Our next case in our series “Insurance Recovery Law: History’s Best Decisions” is the Penford case from 2011. See Penford Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 662 F.3d 497 (8th Cir. 2011). Although this case had a tragic outcome, it illustrates what not to do in the corporate insurance arena.
In Penford, after years of litigation, the insurance broker lost the case. If case was a one-off situation, one could understand a mistake being made. We highlight this case, however, because the way Penford and its broker handled this claim, is similar to the way that many claims are handled today.
The problems in Penford are raised whenever an insurance broker attempts to act as a claims advocate. Watch the video to understand what happened, and to devise a plan that properly utilizes insurance broker expertise and contacts to settle a claim.
We have included a transcript of the video below:
Insurance Recovery Law: History’s Best Decisions: The Penford Case
Next stop in our top insurance decisions of all time is the Penford case. In the Penford case the insurance broker killed a claim. The insurance broker there was doing a number of things that they shouldn’t have done, and it completely killed the claim after years of litigation. Now this case is one of these unfortunate cases, but we’re highlighting it, because it’s something that can be prevented.
Penford Corporation versus National Union Fire Insurance Company of Pittsburgh, PA. Citation 642 Fed 3rd 497, 8th circuit 2011. Recent case in the 8th circuit of the Federal Court System, and it’s a situation where … It’s a property insurance case, but it highlights some of the problems in the insurance industry that can get a policyholder into a lot of trouble. Here’s what happened. Penford is a manufacturing facility. They’re a big company located in Cedar Rapids, Iowa. Had a flood. The flood was terrible. It caused a lot of damage, and they got into a dispute with their insurance company about which limits applied. There are several different limits in the policy as far as it will pay this much for that, this much for that, and this much for that.
We won’t get into the details of how that worked, or what they claim, but what we would like to say is the policyholder was right. They had the right argument, and they had the correct interpretation under the policy, but they still lost. They lost in the worst possible way. That is they lost after years of litigation on appeal, the Appellate Court said, “You know what? Your broker said something. We are dismissing the claim, because of what the broker said.” Let me explain what happened.
The problem in this situation was Marsh, which was a very sophisticated insurance broker. Marsh was representing Penford on something. They were doing what they call an insurance claim advocacy. What happens is if you have an insurance claim … Marsh deals with these things, so they have Claims Advocates. People who will help resolve the claim. These Claims Advocates at Marsh were working on this claim, but Marsh also placed the policy. They did whatever work they needed to do to get the policy in place.
What happened here is the insurance company did what any insurance company would first do, and that’s depose the broker. They asked the broker, “Hey, what … Don’t you think our interpretation of the policy is correct?” The broker, I guess after a lot of questioning said, “Okay, yeah. Okay, you’re right.” You know how these depositions go. Clients under oath, they’re there for long periods of time, and the insurance company’s only job is to break ’em down. They’ll hit ya, and they’ll hit ya, and they’ll hit ya hour, after hour, after hour looking for that one snippet of information that helps them.
They got this one snippet here. I’m not saying that it wasn’t easy for Marsh, but Marsh gave that snippet of information. That snippet of information was, “Yeah. We get what you’re saying about the deductible. Yeah, it could be right.” That was it. The court said, “Marsh is the agent of Penford. Marsh speaks …When Marsh speaks, Penford speaks. Marsh spoke and said, “It’s not covered,” therefore Penford spoke, and said it’s not covered. It’s under the agency principle.
Not disputing agency law, but what we’re disputing here is how Penford got into so much trouble. It can be avoided. Here’s the problem. I think there’s several problems that can be avoided here. Problem number one to avoid: Marsh drafted the policy. You’re like, “Why did Marsh draft the policy?” Here’s what happens. Marsh does so many of these things. They have a word processor like everybody else. They scan in everybody’s policy. They cut and paste, put the different pieces together, and then they put it on Marsh letterhead, so to speak and they say, “This is the best, and the brightest policy out there.” They put Marsh on the bottom of it, and they market it to their clients and they say, “Hey. Why don’t you use the Marsh form, because we had our word processing folks put this together, and it’s the best.” Some clients say, “Okay, we’ll use the Marsh form.”
The problem with that, and it’s a big problem, is the court looked at it and said, “You know what? We would’ve found in your favor here, because the policy could be interpreted that way. The language is good. It could be interpreted in favor of the policy holder, but we’re not going to do it here.” Why? Because Marsh drafted the policy. The insurance company didn’t draft it. Policyholder said, “Wait a second. Contra Preferentum.” What’s Contra Preferentum? It means you construe a document against the party that drafted it. This has been around insurance law for hundreds of years. If an insurance company drafts the policy it’s construed against them. If it’s unclear the policyholder wins. That’s a doctrine that’s been around forever.
What happened here is Marsh took the doctrine away, because they wanted to do some word processing, and put it on their letterhead, and make it look good, and use it as a piece of marketing. It doesn’t matter that the insurance company’s drafted the language. The fact … They did draft the language. What happened was Marsh put it on their paper, and it looked like a Marsh policy. That gave the court the opportunity to say, “No Contra Preferentum. Marsh drafted this. Marsh is your agent, i.e. you, the policy holder drafted this policy.” That’s the problem.
The court didn’t apply Contra Preferentum. We get it. The lesson here is don’t accept a policy from Marsh, or any other broker. Marsh is not the only company, broker that’s doing this. Most of the big brokers like to put it on their letterhead, and then give it to the clients and say, “Hey. This is the best and the brightest.” It may be a good policy. We’re not saying that. What we’re saying is that you can’t take a policy off broker letterhead. You have to have the policy from the insurance company, so the Contra Preferentum applies.
Point number two, which is very important about this case. The case got messed up, because Marsh accepted insurance industry custom and practice. You can read the case, and you can see the quotes. I think there’s a point in there where the insurance adjuster says, “This is insurance industry 101 practices,” something to that effect. He says, “This is just what we do. This is how we do it. Everybody knows this is how we do it.”, so that’s custom and practice. It didn’t mean the policy said it. It just meant this is how we do it. What did Marsh say under oath? Oh, Marsh said, “Yeah, that’s pretty much how they do it.” “Do you disagree with it?” “Not so much. Not really.” That was what got ’em in trouble.
Marsh adopted the industry custom, and practice as the truth. They should not have done that, because it’s not the truth. It’s all in how it’s looked at. Yes. It’s true that that’s what the insurance companies do, but it’s not true that that’s what the policy means. There’s a big distinction between those two things.