• Key point. Many churches insure their property for less than its market or replacement value. In the event of a total loss through fire or other catastrophe, the church faces an unexpected and often substantial uninsured loss. In some cases, the church may have a legal claim against its insurance broker for the uninsured amount if the broker breached a contract to provide the church with adequate insurance coverage. The insurance company itself may also be liable for the broker’s acts.

A Virginia court ruled that a church that was destroyed by fire and that was insured for only one-third of the value of the property could sue its broker and insurance company for the balance. For many years, a church purchased insurance from the Aetna insurance company through a local insurance broker. These policies provided coverage for any fire loss to the church building. The church’s insurance broker set the coverage limits on the church’s policies each year. The church’s pastor claimed that he was assured by the broker that adequate insurance coverage was being provided under the Aetna policy. For the policy period between February 15, 1987 and February 15, 1988, the broker obtained an Aetna policy with a $100,000 property coverage liability limit. The coverage amount increased gradually between $2,000 and $4,000 each year, until the broker obtained an Aetna policy with a $132,000 property coverage liability limit for the policy period between February 15, 1996 and February 15, 1997. The 1996-1997 policy premium increased approximately 46% over the 1995-1996 rates.

In 1996, an Aetna underwriter instructed the church’s broker to inform the church that its current fire insurance coverage was inadequate. The letter specifically notified the broker that the church’s insured value needed to be increased to $353,352 in order for the building to be “properly insured” and requested that the church be notified that “if there is a loss, the building is not adequately insured.” The church was destroyed by a fire one week after the broker received the letter from Aetna, and before he had instructed the church to increase its fire loss coverage. A few days after the fire, an Aetna claims representative notified the chairman of the church’s board of trustees that the structure was worth $383,000 prior to the incident, or $251,000 more than the insured property coverage of $132,000 procured by the broker from Aetna. Aetna tendered a check for $143,000 to the church ($132,000 for building damage, and $11,000 for personal property loss). The church did not consent to any release.

The church sued its broker, claiming that (1) the broker’s “negligent breach” of his professional duties caused the church to be grossly underinsured; (2) the broker breached his contract with the church to obtain adequate property insurance coverage; (3) Aetna was legally liable for the negligence and breach of contract of its agent (the broker). The broker argued that any “contract” to obtain adequate insurance coverage was void under the Virginia “statute of frauds,” which requires all contracts that cannot be performed within one year to be in writing and signed by the party who is accused of violating it.

The court first addressed the existence of a contract to obtain adequate insurance coverage. It noted that “a contract that may be performed on either side within one year is not within the statute of frauds” and need not be in writing to be enforceable. The court concluded, “The church procured first party property coverage on an annual basis from Aetna via [the broker]. . . . The policy was renewed each February 15 for the period of 1987 through 1997. By clear inference, this demonstrates to the court that the accompanying oral contract to procure adequate insurance was capable of being performed within a year.” As a result, the court rejected the broker’s argument that the contract was void because it was not in writing.

The court also concluded that Aetna was legally responsible for the actions of its broker. Aetna had argued that it could not be liable for the broker’s actions since they were not in the course of the agency relationship. In rejecting this defense the court observed, “A principal is held liable to third persons in a civil suit for frauds, deceits, concealments, misrepresentations, torts, negligence, and other malfeasances, or misfeasances, and omissions of duty, of his agent, in the course of his employment, although the principal did not authorize, or justify, or participate in, or, indeed know of such misconduct, or even if he forbade the acts, or disapproved of them.”

Application. Every church faces the risk of a total loss of its property through fire. The tragedy of such an event is made even worse when church leaders discover that they have inadequate insurance to cover the loss. What about your church? Do you know the value of your church property? Do you know the amount of insurance you carry for fire and other catastrophic losses? Is your church underinsured, or adequately insured? Church leaders should review the adequacy of their insurance coverage annually with their insurance agent. If there is any question about the property’s value, your agent can suggest ways to obtain an accurate valuation. As this case illustrates, this is an important but often neglected safeguard. Glorious Church of God in Christ v. Aetna Casualty and Surety Co., 1998 WL 972079 (unpublished opinion, Va. Cir. Ct. 1998). [Corporations]

© Copyright 1999 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m50 c0699