Morris Manning & Martin, LLP

Becoming an Additional Insured Now May Be Easier

12.01.2009

On July 6, 2009, an Atlanta jury awarded Regency Savings Bank (n/k/a Park National Bank) $1,106,740, including $400,000 in attorneys’ fees and costs, as an additional insured on a policy issued by Pacific Insurance Company. See Regency Savings Bank v. Pacific Ins. Co., Fulton Cty. Sup. Ct. no. 2006-CV-123845. This award, if upheld on appeal, may have far-reaching effects on who is an “additional insured” and the proof necessary to obtain coverage as an “additional insured.”

In April of 2000, Princewill Properties, Inc. purchased an apartment complex with proceeds of a mortgage loan from Southern Pacific Bank. In February of 2003, Regency acquired the mortgage from Southern Pacific. Under the terms of Regency’s security agreement with Princewill, Princewill was required to maintain insurance on the apartment complex at all times.

The requisite insurance included fire coverage. Princewill obtained such insurance from Pacific Insurance Company (the “Pacific Policy”) through Jenkins, Skipworth & Associates Insurance Agency. When Princewill obtained the Pacific Policy, Regency sent a facsimile to JS&A requesting evidence that Regency was an additional insured on the policy. JS&A issued a certificate showing Regency as an additional insured but did not send a request to Pacific to add Regency to the Pacific Policy.

Before an agency sends a certificate of coverage to a mortgagee, such as Regency, it is supposed to send a written request to the insurer (or a wholesale broker through which the coverage is placed) and receive written confirmation from the insurer (Pacific) that the mortgagee has been added as an additional insured. JS&A did not make the request, and Regency was not added to the Pacific Policy.

Princewill ultimately defaulted on its mortgage, and Regency foreclosed on the apartment complex and assumed all of Princewill’s rights to the property including rights under the Pacific Policy.

The apartment complex was damaged by fire after Regency assumed the mortgage and while the Pacific Policy was in effect. The repair costs were estimated by a Pacific employee to be $690,108.66, and Regency demanded payment of the claim. Pacific denied the claim in part because it had no record of Regency as an additional insured and therefore argued Regency was not entitled to coverage.

Regency did not - and indeed could not - argue it had been added to the Pacific Policy, but instead Regency argued it was covered because it contended no mortgage company has ever been denied being added to a policy. Regency’s argument was supported by expert testimony regarding the common industry practice of adding a mortgagee to an insurance policy.

Following a three-day trial, a jury ordered Pacific to pay Regency $881,740 and JS&A to pay Regency $225,000. This total verdict of $1,106,740 included $400,000 in attorneys’ fees. This ruling begs the question of whether other entities commonly added to insurance policies can now claim automatic coverage whether formally added or not. According to news reports, Pacific intends to appeal, but JS&A does not.

Jessica F. Pardi is a partner in the firm’s Insurance and Reinsurance Practice. Ms. Pardi practices in the areas of insurance litigation, reinsurance dispute resolution, complex coverage disputes, bad faith matters, managing general agency disputes and insurer insolvency. Jessica received her bachelor’s degree from Boston University and her law degree from the University of Virginia.