Lessons from Losses
KEY ISSUE: Recovery of a stolen art work years after the actual theft and the importance of a properly executed Proof of Loss and Subrogation Agreement and its relationship to policy wording.
Actual Policy Subrogation Agreement wording -
KEY WORD(S): Proof of Loss; Subrogation; stolen art work; recovery; Loss Buy Back Clause
DATE OF LOSS: 1975
LOCATION OF LOSS: Home of insured in Concord, MA
CLASS OF BUSINESS: Fine Arts; however, the underlying issues relating to a properly executed Proof of Loss Statement could be transferable to other classes of business.
BRIEF DESCRIPTION OF LOSS:
In 1975 the home of the insured was burglarized. Among the items stolen was a portrait that had been recently appraised by a Boston art dealer at $25,000, but had unique and intrinsic value to the family. The portrait was painted in Italy in 1765 by the artist Angelica Kauffmann and depicted ancestors - a family heirloom.
The insured notified the insurance carrier and submitted appropriate documentation of all items stolen at $65,000 inclusive of the valued piece. Since the policy had an unscheduled limit of $32,500 the carrier agreed to pay only that amount. The insurance company and the plaintiff entered into a Subrogation Agreement for $32,500 "...in full release and satisfaction in a compromise settlement..." of the claim.
In March 2007 the portrait was recovered by the Art Loss Register [ALR] when it came to the attention of an art dealer. In June the portrait was turned over to the Concord Police, and the insurance carrier gave notice that it was claiming ownership of the portrait as "salvage". The executor of the now deceased owner disputed the insurance carrier’s claim, and thus began a trail of litigation and appeals because the portrait now had a value of somewhere between $400,000 and $800,000.
WAS THERE ANYTHING UNIQUE OR UNUSUAL ABOUT THE LOSS?
Because of the way the Subrogation Agreement was worded, a judge’s reasoning was summarized as follows -
By its unambiguous terms, the Subrogation Agreement did not assign title to any of the stolen property to [the insurance carrier]; it conferred a right of subrogation, which merely allowed [the carrier] to exercise any rights that [insured] may have had against the party or parties responsible for the loss, to the extent of the payment [the carrier] had made. Furthermore, the Subrogation Agreement expressly provided that, should any item of property be recovered, the insured was obliged to do one of two things:
- turn it over to the insurer or
- reimburse the insurer to the extent of the insurer's payment for such property.
TYPE OF POLICY FORM USED: Company homeowner’s form with an unscheduled limit of $32,500.
WHAT LESSON(S) WERE LEARNED FROM THIS LOSS?
Suffice it to say that the term "subrogate" has long had an established meaning -- to confer substituted rights against third parties. Had the insurer wished to condition its payment to its policy holder/claimant upon the actual transfer of ownership to the stolen property -- so that the insurer would be its owner if it were recovered -- it could have done so by means of an assignment to that effect. Here, however, because the agreement drafted by the insurance carrier conferred only a right of subrogation, the insurer did not acquire ownership, which remained in the policyholder’s estate.
In this loss the insurance carrier got into trouble by misusing and trying to stretch the language of subrogation ("...does hereby subrogate to said insurer all right, title and interest in and to the property..") which is really not traditional usage for transfer or assignment of title and therefore runs the risk of being ineffective from the onset.
STEPS/MEASURES THAT MIGHT HELP PREVENT/MITIGATE/MINIMIZE LOSS.
The insurance carrier’s final argument was, notwithstanding the provisions of the aforementioned Subrogation Agreement, that it was entitled to obtain a greater recovery as a matter of "fairness." It maintained that the parties should be deemed equal owners of the portrait and that it be permitted to seek "partition."
Contrary to the carrier’s position; however, there is nothing unfair about enforcing the Subrogation Agreement as written by the carrier. It wrote the agreement, it was in the business of assuming the risk of its insured’s' losses; it had established and accepted what it considered to be an appropriate premium to assume the risk of loss of the policyholder’s personal property up to a limit of $32,500; and it had the use of the policyholder’s premium dollars since 1975 when the policy incepted. There is nothing unfair or inequitable in enforcing the contract that was made.
