When a fire destroyed the house, the insurance policy paid out the policy limits – – $193,000.00. However, the cost guide estimate would have increased the limits to $213,000 using the information the agent had obtained, and as much as $240,000 if the questionnaire had been used. The actual cost to replace the home was $328,843. The insureds sued for the difference between the $328,843 cost to replace the home – – which they had requested the agent obtain – – and the $193,000 paid by the insurer. Because certain services in regards to calculating coverage limits had been promised but not provided, the trial court held that the agent had breached its duty of care to the insureds. But the court calculated the damages only as the difference between the cost guide estimate had it been properly applied, and the insurance limits that were paid. The insureds appealed from this ruling.
In affirming the trial court decision, the appellate court acknowledged that “the duty of care that an insurance agent owes his or her client does not include the obligation to procure a policy affording the client complete liability protection.” Id. at 377. However, the court agreed that in undertaking to provide a cost guide estimate, and failing to do so, the agent had breached the special duty of care it had undertaken. Nonetheless, there was no evidence that the agent had agreed to conduct a professional real estate appraisal, or obtain bids and consult builders or other experts to determine the full replacement value of the home. Accordingly, the agent need only be responsible for the difference between the insurance limits actually in place, and the limits that would have been in place but for the failure to utilize the cost guide estimate (and questionnaire), as represented.
In Cole v. Wellmark of South Dakota, 776 N.W.2d 240 (S.D. 2009), the parents of several children (the “Coles”) utilized an independent insurance agent to apply for health insurance coverage for their family while the wife transitioned in her career. The insurance application was filled out and submitted, but it expressly noted above the signature line that coverage would not be effective until the insurer had reviewed and approved the issuance of the policy, and notified the insureds in writing of the approval of coverage. While the initial premium check was cashed, the insurer allegedly sent two riders to be signed and returned (regarding coverage limitations with regard to disclosed preexisting conditions), and never received them back. The Coles claimed they never received the riders. The insurer also claimed to have sent out a letter rejecting the application in light of the Coles’ failure to return the executed riders. The Coles claimed they never received this letter either. Thereafter, a refund check was allegedly sent which the Coles claimed not to have received, and 5 days later the Coles’ daughter suffered a knee injury requiring the family to incur $20,000 in medical expenses to treat.
The Coles sued both the insurer for coverage and the agent for negligent breach of their duty to procure. The insurer sought and obtained summary judgment dismissing the claim against it in light of the policy application’s express language advising that coverage would not be effective until written approval had been issued by the insurer. The decision was affirmed by an intermediate appellate court, and the South Dakota Supreme Court affirmed as well. Additionally, the trial court dismissed the Coles’ claim that the agent had breached its duty to procure, this ruling was affirmed, and the South Dakota Supreme Court affirmed this ruling also.
The question before the South Dakota Supreme Court on appeal from the Circuit Court was whether, in connection with the agent’s submission of the policy application, the agent – – who was aware that coverage had not been bound due to the Coles’ failure to return the signed coverage riders – – had a duty to notify the Coles that the insurance could not be procured. In other words, had the agent breached the basic duty of an insurance agent/broker in failing to notify the customer of the failure to procure the requested coverage within a reasonable time of determining that the coverage could not be procured. While that is generally considered a basic duty, as noted above, in this instance the court found that no such duty had arisen because, in this instance, the Coles did not ask the agent to conduct a review, make a recommendation and then obtain the insurance the agent had recommended. Here, instead, the agent had simply been asked to file the appropriate materials so that the application could be evaluated. Because the Coles knew or should have known that their coverage would not be effective until they had received written approval from the insurer, and they had not asked the agent to monitor the progress of their application, no duty was imposed on the agent to do so, or to seasonably notify the Coles of her inability to obtain coverage. Id. at 251.
Even where the broker-insured relationship is longstanding and particular coverage provisions may be less than obvious on their face, recent court decisions suggest that courts will still be careful in their analysis of the agent’s/broker’s duty of care.
In Isidore Newman School v. J. Everett Eaves, Inc., Case No. 09-c-2161, 2010 La. LEXIS 1667 (Sup. Ct. La. July 6, 2010), a broker had had a 16 year relationship with a school in Louisiana for which it had annually procured property and casualty insurance. Each year the broker had met with the school’s business managers to discuss coverages and renew the policy, and provided a written insurance proposal. As part of the property coverage, since 1999 the school had paid for “Business Income and Extra Expense” (“BI & EE”) coverage, the limits for which had been increased from $250,000 to $350,000.
