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April 2, 2015  

 
 Q&A of the Week

Coinsurance on Other Structures

An Ohio subscriber recently asked the following question:

I have a loss to other structures on the homeowners policy. Is coverage and coinsurance determined by taking the value of ALL other structures and adding them together? How does coinsurance work when the damage is to only one of multiple other structures?


ANSWER: Coverage for other structures is 10 percent of coverage of the dwelling; this applies to all the other structures. If the insured has a number of other structures, the ISO HO 04 48 can be added to increase available coverage for other structures. As far as coinsurance goes, the damaged property must be insured to 80 percent of its value. For example, the insured has a dwelling worth $200,000 but has four other structures valued at $10,00, $20,000, $40,000, and $55,000, and the $40,000 structure is the one damaged with damage being $15,000. The calculation of the limit will be the $20,000 of coverage divided by the $40,000 of value; this is a 50 percent proportion, so the insured is underinsured for the loss. Therefore payment will be the lesser of the actual cash value of the damaged portion of the building or the proportion of the cost to repair or replace the damaged property to the 80 percent of the replacement cost. The calculation is ($20,000/$40,000) x $15,000= $7,500. So $7,500 is what is paid out.

Now, if multiple buildings were damaged, then the calculation would add up the value of all the damaged buildings, and work from there. Say the buildings worth $10,000 and $55,000 were damaged for a combined total of $30,000. You would have (20,000/10,000+55,000) x 30,000=$9,230.

 
 Litigation Watch
Manifest Intent

A bank brought an action against the issuer of a fidelity bond seeking to recover losses caused when one of its employees purportedly permitted liens on twenty condominium units to be released without paydown amounts, diverting more the $5 million to the project developer. This case is Keybank National Association v. National Union Fire Ins. Co. of Pittsburgh, 124 A.D.3d 512 (2015).

The bank loaned a developer more than $20 million for a condominium project. The loan was secured by mortgage liens on the units. As individual units were sold, a percentage of the proceeds was to be used to pay down the loan and release the lien on those units. However, an employee of the bank permitted the liens on twenty units to be released without the paydown amounts, diverting more than $5 million to the developer; the employee concealed this by falsely representing to the bank that the units had not closed.

The actions of the employee were discovered and the bank sought to recover its losses under the fidelity bond issued by National Union Fire Insurance Company. When the insurer declined coverage the bank filed a lawsuit and sought summary judgment. The Supreme Court, New York County denied the motion and this appeal followed.

The Supreme Court, Appellate Division, First Department, New York noted that with regards to loans and/or trading, the bond provided coverage for losses resulting directly from dishonest or fraudulent acts committed by an employee of the bank, with such acts being committed by the employee with the manifest intent to cause the insured to sustain a loss, or to obtain financial benefit for the employee. The court found that the bond defined a loan as all extensions of credit by the insured and all transactions creating a creditor relationship in favor of the insured and all transactions by which the insured assumes an existing creditor relationship. The court said that the losses that were caused by the employee's conduct did not fall within the scope of the definition.


However, the court said that summary judgment must be denied because material issues of fact existed as to whether the employee had the manifest intent to cause the bank to sustain a loss or to obtain a financial benefit for himself or the developer. The court noted that manifest intent involves a continuum of conduct where the employee necessarily intends to cause the employer the loss. Manifest intent to injury an employer exists as a matter of law where an employee acts with substantial certainty that his employer will ultimately bear the loss occasioned by his dishonesty and misconduct. National Union Fire argued that this standard was not met because its submissions demonstrate that the employee's intent was to allow the borrower to retain funds needed to complete the construction of the project in order to prevent the bank from sustaining a loss.

The appellate court thus determined that an issue of fact remains as to whether the employee's diversion of checks to the developer that should have been deposited with his employer manifests an intent to harm his employer within the meaning of the fidelity bond. In addition, conflicting expert opinions as to whether the cash flow from the releases was used to pay construction costs and the fact that no forensic accounting has been completed in this case, precluded the court from issuing a summary judgment.

The opinion of the trial court was affirmed.

Editor's Note: The Supreme Court, Appellate Division, found that a genuine issue of material fact as to whether the employee had the manifest intent to cause the employer to sustain a loss precluded the granting of summary judgment. The court discussed the meaning of "manifest intent" as defined in New York case law and found, as a matter of law, that the employer did not meet the required standard. Therefore, summary judgment was not granted.
 
 
   
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