Again subrogation generally relates to the transfer of a claim; when an insurer pays a loss, it makes the insured whole and is subrogated in law and generally also in the operative documents to the insured's claim against the party causing the loss -- to the extent the insurer's payment made the insured whole. The notion of equitable subrogation was probably the source of the insurer's argument that, in fairness it should be able to split the gains with its insured.
When an insurer pays in full for a total loss of property and wants to take title, it must move to different language: the language of transfer of rights and interests in property. While the law would imply a right of subrogation to the extent an insurer pays, it does not imply transfer of property rights. (There is no doctrine of equitable transfer of title.) For example, if your car is a total loss, you sign the title over to the insurance company; and in the absence of proper documentation, the insured will retain ownership and title to damaged, lost or stolen property after having been compensated by its insurer for its loss.
So what might be a more effective wording? Several industry clauses in use are as follows -
Damaged property of the insured, for which a total loss has been paid, may be repurchased by the Insured at the then fair market value of the damaged property.
The Company agrees to notify the Insured of its right to repurchase damaged or recovered property and the Insured shall have sixty days from the date of notice to exercise the repurchase right. The Insured, in exercising this right, shall furnish the Company with copies of the proof of loss, police report and claim draft involving such property.
Loss Buy Back: The Insured shall have the right to repurchase from the Insurer property of the Insured that is recovered for the amount paid to the Insured for the loss, plus an amount which represents loss adjustment and recovery expenses.
Damaged property of the Insured, for which a total loss has been paid, may be re-purchased by the Insured at its fair market value at the time of loss.
The Insurer agrees to notify the Insured by mail at the last known address of the right to repurchase damaged or recovered property and the Insured shall have sixty (60) days from date of such notice to exercise the repurchase right.
Loss Buy Back: The Insured shall have the right to repurchase from the Company property of the Insured that is recovered for the amount paid to the Insured for the loss, plus an amount which represents loss adjustments and recovery expense. Damaged property of the Insured, for which a total loss has been paid, may be repurchased by the Insured at its fair market value at the time of the loss. The Company agrees to notify the Insured of its right to repurchase damaged or recovered property and the Insured shall have sixty (60) days from date of notice to exercise the repurchase right.
Buy-back Agreement: In the event of a Loss insured hereunder, for which the Company has made payment, the Company agrees to offer the Insured first choice of Buying Back the recovered property. If the property is recovered within two years from date of settlement, it is agreed that the Company may request an amount no higher than the amount paid by them when the original claim settlement was made, less any deductible, if applicable.
IMUA constantly seeks examples of losses where it can share some type of lesson, or introduce a loss prevention or mitigation technique with IMUA membership.
If you know of or become aware of a type of loss or claim that might be of broad interest, please send that information to IMUA staff. IMUA staff will ‘sanitize’ the claim, i.e. eliminate all reference to a named insured or insurance carrier with the underlying proviso that the information must be in the public domain.
The Inland Marine Underwriters Association [IMUA] is a not-for-profit national trade association focused on the commercial inland marine line of business. IMUA was organized in 1930 as a national trade association and rating bureau for all inland marine classes. In 1948 the rating bureau activities of the IMUA were transferred to the Inland Marine Insurance Bureau (now defunct) due to the 1944 US Supreme Court decision in the South-Eastern Underwriters Association case.
Today, IMUA is comprised of --
- Members - insurance and reinsurance companies that underwrite a significant portion of the commercial inland marine insurance in the U.S.
- Associate Members - companies or organizations that provide products and/or services to the insurance industry.
One of the services IMUA offers its members is the publishing of information for use by underwriters, loss control and claims specialists, and other interested parties. The topics covered by IMUA Reports, Bulletins and News Articles are intended to provide an overall awareness of the issues, hazards and exposures associated with a specific industry or inland marine class of business.
Volunteer members of a technical committee of the IMUA or IMUA staff have produced this information. Committee members abide by antitrust restrictions while compiling information.
It is generally not possible to treat any one subject in an exhaustive manner, nor is it IMUA's intent to do so. No warranties are made regarding the thoroughness or accuracy of the report or any part of it. Nothing in this report should be interpreted as providing definitive guidance on any question relating to policy interpretation, underwriting practice, or any other issues in insurance coverage.
IMUA does not prescribe to its members how to make underwriting or claims decisions, nor does it require that analysis follow any particular format.