Insurance agent negligence cases typically come to me with the following question: “Chip, I think the agent messed up. What do you think about bringing an action against the insurance agent for errors and omission?” My first two thoughts on this question are:
1. Do you know how complex agent negligence cases are?
2. In what state did this happen?
An insurance agent’s legal duties vary dramatically from state to state. In my opinion, insurance agents often hold themselves out as experts and trusted advisors. Yet, if they mess up, their lawyers and the entire insurance agent trade industry claim they owe a legal duty more akin to the person you are ordering your cheeseburger from at McDonald’s.
To further complicate these cases, most policyholders are trying to purchase insurance for the least amount of price. Insurance agents often try to keep policyholders from shopping around by providing less expensive insurance with less coverage. Unfortunately, the less coverage and lower priced policy often leaves coverage gaps when a loss occurs. When the loss occurs, the policyholder with an uncovered or under-covered loss is upset. The insurance agent says the policyholder should have figured out the coverage gap by reading the policy that was issued.
A typical example of an insurance agent negligence case involved a former Texas Supreme Court Justice who was upset with an appellate court ruling regarding the duties of an insurance agent in Texas. His attempts to have the Texas Supreme Court accept jurisdiction to hear a further appeal have failed, but his motion to the Texas Supreme Court1 caught my attention:
The Court of Appeals has erroneously changed the law in Texas…the Court of Appeals erroneously applied this Court’s decision in May v. United Servs. Ass’n of Am., 844 S.W.2d 666, 669 (Tex. 1992), essentially impacting all businesses, property owners and homeowners’ who purchase insurance, and are provided false information as to why the agent failed to procure the requested insurance, leaving the client uncovered for flood events, such as happened to so many Texans following Hurricane Harvey’s devastation.
For decades, this Court’s decision in May v. United Servs. Ass’n of Am., 844 S.W.2d 666, 669 (Tex. 1992) articulated that an insurance agent owed a duty to his client to procure the requested insurance and ‘to use reasonable diligence in attempting to place the requested insurance; and to inform the client promptly if he is unable to do so.’ But is this duty satisfied when the agent provides false information to the client, and when the agent does so after the policy has been procured? The Court of Appeals decision erroneously applied this Court’s decision in May, essentially impacting all businesses, property owners, and homeowners who purchase insurance, and are falsely told by their agent, after the policy is sold, that they needed more information, which the agent later admitted was not true and acknowledged that the agent’s failure to procure the requested flood coverage was a ‘mistake.’
Wow! Did the lower appellate court really place policyholders at peril by making a huge mistake in the law? I read the lower appellate court decision2 and noted it stated longstanding Texas insurance agent negligence law as follows:
Both parties agree on the basic common-law duties an insurance agent owes an insured. These two duties come from May v. United Servs. Ass’n of Am., 844 S.W.2d 666 (Tex. 1992). An agent has a duty to (1) use reasonable diligence in attempting to place requested insurance and (2) inform the client promptly if unable to do so…. Thus, for example, an insurance agent is liable when he misleads a potential insured into believing that the agent has obtained an insurance policy when he has not. Id. (discussing Burroughs v. Bunch, 210 S.W.2d 211 (Tex. Civ. App.—El Paso 1948, writ ref’d)). And an insurance agent is liable when he assures an insured that a certain event is covered when it proves to be excluded.…
The appellate court also discussed the duty of an agent to renew requested coverage:
The Garcias cite Trinity Universal Ins. Co. v. Burnette, 560 S.W.2d 440 (Tex. Civ. App.— Beaumont 1977, no Writ)…In Burnette, the insured held an automatic right to renew their policy. The insurance agency president testified that his company always renewed policies for their insureds or notified them when their policies were not renewed. Id. The agent failed to renew this insured’s policy or inform the insured that the policy was not renewed. Id. The Burnette court relied on a 1968 federal case to hold that the insurance agent has a ‘duty to keep his clients fully informed so that they can remain safely insured at all times.’ …(quoting Cateora v. British Atlantic Assurance, Ltd., 282 F. Supp. 167, 174 (S.D. Tex. 1968)), in which an agent knew the insurer had become insolvent but did not inform the insured or seek replacement coverage). The Burnette court also held that the agent breached his duty by not renewing the automatically renewable policy or telling the insured of its nonrenewal.
Texas generally places a duty upon the policyholder to read the policy and a presumption that the policyholder understands the contents of the policy. This is where most insurance agent cases get bogged down about who is responsible for the uncovered loss. I call this the “slip and fall” issue of agent cases because in every “slip and fall” case, the defendant always says the plaintiff should have been watching out for hazards, even if the defendant created them or did not remove the hazard causing the plaintiff to slip and fall. Similar to “slip and fall” cases, all agents say the policyholder should have read the policy and complained about the coverage gap even though the agent may have created the gap. On this issue, the lower Texas appellate court noted:
[T]he quarrel was over whether the insureds had an obligation to read their policy to discover that it lacked coverage for a risk that they likely anticipated and wanted to insure against…. The court noted that there is a presumption that an insured knows the contents of their policy but that the presumption can be overcome with evidence of why the insured does not… If the insured comes forward with evidence of why they do not know the contents of their policy, the burden is on the agent to prove the insured was negligent in failing to understand their own policy, such as by not reading it… The issue is generally presented as a contributory negligence question… The insured’s negligence is determined on a case-by-case basis, assessing the facts as they relate to whether it was reasonable to not understand the policy’s terms and whether the insured reasonably relied on the agent’s knowledge and their own assumption that the agent correctly procured the desired insurance…. The insured’s negligence is dependent on the facts and not subject to categorical rule. ..Thus, the Kloesel trial court did not err in refusing to instruct the jury in a way that would have presented the issue as though one side’s obligation was conclusive versus subject to a factual analysis.
In its discussion of the insured’s possible negligence, the Kloesel court discussed the concept of an insured ‘rely[ing] upon his instructions being properly carried out.’… But the court rejected the idea that either side’s duty was conclusive, holding instead that it depended on the facts…. Kloesel does not support the contention that an insured has a conclusive right to rely on the insured’s instructions being properly carried out by the agent. Instead, that court held that the question is one of degree and fact, analyzing the reasonableness of the insured’s actions as part of an evaluation of contributory negligence by the insured….
The lesson learned from this is that the specific facts of each case involving an alleged insurance agent negligence case are significant to the outcome. Investigating the flow of communication back and forth between the policyholder and the agent is extremely important. I always ask for the emails between the parties when analyzing these cases. What is placed in written form during the transaction usually means more than the memories of what was said or misunderstood during discussions.
The second part of the equation is that each state has slightly different law about agent negligence. Some states put an extreme burden on the policyholder to discover and raise the insurance coverage gap, while others seem to place an almost like fiduciary obligation upon the insurance agent. Many states say the agent’s duties depend upon the relationship between the insurance agent and the policyholder. This requires further factual investigation and makes the analysis more complex.
Today is Superbowl Sunday, and many are trying to figure out which team is going to win. That is not an easy task, and the analysis is complex. The lesson from today’s post is that there is nothing easy about an agent negligence case. It is infinitely more difficult than figuring out who will win the point spread of a football game.
Thought For The Day
The further you go in life, the more you realize what you’re going to leave this Earth. It’s not going to be, ‘It was a great platform. It was great to win the Super Bowl,’ but really and truly what you’re going to leave on this Earth is the influence on others.