Agent Liability

Dallas insurance lawyers need to know this case discussing insurance agent liability. It is a 2008 opinion from the Corpus Christi Court of Appeals. The style is, Insurance Network of Texas v. Kloesel.
The Kloesel’s have owned and operated Kloesels’ Steakhouse since 1970. INT is an independent insurance agency. In 1993, the Kloesels wanted a different insurance company to safeguard their restaurant. The Kloesels approached Gary Nitsche, an insurance agent with INT, to discuss having INT procure insurance for their restaurant. When INT first procured a policy for the Kloesels, it obtained a policy that covered communicable disease claims. During the policy year, the Kloesels expressed their intent to add a horse-and-carriage operation to their restaurant. As a result, the carrier opted not to renew the Kloesels’ policy, which was set to expire in October 1994. INT notified the Kloesels of the need to change carriers and subsequently procured for them a general liability policy from Burlington, a surplus lines carrier, for the 1994-1995 policy year. The Burlington policy covered claims arising from the horse-and-carriage operation, which began in November 1994, but excluded communicable disease claims. The Kloesels paid the premiums for this policy and renewed it for the 1995-1996, 1996-1997, and 1997-1998 policy years.
During the 1997-1998 policy year, over ninety customers contracted Hepatitis A at the Kloesels’ restaurant; the Texas Department of Health concluded that this likely resulted from a food handler being infected with Hepatitis A. The Kloesels filed claims under the Burlington policy, but Burlington denied the claims based on the communicable disease exclusion. Two separate lawsuits were then filed against the Kloesels by the Simpsons and the Lairds–customers who had contracted Hepatitis A. Burlington defended the Kloesels in these two lawsuits under a reservation of rights. The Simpsons obtained a judgment in their favor worth $242,625. Eight months later the Lairds obtained a judgment in their favor worth $323,441. INT declined to cover the Kloesels for the amounts owed under the Simpson and Laird judgments.
Burlington later filed a declaratory judgment action asking that “Burlington was not required to indemnify the Kloesels for any damages recovered against the Kloesels based on their patrons contracting Hepatitis A, since the Burlington policy contains an enforceable `communicable disease’ exclusion.”
INT argued that it did not have a duty to explain the Burlington policy’s coverage limitations to the Kloesels. In response, the Kloesels conceded in their brief that there is no duty to explain. At trial, the Kloesels’ expert witness testified that an insurance agent does not have a legal duty to explain the terms and conditions of an insurance policy. This testimony is in tune with the holdings of a few courts of appeals, which have likewise found that no duty to explain exists.
An insured’s reading of certain policy provisions will often result in nothing more than an exercise of the eyes. In other words, the fact that an insured has made himself cognizant of the existence of certain terms in his policy does not necessarily mean that the insured has thus acquired an understanding or appreciation of those terms. This is because policy provisions may be simple or complex, and the insured reading the provisions may be an experienced business person who is insurance savvy or an unsophisticated individual who knows nothing about insurance. It thus behooves an insured to not only read his policy, but to also question his agent on terms and conditions that are not understood; the agent’s reiteration as to what is covered under the policy will assist the insured in any later lawsuit. Though it clearly advantages an insured to explore any confusion over terms read but not understood, it is not clear that an insured is always negligent in failing to do so.
An insured’s reading of certain policy provisions will often result in nothing more than an exercise of the eyes. In other words, the fact that an insured has made himself cognizant of the existence of certain terms in his policy does not necessarily mean that the insured has thus acquired an understanding or appreciation of those terms. This is because policy provisions may be simple or complex, and the insured reading the provisions may be an experienced business person who is insurance savvy or an unsophisticated individual who knows nothing about insurance. It thus behooves an insured to not only read his policy, but to also question his agent on terms and conditions that are not understood; the agent’s reiteration as to what is covered under the policy will assist the insured in any later lawsuit. Though it clearly advantages an insured to explore any confusion over terms read but not understood, it is not clear that an insured is always negligent in failing to do so.
In making it’s ruling, this court stated, “When we assess whether an insured is negligent in failing to read his policy, we do not do so for the purpose of determining whether the insured should be excused from failing to exercise his eyes; rather, we do so for the ultimate purpose of determining whether the insured should be excused from failing to know and understand the contents of his policy. An assessment of an insured’s negligence in remaining silent shares the same ultimate purpose. Accordingly, we believe a fact-finder should be able to determine that an insured is not negligent for failing to question or investigate the policy terms he reads, but does not understand. In order to arrive at this determination, the fact-finder must find that
(1) it was reasonable for the insured to have not understood the import of the terms read, and
(2) the insured’s failure to acquire an understanding of the terms was directly related to the insured’s reasonable reliance on the agent’s knowledge and the assumption that the agent had correctly drawn the policy in conformance with said knowledge.

Given the varying complexity of insurance terms and provisions, the varying degrees of insurance knowledge possessed by insureds, and the varying communications that may exist between an agent and insured, a fact-finder should assess what is reasonable on a case-by-case basis. The common-sense rationale for permitting a fact-finder to find in an insured’s favor is as follows:
“When an agent of repute is employed to effect an insurance against certain risks, the client is entitled to rely upon his instructions being properly carried out. It is no answer for the agent to say: `I handed you the policy and you should have examined it and seen whether it gave you the protection you required.’ … Business could not be carried on … if, when a person has been employed to use care and skill with regard to a matter, the client is bound to use his own care and skill to see whether the person employed has done what he was employed to do.”
Because “an insured who hires and pays a professional agent does so to reduce, if not eliminate, the risk that an inadequate policy will be procured,” it stands to reason that “insurance consumers who instruct their agents to provide coverage should be entitled to have those instructions followed without regard to the insured’s failure to detect the agent’s negligent conduct.”
An agent’s client should be able to rely on the agent’s knowledge in two respects.
First, when the agent’s knowledge is composed of his client’s instructions regarding the qualities desired in a policy, the client may rightly assume that the agent will procure a policy in conformance with such knowledge.
Second, the client may rightly assume that the agent will procure a policy that a reasonably prudent agent would procure–a policy that is reflective of the agent having exercised the appropriate degree of skill and knowledge that an agent is expected to have upon entering the profession.

This court went on to rule in favor of the Kloesel’s. As stated in the beginning, this case is a must read for Experienced Insurance Law Attorneys.