Agency has no duty to procure coverage it did not agree to obtain
(In June, the Wisconsin Supreme Court helped insurance agents who help themselves. Its decision in the following case teaches prudent agents and brokers to write summaries of important contracts and mail them to clients to protect themselves from unhappy insureds. The decision gives some reassurance to insurance agents and brokers who are asked to shop for insurance but not buy it, or who do not agree to purchase insurance for values in excess of what the agent feels is sufficient.)

Early in 2002, a woman was given ownership of a residence from her father's real estate trust. Her parents had used the four-bedroom residence as a vacation home. The husband contacted the couple's insurance agent to arrange replacement cost coverage on the property. The agent previously had sold the couple a number of policies, including an equine professional policy, a farm owners policy, a commercial automobile policy, and several policies for rental properties.
The husband requested $150,000 of coverage for the property, the same amount of coverage that his father-in-law had maintained on it. After binding the coverage and submitting the application, the agent visited the property and confirmed that, in his estimation, the $150,000 coverage limit was appropriate.
In July 2002, the couple met with the agent to review their coverages. Such meetings took place annually. At the meeting, the couple asked the agent to increase the coverage limit on the house in question to at least $250,000, which they thought it was worth.
The agent disagreed that a $100,000 coverage increase was justified. He thought the cost to replace the property would not exceed the existing $150,000 of coverage. He said he also thought that a $100,000 coverage increase would look suspicious to the insurance company.
The idea of having the property independently valued came up. The couple planned to contact an independent contractor to get such an appraisal. Meanwhile, the property continued to be insured for $150,000.
Following the meeting, the agent sent the couple a letter summarizing what they had discussed. Specifically, the letter noted that the couple planned to contact a contractor, who would determine whether an increase in coverage was justified.
The couple's independent contractor determined that the coverage limit should be at least $250,000. The contractor gave the couple a verbal assessment, but they never got a written estimate of the property's value. Neither the couple nor the contractor informed the agent of the verbal estimate.
The couple had no further contact with the agent regarding coverage on their property. Nor did they attempt to get increased coverage for the property through another agent or insurance company.
In September 2002, a fire destroyed the property. The couple alleged that the cost of replacing the residence on the property exceeded $250,000.
In January 2004, the couple sued their agent, his E&O insurer and the insurance company that had insured the residence. The complaint alleged that the agent was negligent for failing to procure the increased coverage for the property that the couple had requested. The parties eventually stipulated to dismiss with prejudice the claims against the insurer of the residence.
In a deposition, the wife confirmed that she had understood that, following the annual coverage review meeting, that the coverage on the property remained at $150,000 and that the agent was not going to increase that amount without hearing back from her about the discussed appraisal. She also acknowledged that “the ball was in my court” in regard to obtaining the appraisal.
The agent and his E&O insurer moved for summary judgment on the grounds that the agent had no duty to obtain additional coverage for the couple because he never agreed to do it. A circuit court denied the motion, concluding that the agent had a duty to carry out the couple's instructions. Based on prior Wisconsin cases, the court decided that once the couple decided what coverage they desired and asked their agent to obtain it, he had a duty to carry out his insureds' instructions.
Eventually, the case reached the state supreme court. It noted that to prevail on their negligence claim, the couple would have to prove four elements: “(1) a duty on the part of the defendant; (2) a breach of that duty; (3) a causal connection between the conduct and the injury; and (4) an actual loss or damage as a result of the injury” (Nelson, 155 Wis. 2d at 679).
The court noted that in their request for summary judgment, the agent and his E&O insurer denied the agency had a duty in the matter at hand, because the agent hadn't agreed to procure the requested coverage.
“In this case,” the court said, “we address the following question: If an insured requests an increase in insurance coverage and the insurance agent has not agreed to procure it, does the agent have a duty to procure it?
“Numerous cases have addressed the scope of an insurance agent's duty to an insured,” the court continued. “Although none resolved the issue presented in this case, they do provide a framework in which to consider the agent's duty to procure coverage.”
Citing other cases, the court said an insurance agent has a duty to “exercise reasonable skill and diligence in the transaction of the business entrusted to him (or her).” Also, “When an insurance agent fails to act with reasonable care, skill, and diligence in procuring coverage he or she agreed to procure, the agent has breached his or her duty to the insured.” But the court added that other cases have also established that “absent special circumstances, an insurance agent's duty to an insured is limited.” (Citations omitted.)
There can be such special circumstances when something more than a standard insured-insurer relationship exists, the court said, “such as an express agreement that an agent will advise the insured about his or her coverage … if an insured pays the agent compensation for his or her advice, (if) an insured has entrusted the agent to an extent that the agent appreciates that he or she has an enhanced duty of providing advice, or (if) the insured relies on advice after an agent held himself or herself out as a highly skilled insurance expert.” (Citations omitted.)
