Why Did the Coverage Fall Short?

A family-owned business owns a two-story building in Evanston, with its shop on the first floor and two rental apartments above. A fire guts the building. The contractor’s estimate to rebuild is $1 million, but the property policy’s building limit is $750,000. Three years earlier, after a major renovation, the owner emailed the insurance broker asking to “make sure the building limit covers the new work.” The limit never changed.

The owner now faces a $250,000 gap. Who is responsible for it depends on why the gap exists.

Is It Really an Underinsurance Problem?

The first question is whether the limit was actually the problem. A payment below the rebuilding estimate doesn’t always mean the limit was too low, because the complete policy, including every endorsement, may provide more than the building limit suggests. For example, some policies include ordinance or law coverage for the extra cost of meeting current building codes, extended or agreed value provisions, or separate limits for debris removal. Each of these has its own conditions and deadlines.

Similarly, the insurer’s estimate deserves a line-by-line comparison with the contractor’s. An insurer may have omitted covered work, disputed necessary repairs, or applied depreciation that becomes payable only after rebuilding. If the policy already provides the missing money, then the claim is against the insurer for unpaid benefits, not against the broker.

Coinsurance Can Reduce Even the Covered Amount

Commercial property policies often contain a coinsurance clause, which works differently than many owners expect. If the policy requires coverage of at least 80% of the building’s value and the owner carries less, the insurer pays only a proportion of each loss, even a partial one.

Suppose the building’s value is $1 million, so the policy requires an $800,000 limit, but the owner carries $750,000. On a $300,000 partial loss, the insurer might pay only about $281,000, because the owner carried 75/80 of the required coverage. In a total loss, the policy limit usually caps the payment anyway. Even so, coinsurance can turn a smaller claim into an underinsurance problem, and it’s often the first sign that the limit was set too low.

Why Limits End Up Too Low

Limits are often set against the wrong number. Market value is what a buyer would pay for the whole property, including the land, location, and demand. Replacement cost is what it takes to rebuild the structure. The land doesn’t burn, so a valuable lot can make market value exceed rebuilding cost. Older and custom buildings often work the other way: plaster, original millwork, slate roofs, and specialized systems are expensive to reproduce.

Rebuilding also costs more than replacing what burned. A major rebuild requires demolition, debris removal, design work, permits, and months of labor, at construction prices that may have risen sharply since the limit was set. Current building codes may require electrical, structural, energy, or fire safety upgrades the original building never had, and those are typically covered only by ordinance or law coverage, often with its own lower limit.

Replacement cost coverage doesn’t mean the insurer pays whatever it takes. Payment is still capped by the limit and subject to the policy’s conditions, and many policies pay depreciated value first and the balance only after rebuilding. Extended replacement cost endorsements add a percentage above the limit, often 20 to 50 percent; guaranteed replacement cost, which is rarer, removes the fixed cap subject to conditions. The time to compare a rebuilding estimate against these numbers is at renewal, especially after renovations, which raise rebuilding cost and should be reported to the broker.

What Coverage Did You Ask the Broker to Obtain?

If the policy truly falls short, the focus shifts to the broker. Illinois law, however, does not make every broker the guarantor of an ideal insurance program. Under 735 ILCS 5/2-2201, insurance producers, which includes both independent brokers and captive agents, must exercise ordinary care and skill in renewing, procuring, binding, or placing the coverage requested by the insured. The Illinois Supreme Court has held that the statute generally prevents treating producers as fiduciaries, except in narrow circumstances involving the handling of money.

For that reason, the specific request is critical. In the example, the owner’s email asking that the limit cover the renovation is a concrete request. By contrast, a general belief that the broker should have recommended more coverage is a much weaker claim. Emails, applications, renewal proposals, replacement cost worksheets, and notes of phone calls are the evidence of what was asked and what was confirmed.

The Missing Coverage Must Have Made a Difference

Even a clear procurement error requires proof that it caused the loss. That means asking whether the requested coverage was available, whether it would have paid this loss, and what the higher premium would have cost. It also means asking whether an exclusion or condition would have defeated the claim anyway. For example, a request for a higher building limit may not explain an unpaid loss that falls within a flood exclusion.

In addition, any recovery from the broker has to be measured separately from what the insurer still owes, because the same $250,000 can’t be collected twice under different theories.

The Two-Year Deadline May Have Started Before the Fire

Claims against insurance producers in Illinois must be filed within two years after the claim accrues, under 735 ILCS 5/13-214.4. In American Family Mutual Insurance Co. v. Krop, 2018 IL 122556, the Illinois Supreme Court held that a claim for negligent failure to procure insurance usually accrues when the customer receives the policy, not when a loss happens or the insurer denies coverage. The court reasoned that customers can read their policies and spot defects. However, it recognized exceptions where a policy’s application to a loss would be too unexpected for a typical customer to anticipate.

For the building owner, that rule creates a serious problem. If the policy without the increased limit arrived three years ago, the deadline to sue the broker may already have passed before the fire. Renewals, later conversations, and the specific facts may affect when the clock started, but no one should assume it begins when the rebuilding estimate comes in. For that reason, a broker claim should be evaluated right away, not after the insurance claim is finished.

Before Signing Anything

Finally, a release signed to close the insurance claim may affect other potential recoveries, depending on its wording. For that reason, the policy, both estimates, the payment history, and the placement communications should be gathered and reviewed together, so that the insurer claim, any broker claim, and their separate deadlines are evaluated at the same time.

We help policyholders assess inadequate coverage, distinguish insurer obligations from broker procurement issues, and evaluate potential recovery for a supported coverage shortfall. Contact us to discuss your matter.

This article provides general information and does not constitute legal advice. For guidance concerning a specific matter, see our insurance recovery services. Coverage depends on the policy wording, the facts, and applicable law. To discuss potential representation, request a consultation. Submitting an inquiry does not establish an attorney-client relationship.