Articles Posted in Insurance Agents

As most insurance law attorneys can tell a prospective client: An insurance agent does not have a responsibility to explain the terms of the policy.

As in most laws, there are exceptions based on the facts of each given situation.  The Western District of Texas, Austin Division, issued an opinion in 2019 worth reading.  It is styled, Riojas v. Nationwide General Insurance Company, et al.

While in the process of selling the Riojases a home loan in 2015, DHI, through its employee Brittany Present, allegedly told the Riojases that DHI would secure homeowners’ insurance for their home.  Brittany asked Lezam to obtain a policy, which he did through Nationwide.  All of the defendants in this case, allegedly told the Riojases that the policy provided full coverage for their home including water damage.

Here is a list of responsibilities that insurance agents can be held responsible for failing to perform or performing incorrectly.

A.  From a 1948, El Paso Court of Appeals opinion styled, Burroughs v. Bunch, an insurance agent has a duty to procure the coverage entrusted to his care, or failing to do so, to immediately notify the insured of this fact.  A more recent opinion from the Tyler Court of Appeals, Critchfield v. Smith, which was issued in 2004, says this duty to procure is two distinct duties: (1) the duty to use reasonable diligence in attempting to place the requested insurance, and (2) the duty to inform the client promptly if unable to do so.

B.  From the 1992, Texas Supreme Court opinion styled, May v. United Services Association of American, requires that agents keep their insureds fully informed about the current status of a policy’s in force status.

In order to hold a person liable for his/her acts or omissions, the thing complained of must violate a duty which the law recognizes.  This is easily understandable in the case of a collision resulting from running a stop sign.  The law imposes a duty of drivers to stop at stop signs.  So, when a driver violates that duty by running a stop sign, he or she is liable for the damages caused.  So, too, with insurance agents.

Nationally there is a concept known as the “professional judgment rule” which holds that an agent in the business of selling insurance must act in a manner befitting a reasonable and prudent agent.  Accordingly, agents who do not utilize their skills in this way are subject to claims for damages.  Unfortunately, our Texas Supreme Court has rejected the “professional judgment rule” for use Texas.  Instead, in Texas, agents have a general duty to use reasonable care, skill and diligence in procuring insurance.  It even includes the duty of an agent to “keep his clients fully informed so that they can remain safely insured.”  This is according to the 1977, Beaumont Court of Appeals opinion, Trinity Universal Ins. Co. V. Burnette.  In the Burnette case the court upheld a jury finding that an insurance agent was negligent in failing to “thoroughly acquaint himself” with his client’s needs and in failing to produce the coverage for risks or perils the client faced.

On 1992, the Texas Supreme Court was faced with deciding if an insurance agent was negligent for failing to explore other health insurance coverage options beyond one with a tricky termination and deferral clause.  This was the opinion styled, May v. United Services Association of America.  In this case, the May wound up without coverage after buying the policy that the agent recommended.  The lawsuit claimed that the agent failed to investigate alternative policies which were easily obtainable.  This was factually true – the agent did not investigate any of the several other possible policies and instead settled on the first one he found.  Nevertheless, the Texas Supreme Court found that the agent did not “mislead” the May about the limits of the policy selected.  The May case dramatically changed the fact of insurance law in Texas.  In essence, it appears the the Court now requires there to be an actual misrepresentation in order for the Plaintiff to succeed.  However, the court did leave open the possibility that the Mays might have succeeded if they had an explicit agreement with the agent regarding what terms they required in the policy that the agent obtained.  Had the agent violated such an agreement, he might have been found liable.

A new law, Texas Insurance Code, Section 542A.006(a) matters in this case.

The case is from the Western District of Texas, Austin Division.  It is styled, Yan Qing Jiang v. The Travelers Home and Marine Insurance Company and Dana Ellen Pustka.

Jiang filed this action in state district court alleging her home was damaged in a storm and that Travelers is the insurer and the adjuster was Pustka.  Jiang asserted causes of action for violations of the Texas Insurance Code and the Texas Deceptive Trade Practices Act (DTPA).  Travelers and Pustka had the case removed to federal court based on diversity jurisdiction, 28 U.S.C., Section 1332(a), and argue that Pustka was improperly joined in an effort to defeat diversity jurisdiction.

Many times an insurance agent makes mistakes and those mistakes cost his customer, the insured.  An experienced Insurance Law Attorney should be able to recognize when an agent violates a duty he owes to his customer.

There are arguably several duties that exist for insurance agents in Texas, among them:

(1)  Duty to Procure, which requires an agent to actually obtain the coverage entrusted to his care, or failing to do so, to immediately notified the insured of this fact.  This includes leading a client to believe he has coverage for a particular peril which he in fact does not have.  This is discussed in the 1948, El Paso Court o f Appeals opinion, Burroughs v. Bunch.  More recently, one Texas appeals court articulated this as two distinct duties: (i) the duty to use reasonable diligence in attempting to place the requested insurance, and (ii) the duty to inform the client promptly if unable to do so.  This is from the 2004, Tyler Court of Appeals opinion, Critchfield v. Smith.