Courts have also concluded that in the absence of special circumstances, agents do not have a duty to inform insureds about policy limits higher than those selected by the insured, or to recommend such limits, the court said. Nor do agents have a duty “to advise them regarding the adequacy of coverage,” to “advise [the insured] to increase the limits of its insurance coverage for personal property,” to “anticipate what liabilities an insured may expect a policy to cover” or “to identify which exclusions in a policy an insured may deem important.” (Citations omitted.)
The state supreme court concluded: “Adhering to the underlying principles of the other cases related to the duty of insurance agents, we conclude that an insurance agent does not have a duty to procure requested insurance coverage until there is an agreement that the agent will do so.”
The court noted that during their depositions, the insureds acknowledged that the agent had not agreed to procure the coverage they had requested at the July 2002 meeting. They also agreed that they understood the agent was not going to procure increased coverage until he heard back from them regarding a new appraisal. Although the couple received an estimate that would have supported the increase in coverage, the court said, they never gave the agent that information. That kept them from reaching an agreement concerning increased limits.
“Accordingly, we conclude that (the agent) did not have a duty to procure the requested increase in coverage,” the court said, thus affirming an appeals court ruling granting summary judgment to the agent and his E&O carrier.
Avery v. Diedrich, 2007 WI 80 (Wis. 06/27/2007).
Insurer not bound by inaccurate cert issued by a broker with no authority
(In Missouri a court ruled in favor of an insurer who claimed no knowledge of the actions of a broker who issued a certificate of insurance wrongfully and falsely describing the existence of insurance. The case teaches that a broker should never issue a false certificate since, although the insurer was successful in its suit, it incurred fees and costs that it should seek to recover from the broker. A certificate should only be issued by an agent with the right to issue the certificate and only describe the coverages actually provided by the policy. Failure can expose the broker's assets.)
A man was involved in a motor vehicle accident with a tractor-trailer. He filed a lawsuit seeking damages for personal injuries from the driver of the truck and other parties. The action alleged that the man's injuries were the result of the truck driver's negligent operation of his truck.
That lawsuit prompted the insurer of the trucking company to file a declaratory judgment action in a Missouri court to establish that it was not obligated to defend the company in that action or to pay any part of any judgment awarded to the man, because the tractor-trailer involved in the action was not designated or identified as a covered auto in the truckers policy the insurer had issued to the company.
The injured man opposed the insurer's motion, arguing that the trucking company's insurance agent had issued a certificate of liability insurance to a third party (also named as a defendant in the man's suit) stating that the tractor-trailer in question had insurance coverage under the insurer's policy. The injured man contended that because the certificate stated that the tractor-trailer was insured by the carrier, it had to provide coverage.
The insurer submitted affidavits establishing that the agency was an independent insurance broker and not the insurer's employee. The agency did not hold an “agency agreement” or any contract with the insurer, and the injured man produced no admissible evidence to controvert the insurer's description of the agency's status. As such, the court hearing the case ruled there was nothing to overcome the presumption that the independent insurance broker was not the insurer's agent.
Although the court said the lack of agency relationship between the insurer and the independent insurance broker sufficed to entitle the insurer to summary judgment, it noted a second reason why the injured man's argument must fail–his reliance on the certificate of insurance. The court acknowledged the discrepancy that existed between the insurance policy and the certificate, but noted that the law governing this issue precludes coverage. It cited applicable cases stating that a certificate is not a part of an insurance contract or necessary to the insurance. Rather it serves “merely as evidence of the insurance.” Moreover, the court noted, the certificate itself establishes that it provides no coverage in and of itself. Clearly stated on a certificate is the provision that it “does not amend, extend, or alter the coverage” afforded by a policy.
The court said the injured man failed to present evidence sufficient to establish that genuine issues of material fact existed with respect to insurance coverage. The vehicle in question was not a covered “auto” under the insurance policy, and there was no evidence that the independent insurance broker was an agent of the insurer. “Absent an agency relationship, the actions taken by an independent insurance broker are not attributable to Plaintiff,” the court said. “Because the policy did not provide coverage for the tractor-trailer in question, Plaintiff is under no duty or obligation to defend the defendants in the underlying suit … and it is under no obligation to pay any amounts adjudicated to be owed by those defendants. Plaintiff is therefore entitled to judgment as a matter of law.”
Stratford Insurance Co. v. Staggs Trucking Co. Inc., et al., No. 1:05CR218 HEA (E.D.Mo. 05/14/2007)
Agency not liable for failing to procure coverage unavailable elsewhere
In 1996, a man asked a shipbuilder to outfit a hull he previously had bought from another party. After reaching initial agreement with the owner, the shipbuilder contacted an insurance agent to arrange insurance on the 30-foot boat during its construction. Following the agent's recommendation, the shipbuilder bought an endorsement on its existing builder's risk insurance.
