2 (4). Per the court, construing the wind-driven rain endorsement to not have any applicable sub-limit would essentially render the entire wind-driven rain endorsement completely meaningless. In fact, without the endorsement, the court found it “manifest” that the policy “was not intended to speak the whole contract.”

And so the court of appeals tossed the question of what the ambiguous language meant to a jury – step three.

Holding (2): Ironshore’s reformation claim failed as a matter of law.

Ironshore claimed the missing sub-limit endorsement was a mutual mistake, so it was entitled to reform the policy to add that term. The court said no.

Reformation is only an option if the parties’ mistake is mutual and no party is prejudiced by the mistake. This case was a no on both counts. Ironshore alone caused the mistake, and RPG would be prejudiced by the reformation, because it engaged in extensive repairs that well exceeded the alleged $250,000 sub-limit amount under the assumption that it had coverage for wind-driven rain damage up to the full policy limits.

Take-Aways

Most insurance coverage conflicts arise when policyholders and insurers have different interpretations of existing policy language. A rarer, but more fundamental conflict arises when policyholders and insurers differ on the existence of the policy’s contents. Here are two questions to help avoid the second scenario:

1. Are all of the endorsements listed in the binder actually included in the issued policy?

2. Once the policy is issued, are any endorsements missing? Cross-check the policy’s schedule of endorsements with the actual policy documents.

Although seemingly easily accomplished, not so in practice, where commercial insurance policies are often issued weeks or months after binding and after coverage has incepted. This has historically led to significant disputes over intended policy wording.^[2]

Policyholders also should work closely with their insurers following significant losses and confirm available types and amounts of coverage before undertaking costly repairs and mitigation to ensure that appropriate strategic decisions are being made.

Experienced coverage counsel can help in both respects, confirming that issued polices conform to the intended and bound coverage and coordinating an appropriate post-loss action plan that considers all available coverages, secures appropriate advanced-payments, and protects the policyholder from unexpected surprises after key strategic decisions have been made and significant resources have been committed.

FOOTNOTES

[1] “Binder,” International Risk Management Institute, Inc.,  (“A binder is legal agreement issued by either an agent or an insurer to provide temporary evidence of insurance until an insurance policy can be issued.”).

[2] See, e.g., SR Int’l Bus. Ins. Co., Ltd. v. World Trade Center Props., Inc., 467 F.3d 107 (2d Cir. 2006) (multi-billion dollar insurance dispute over the terms of coverage after the 9/11 terrorist attack destroyed the World Trade Center shortly after coverage was bound but before the final policies had been issued).