Insurance Agent Liability in Texas: When the Exclusion Eliminates the Coverage

Most of my clients are entrepreneurs. They are folks who started out with no money. However, they were rich in work ethic, dreams, hope, perseverance, and intelligence. They are true rags-to-riches people. It is so much fun having these clients because I get to hear their stories and over and over again. I am constantly reminded that the American Dream is still alive. My clients pay tens of thousands of dollars a year in insurance premiums to protect their investments. Like all of us, they pay premiums so that when a storm or fire or other covered loss causes damage to their property, they have insurance money to cover the damage. Nothing is more heartbreaking for my clients than to file a claim and find out that the policy either does not cover the loss or else contains exclusions, which exclude the exact loss they were trying to insure in the first place. This despite the fact that their agent told them they were covered and they paid premiums every year to protect themselves from the exact loss that occurred.

I have been involved in cases where my clients had specialized businesses. They have had the same insurance agent for years and have paid huge premiums every year. However, my clients did not know that their policy contained exclusions, which excluded all coverage because of the type of business my clients were in. And it is not as if there was no insurance product for them. In fact, had the agent paid attention to what business my clients were in and what the policies contained, the agent could have procured coverage for my clients, which covered all losses and at the same premium rate. The problem is that the agent ignored the business my clients were in and did not pay attention to the provisions in the policy he placed. As a result the entire policy is useless because it contains an exclusion that excludes my clients’ business. My kids love Willy Wonka (the original movie and the Johnny Depp version). What if Willy Wonka paid $150,000 a year for insurance on his chocolate factory and every year his agent took his premiums and assured Willy he was covered? What if the chocolate factory burned down and Willy filed a claim, only to find out that the policy had an exclusion that excluded all damages that had anything to do with chocolate? What can Willy do to recover his damages? His insurance claim is dead thanks to the chocolate exclusion. What else can he do? Is his agent liable?

One court in Texas indicated that the insurance agent has a duty to acquaint himself with his client’s business so the insurance will cover all risks associated with the business.1 Another court in Texas held: “When the agent of an applicant agrees to apply for insurance on behalf of the principal, the agent has the duty to either explain the terms of the application form, or otherwise inform the principal what coverages are included in the application.”2 However, it is also clear in Texas that the insured has the duty to read his policy and it will be presumed he did so.3 And the Texas Supreme Court has indicated that the duties of the agent to become familiar with his client’s business and to make sure that the proper coverage is placed and explained, may depend upon whether the policyholder and the agent has a longstanding relationship.4 However, even if a policyholder had a duty to read his policy, the insurance agent has a duty to procure the insurance requested by his client.5 If a policyholder asks for all risk insurance on his business, then the duty of that agent to procure must mean he has to procure insurance that will actually insure the property. Procuring insurance that contains an exclusion that excludes all insurance due the nature of the policyholders business is not procuring insurance at all. Worse, the agent is receiving commission on premiums every year on a worthless policy.

No business would buy insurance that is impossible. In order words, no business would pay for insurance that contains an exclusion, or a series of exclusions, which completely exclude all coverage due to the nature of the business. In Texas if that happens then the agent is liable to the policyholder for failing to procure insurance, failing to know his client’s business, failing to explain the coverage (or lack of coverage) to his client, and for misrepresentation under the Insurance Code and the Deceptive Trade Practices Act.

1 Frank B. Hall & Co. v. Beach, Inc., 733 S.W.2d 251 (Tex. App. - - Corpus Christi, 1987, writ refused n.r.e.).
2 McNeill v. McDavid Ins. Agency, 594 S.W.2d 198 (Tex. App. - - Dallas, 1980).
3 Continental Casualty Company v. Bock, 340 S.W.2d 527 (Tex. App - - Corpus Christi, 1960, writ refused n.r.e.).
4 May v. USAA, 844 S.W.2d 666 (Tex. 1992).
5 Burroughs v. Bunch, 210 S.W.2d 211 (Tex. App. - - El Paso, 1948, writ refused).


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Gary - December 28, 2015 8:27 AM

It's one thing for the agent to do their due diligence to acquaint themselves with the nature of the business in order to insure it properly. But in my experience, agents often do not necessarily understand how coverage will be applied or why it will be denied in certain losses. In addition, requiring the insured to read the policy is all fine and good, but given how difficult it can be to correctly understand the meaning in the policy is another matter, and presents a significant barrier.

shirley heflin - December 30, 2015 9:21 AM

Dear Mr. McGinnis:

It's good to hear that TX is fair to the policyholder and holds the Agent responsible for not doing their job! Unfortunately, most people buying insurance are unaware that many insurance agents work on a commission basis and are "hearing" what they're going to make on selling a policy instead of "listening" to the coverage the policyholder needs!

Happy New Year!

Shirley Heflin
Tampa, Fla.

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