Everyone makes mistakes, and insurance agents are not immune. The very complexity of the insurance business creates numerous opportunities for errors and omissions to creep into an agency's operation.
The E&O claim is the insurance agent's malpractice suit. Agents follow closely behind doctors and lawyers as subjects of an increasing number of claims alleging professional misconduct and negligence. Not only has the number of claims against agents increased, but the size of the claims has increased as well. Legislated tort reforms have helped stem the tide, but the overall trend continues upward.
Sources of an Insurance Agent's Legal Responsibilities
An insurance agent serves two masters the insured and the insurer. (In the context of this article, an insured includes one who thought he or she was insured, whether they were or not.)
The agent's legal responsibilities to the client arise out of:
- common law theories of negligence, and
- an implied contract to procure insurance for the insured.
The agent's legal responsibilities to the insurer arise out of:
- common law theories of negligence, and
- the written contract that ties the agency to the insurer.
Common Law Negligence
Negligence is defined as "failing to do something that a reasonable and prudent person would do, or doing something which a reasonable or prudent person would not do." The criteria against which actions are measured, therefore, are subject to change over time, and the prudent person against whom one is measured is intended to be a peer.
It is clear from this definition and it's reference to a "reasonably prudent agent" that the actions of an insurance agent in a specific case will be examined and evaluated based on the facts and circumstances involved in that case. The standard against which an agent will be measured depends on the "state of the art" of insurance agency procedures and operations existing at the time of the loss. An agent's duty to an insured, therefore, constantly is evolving with the times.
Professional or Salesperson? One implication of the definition of negligence is that the higher the level of experience, education or skills involved, the higher the standard of care against which actions will be judged. Thus an insurance agent who holds himself out to be a professional through written or oral representations and appearances raises the standard of care against which actions will be judged.
Client Relationships. In addition to an agent's perceived professionalism, an established "course of dealing" or a "special relationship" with an insured can affect the degree of the agent's legal responsibility to the insured. If an agent consistently renews insurance policies for an insured over a period of years, for example, the agent has established a "course of dealing" and may then be held liable for failure to renew. An agent that counsels the insured on needed coverages, thereby creating a "special relationship" with the insured as an insurance consultant, can be held liable for failing to mention a coverage that the insured does not have in effect at the time of a loss.
Common Law Duties of an Agent to its Insured
Under common law, an insurance agent owes a duty to use the degree of care necessary to protect the interest of the insured. If failure to use care results in injury or damage to the insured, the agent can be held liable for the injury or damage. Of course, the agency is also responsible for the negligent or fraudulent acts of its employees and solicitors.
For an agent to be legally liable for negligence, the injured party (the plaintiff) must prove the following:
- the agent owed a legal duty to the plaintiff;
- there was a breach of that duty by the agent; and
- the damages suffered by the plaintiff were proximately caused by the breach of duty.
General Duty to Act Reasonably. An agent generally has a duty to act as a reasonably prudent agent would act in the same or similar circumstances. Texas courts have defined the duty owed to the insured as follows:
"An agent owes his clients the greatest possible duty. He is the one the insured looks to and relies upon. The insured looks to the agent he deals with to get the coverage he seeks, with a sound company who can and will promptly pay claims when they are due. It is his duty to keep his clients fully informed so that they can remain safely insured at all times." (Trinity Universal Insurance Company v. Burnette - Texas, 1977.)
This general duty to act reasonably has been softened somewhat over the years by various court decisions that described certain specific duties of insurance agents. The following common legal theories for errors and omissions claims illustrate the degree of care recognized in common law:
- Misrepresenting insurance coverage. An insurance agent may no misrepresent the existence or the extent of coverage provided in a policy.
- Failure to procure requested insurance. An insurance agent who undertakes to procure insurance for another owes a duty to use reasonable diligence in attempting to place the requested insurance.
- Failure to notify insured of inability to procure insurance. As an expansion of the above theory, an insurance agent owes a duty to inform the insured promptly if unable to place the requested insurance.
- Procurement of inadequate coverage. An insurance agent who agrees to provide insurance to an insured owes a duty to use reasonable care to obtain adequate insurance to meet the insured's needs.
- Failure to maintain requested insurance. An insurance agent owes a duty to inform the insured when a renewal policy contains coverage changes.
- Failure to inform insured of renewal. An insurance agent owes a duty to inform the insured of premiums due for a renewal when the agent receives information pertaining to the expiration date that is intended for the customer.
- Failure to investigate an insurer's financial solvency. An insurance agent owes a duty to place coverage with a solvent insurer, reasonably moni tor an insurer's financial condition, disclose solvency information to the insured, and protect the insured when the risk of insolvency becomes too great.
Duty to Explain Policy Terms
Does an agent have a duty to explain policy terms and coverages to customers? Does an agent have a duty to offer higher limits or additional coverages? Generally, the courts have said the answer to these questions is "NO." As is the case with most E&O loss exposures, however, an agent can get sued for failing to explain or offer coverages, even if there is no legal duty to do so based on previous court decisions. That's why loss prevention measures are so important.
Client relationships can affect the success or failure of a client's claim against the agency. An established "special relationship" with an insured can affect the degree of the agent's legal responsibility to the insured.
If an agent counsels the insured on policy terms or needed coverages, for example, a judge or jury may say that the agent has established a "special relationship" with the client and may hold the agent liable for failing to explain a coverage or exclusion, or for failing to mention a coverage that the insured does not have at the time of the loss.
Without this special relationship, however, the courts have fairly consistently refused to blame the agent for a policyholder's failure to read and understand his or her policy, or for not providing coverage for every conceivable loss.
Duties of an Agent to its Company
An insurance agent may be liable to an insurance company for negligence or a breach of contract that causes loss or damage to the company. In particular, the agent owes the insurer loyalty, fairness and honesty, and a duty to act in good faith and to keep the insurer informed of material matters that relate to the insurance or to the agency/company relationship. An agency may also be liable for the negligent or fraudulent acts of agency employees and solicitors.
The agency/company contract creates a "special relationship" between the agent and insurer, thereby increasing the required degree of care. In addition, an agent has a fiduciary relationship with an insurer that requires an extraordinary degree of care. An agent's duty of care to an insurer is illustrated by the following common types of errors:
- Making mistakes. An agent owes a duty to use reasonable diligence and care in conducting business with its insurers. An insurer may be held liable for an agent's error in processing an insured's request for coverage, but the insurer may then have a right to seek indemnification from the agent.
- Failing to follow company instructions. An insurance agent owes a duty to comply with a an insurer's instructions promptly and fully and may be liable for any loss the insurer incurs as a result of the agent's failure to do so.
- Failing to disclose information. An agent has a fiduciary duty to the insurer to disclose any pertinent information related to the policies the insurer assumes for the agent.
- Delay in forwarding information. An agent owes a duty to use reasonable diligence in forwarding information that has been requested by the insurer or is material to the insurance.
- Exceeding the express or implied authority the company gives the agent. An agent owes a duty to understand and comply with binding authorities granted by the insurer and comply with all other terms of the agency/company agreement.