Following Hurricane Katrina, the school suffered major damage to its physical structure, which caused the school to be closed for over two months. As a result, the school suffered a loss of tuition revenue/income of more than $3 million. The school thereupon sued the broker for failing to appropriately advise the school with regard to the BI & EE, alleging that the broker “had a duty to inform [the school] of the different coverage options that were available to it and to explain the costs and potential benefits of those coverages.” Id. at *4. The school also argued that by holding itself out as an insurance professional, the broker “voluntarily assumed a duty to provide accurate and complete information about the scope of the coverage recommended.” Id. The school maintained that had it been properly informed that BI & EE coverage included tuition loss, it would have increased its coverage. In particular, it argued that because the policy was over 400 pages in length and was quite complicated and difficult to understand (particularly with regard to whether it could understand “net profits” as something it was entitled to as a non-profit institution), it was incumbent upon the broker to spell out what was covered under BI & EE.
After a trial on the merits, the trial court found that the broker had breached its duty of care by not explaining the components of the BI & EE coverage sufficiently to permit the school to make an informed choice regarding the coverage. On appeal, the decision was affirmed, with the appellate court finding that the broker had assumed a duty to provide recommendations on the scope and amount of insurance coverage that the school should purchase. Upon review by the Louisiana Supreme Court pursuant to grant of certiorari, however, the court reversed, concluding that the lower courts had erred in holding that the broker owed a duty to the school to advise as to the amount of insurance coverage to obtain. In so holding, the court stated:
An agent has a duty of “reasonable diligence” to advise the client, but this duty has not been expanded to include the obligation to advise whether the client has procured the correct amount or type of insurance coverage. It is the insured’s responsibility to request the type of insurance coverage, and the amount of coverage needed. It is not the agent’s obligation to spontaneously or affirmatively identify the scope or the amount of insurance coverage the client needs.
Id. at *20.
Finally, even in circumstances where one might arguably suggest the agent/broker had or should have had access to information to justify imposing a duty to question the insured about coverage and/or offer advice regarding possible coverage changes or options, recent decisions have shown circumspection in taking that leap.
In Carpenter v. Bolz, 234 P.3d 866, 2010 Kan. App. Unpub. LEXIS 523 (Kan. Ct. App. 2010), the court considered an appeal of a dismissal of breach of contract, negligence and breach of fiduciary duty claims against an insurance agent made after the plaintiffs had suffered a fire loss for which their insurance was $87,000 less than their mortgage. Noting that the homeowners had only advised the agent of their original mortgage, and not the subsequent increased mortgage, the trial court granted the agent summary judgment. On appeal, the appellate court affirmed, noting particularly with regard to the breach of contract claim that in order to establish a breach of contract claim against an agent in regard to a “failure to procure” based claim it first must be shown that there was a “meeting of the minds” with regard to the coverage to be procured. Here, because there was no evidence the agent had been advised of anything other than the original loan amount, the court found that “there is no evidence that the parties came to a meeting of the minds that defendants would procure coverage for any amount other than the amount of the original loan . . . .” Id. at *13.
In a very recent Supreme Court Iowa decision, Merriam v. Farm Bureau Insurance, 2001 Iowa Sup. LEXIS 3 (Sup. Ct. Iowa Feb. 4, 2001), the court considered the question of whether an insurance agent had breached a duty of care to a self-employed over-the-road truck driver by assisting him with certain insurance coverages, but never recommending he procure self-employment workers’ compensation coverage. This case is interesting and significant because in the context of the interactions between the agent and customer, the court had ample opportunity to find a basis for concluding that there was a justified reliance upon the agent’s expertise, and concluding the agent had a broader duty to advise regarding possible coverage concerns and options. But the Iowa Supreme Court refused to be drawn towards adopting an expansive perspective of the agent’s duty to advise in ordinary circumstances.
In Merriam, the agent worked for Farm Bureau Insurance, and had been assigned to the account of the Merriams, a married couple who had insurance on their primary residence with Farm Bureau. He met with them in early 2005 to discuss insuring a second residence the Merriams were purchasing for Mr. Merriam’s mother. During this meeting, the agent suggested the Merriams consider insuring their personal vehicles with Farm Bureau. At the same time, the Merriams indicated an interest in obtaining insurance on their horses, and the agent agreed to get them a quote. They also asked about getting a quote on insurance on the husband’s guns, as well as adding their new garage and chicken coop onto their homeowner’s policy, and obtaining life insurance on Mr. Merriam’s mother.
During the meeting, the agent was aware that Mr. Merriam was a self-employed truck driver and, in fact, Mrs. Merriam mentioned that he had a million dollar policy in place if he was killed in his truck. But no discussion was had regarding whether he had unemployment insurance, and the agent neither asked questions about it nor suggested it as a consideration. Then, unfortunately, just a few weeks later Merriam sustained severe injuries to his arm (which was crushed by a dump truck he was operating while he was patching the driveway where he parked his truck).