Here is a case where an insurance law lawyer sued an agent and was able to prevent the case from being held in Federal Court.  The case is from the Southern District of Texas, Houston Division, and is styled, Mary’z Mediterranean Cuisine, Inc. v. Blackboard Insurance Company f/k/a Hamilton Insurance  Company, Texas General Insurance, and Mir Khan.

This lawsuit was filed in State District Court and the defendants removed it to Federal Court based on their assertion that Texas General and Khan were improperly joined in an effort to defeat diversity jurisdiction.  Mary’z filed a motion to remand to State Court which the Court granted.   Here is why:

Mary’z alleges that Khan and Texas General sold a commercial policy to Mary’z with full knowledge of Mary’z business operations, building design, and Mary’z lack of an internal fire alarm by falsely representing to Mary’z that damages caused by a fire would be covered by the policy.  A fire occurred and Blackboard denied the claim based on Mary’z not having an internal fire alarm.

Any insurance lawyer who handles many cases will see situations where the insurance agent is simply a criminal.  The Insurance Journal has published two stories where an agent has been convicted for his actions.

The first one is from June 2016 and is titled, Texas Insurance Agent Arrested In Scam Targeting Elderly Clients.  The story tells us about a Lubbock based insurance agent being arrested and charged with defrauding elderly victims through an annuity scam.

The Texas Department of Insurance reported that Joseph Allen Gaines was arrested last month on charges that he kept clients’ money that was intended to be used to purchase annuities.

Grand Prairie insurance lawyers need to be able to evaluate an insurance agent’s conduct to determine if the insurance company is liable for the agent’s conduct.

An insurance company may be liable for unauthorized conduct of an agent or other person, if the insurance company ratifies the conduct.  Ratification may occur when the insurance company, though having no knowledge of the unauthorized act, retains the benefits of the transaction after acquiring full knowledge of it.  The critical factor is the insurer’s knowledge of the transaction and its actions in light of that knowledge.  Ratification extends to the entire transaction according to the 1980, Texas Supreme Court opinion, Land Title Co. of Dallas, Inc. v. F.M. Stigler, Inc.

One example of ratification is found in the 1989, Houston Court of Appeals [14th Dist.] opinion, Paramount National Life Insurance Co. v. Williams.  Here, an insurance company issued a hospitalization policy, without further investigation, despite having an application indicating the insured’s advanced age and poor health, and despite having knowledge of the agent’s inexperience.  By nevertheless accepting premiums, the insurance company ratified the agent’s misrepresentations made in the sale of the policy.

Most experienced insurance attorneys in Dallas and Fort Worth can tell you the law in this area can be confusing, despite the relatively straightforward principles.  Historically, there was a distinction between “recording” agents and “soliciting” agents.  A recording agent had authority co-extensive with that of the company, so there was no question of the agent’s actual or apparent authority.  This was discussed in the well known 1979, Texas Supreme Court opinion, Royal Globe Insurance Co. v. Bar Consultants, Inc.  The court noted that the authority of a soliciting agent was much more limited than the authority of a recording agent.  The same court went on to hold that the insurance company was liable for the agent’s misrepresentation of coverage.

This has led some courts to conclude mistakenly that an insurance company could be liable for misrepresentations by a recording agent, but not by a soliciting agent.  This has been seen in the 1984, Houston [1st Dist.] opinion styled, Guthrie v. Republic National Insurance Co.  This analysis was wrong, which was made clear when the Texas Supreme Court decided the 1994, opinion, Celtic Life Insurance Co. v. Coats, and rejected this argument.

In Celtic v. Coats, the court held the insurance company was liable for a misrepresentation by a soliciting agent.  The focus was not on the agent’s status as recording or soliciting.  Instead, the court applied the two-step analysis:  was he the company’s agent; and was the misconduct within the actual or apparent scope of his authority?  Both questions were answered affirmatively, so the insurance company was liable.

Another one of those questions that Insurance Law Attorneys ask themselves on many of the cases they see.

Pursuant to Texas Insurance Code, Sections 4001.051(c) and 4001.053, an agent is not authorized by statutes to alter or waive a term or condition of an insurance policy or an application for an insurance policy.  Nevertheless, as can be seen in section 4001.051(b), an insurer will be liable “for purposes of the liabilities, duties, and penalties provided by” certain statutes.  The referenced statutes include the prohibitions found in Chapter 21 and now found in the new codification at Sections 4001.051 and 4001.009.  The Texas Supreme Court explained the interaction between these provisions under the older statutes as follows quoting from Royal Globe Insurance Co. v. Bar Consultants, Inc.:

We are not to be understood as holding that the statutory authority granted an agent under Article 21.02 authorizes that agent to misrepresent policy coverage and bind the company to terms contrary to those of the written policy; that question was decided by us in International Sec. Life Ins. Co. v. Finck, 496 S.W.2d 544 (Tex. 1973).  However, an insurance company that authorizes an agent to sell its policies may not escape liability for the misrepresentations made by that agent which violate article 21.21 or section 17.46 merely by establishing that the agent had no actual authority to make such misrepresentation.