When it delivered the completed boat to the owner in 1999, the shipbuilder was aware that the boat had structural problems that caused it to list to starboard. In 2000, the owner filed a civil action against the shipbuilder, asserting claims for breach of contract, breach of warranty and negligence. The owner sought recision of the contract and a refund of the purchase price. In 2002, following a jury-waived trial, a court found that the boat was not safe at certain speeds because of the listing problem. It ruled that the shipbuilder had breached an implied warranty, because the boat was not fit for the ordinary purpose for which such boats are used. The court ordered recision of the contract and required the boat builder to return the $118,000 purchase price to the owner in exchange for the vessel.
After the owner filed his complaint, the shipbuilder sought coverage from its builder's risk insurer, pursuant to the endorsement it had bought through its agent. The insurer denied coverage, however, citing an exclusion. The shipbuilder and insurer litigated the issue in a U.S. District Court. Prior to entry of any judgment, however, the parties settled the matter.
On July 2, 2003, the shipbuilder filed a three-count complaint in state superior court against the insurance agency. It alleged the agency misrepresented the scope of the builder's risk endorsement, breached its contract in failing to arrange for the coverage the builder sought, and was negligent in failing to provide accurate advice and a policy that fulfilled the shipbuilder's coverage request. (In its complaint, the shipbuilder said it intended to buy “full and complete coverage for all liability claims” that could be asserted against it in the construction of the boat, but it also admitted elsewhere that the builder's risk policy it purchased was not a liability policy.)
The court granted summary judgment in favor of the agency on all three counts. The shipbuilder appealed to the Supreme Judicial Court of Maine. It noted that one of the six bases on which the lower court granted summary judgment was its conclusion that, because the shipbuilder's claims were based on the agency's failure to procure better insurance coverage, the builder was required to prove that better coverage was otherwise available–but it had failed to do so. The ship builder conceded that the scope of coverage it sought was not available from any other insurer, but nevertheless contended that summary judgment was improperly entered against it.
The court noted that in granting the insurance agency summary judgment, the lower court relied, at least in part, on Bangor-Brewer Bowling Lanes Inc. v. Commercial Union-York Insurance Co. In that case, the Superior Court held that to make out a case against an insurance agent for failure to procure adequate insurance under either contract or tort theory, a plaintiff must prove that such coverage would have been available had the agency fulfilled its alleged duty of care or had not allegedly breached its contract with the plaintiff. The Superior Court likened the case to one for legal malpractice. To prove causation, such a case requires evidence that better legal representation would have resulted in a more favorable outcome for the plaintiff.
The Supreme Court said that although there is abundant authority that proof of better alternative coverage is required in failure-to-procure-insurance cases, “we need not decide whether the availability of better coverage is … an essential element of proof in this type of action because, in this case, (the shipbuilder) failed to allege sufficient facts necessary to establish causation. For causation to be established in such circumstances, the plaintiff must allege that, but for the defendant's acts, the resulting outcome for the plaintiff would have been both different, and more favorable.” (Citation omitted.)
“The builder's pleadings did not allege, nor did its facts establish, that absent the agency's acts, the builder would have acted in a substantially different way; e.g., that it would have charged its client more for building the boat, would have declined to build the boat at all, or would have made some other arrangement in light of the increased risk to the builder, absent the type of insurance it sought through the agency,” the court said. “Indeed, the builder never alleged or demonstrated that, had it known the true scope of the policy … it would have acted any differently in procuring the coverage. (Indeed, it was undisputed that the shipbuilder didn't contact the agency about procuring coverage until after it had reached an agreement with its client to build the boat.)
“Absent some such evidence, (the builder) has failed to establish on a prima facie basis the element of causation common to all its claims against (the agency), and the court therefore properly granted a summary judgment in the agency's favor.
“Because we conclude that the court properly granted a summary judgment to the agency on all counts, we need not consider (the builder's) remaining contentions of error as to the other independent bases on which the court entered the summary judgment,” the court concluded in affirming the lower court's judgment.
Tri-Town Marine Inc. v. J.C. Milli-ken Agency Inc., 2007 Me. 67 (Me. 05/29/2007)
Barry Zalma, Esq., CFE, is a California attorney. His practice emphasizes the representation of insurers and others in the business of insurance. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He provides expert witness testimony and consults with plaintiffs and defendants concerning insurance coverage, insurance claims handling and bad faith. He has qualified as an expert in state and federal courts in California, Mississippi, Texas and New Mexico, as well as in the Grand Caymans. He can be reached at [email protected]. His consulting practice's Web site is www.zic.bz.