In the absence of workers’ compensation insurance, the Merriams sued Farm Bureau, alleging the agent was negligent in failing to advise them that, as a self-employed over-the-road truck driver, Mr. Merriam had no workers’ compensation insurance unless he purchased it himself. They claimed he “was in a position of superior knowledge pertaining to available insurance products and was negligent for failing to initiate a conversation with them regarding this issue.” 2011 Iowa Sup. LEXIS 3, at * 4.
After discovery, Farm Bureau moved for summary judgment contending the agent owed no affirmative duty to inquire or advise the Merriams on the husband’s need for self-employment workers’ compensation coverage. The lower court agreed and dismissed the claim. The Iowa Supreme Court affirmed.
In reaching this decision, the Iowa Supreme Court noted that the agent had admitted he was aware that Mr. Merriam was self-employed, because in rating their personal vehicles he needed to know what their occupations were, where they worked, how far it was to and from work, etc. The Merriams argued that the agent’s awareness of his self-employment status and his life insurance policy, combined with his unsolicited recommendation for other insurance coverage, supported a conclusion that the agent was holding himself out as an insurance specialist and thereby assumed a greater duty of care to the Merriams, including to make recommendations regarding the workers’ compensation coverage.
In rejecting this argument, the Iowa Supreme Court noted that the Merriams had made no specific inquiry with respect to self-employed workers’ compensation insurance, and did not either expressly or impliedly seek the agent’s assistance in assessing any of their insurance needs other than those specifically requested. Further, there was no evidence of a long-standing relationship between them that would support an implied agreement to expand his duty to include assessment of the Merriams’ other insurance needs, no evidence that he had advised them that he was an insurance specialist, no evidence he offered to consult with them regarding additional insurance needs, and no evidence he had received any additional compensation above his commission. Id. at 11.
Summing up, the Court stated:
The plaintiffs contend [the agent] Stonehocker’s knowledge of Timothy’s self-employed status and million dollar life insurance policy was sufficient to trigger a duty of inquiry on Stonehocker’s part. The fact that Stonehocker was a trained and licensed insurance agent with arguably “superior knowledge as to what insurance products in [Timothy’s] position would require to be adequately protected from injury or loss” cannot be the basis to find an implied agreement to expand Stonehocker’s duty. If that were the case, then every trained and licensed insurance agent would have a duty to provide an assessment of all of the insureds’ insurance needs, whether requested or not.
Id. at 12.
What these cases tell us is, first, that where there is an uninsured loss, efforts will often be made by the customer to establish a duty to advise/procure coverage that would have covered the loss, and pin responsibility upon the agent/broker for failing to have done so. It is indeed a truism that “misery loves company”, and where money is involved “it’s just business, nothing personal.” Second, while courts have, in fact, expanded their review of the responsibilities of agents/brokers in recognition of the special expertise they generally provide (and, more and more frequently, explicitly promise in order to win business), a practical analysis will still be applied to determine what was actually requested. Courts considering the scope of the duty to advise/procure appear to be exercising prudence and caution in considering under what circumstances the agent’s/broker’s duty should be expanded, and when particular coverages should be offered or suggested in the absence of a request for same.
This said, where a loss is not covered and an argument can be fashioned that the agent/broker should have inquired about particular coverages or offered or suggested certain coverage options, it is extremely helpful to have documented your interactions with the insured. In this regard, whether with a new customer or an existing customer on renewals, it is a good idea as a regular practice to document what has been offered, what has been requested, what has been bound, and what was, accordingly declined. This is the medicine that has to be taken. Of course, there is an inherent danger is documenting what you’ve promised, because it becomes black and white proof of the breach of a duty of care if you fail to deliver. But it helps immensely in establishing the true parameters of your duty to advise/procure, and, as such, may help you avoid the costs and uncertainties of “he said/she said” litigation if a loss at some point arises that there is insufficient coverage to fully indemnify.
Peter Biging is a partner in the law firm of Lewis Brisbois Bisgaard & Smith, LLP, where he is a Vice Chair of the firm’s Professional Liability Practice Group. Mr Biging’s practice involves defense of a wide variety of professionals against errors and omissions claims. He also handles a significant amount of coverage work, focusing primarily on reviewing and litigating coverage issues with respect to professional liability policies. When not litigating cases, Mr. Biging has authored numerous articles and is a frequent lecturer on professional errors and omissions liability and coverage issues. He has been recognized in both 2009 and 2010 as a New York Super Lawyer.