Insurance Agent – Misrepresentation

Insurance agents misrepresenting the terms and conditions of an insurance policy is a common complaint.  Here is a 1994, Texas Supreme Court opinion styled, Celtic Life Insurance Company v. John D. Coats, Jr.

This case presents three issues relating to an insurance company’s liability for its agent’s representations: first, whether the company’s liability depends on its authorization of misrepresentations; second, whether reliance on the representations is an element of recovery; and third, whether the insured’s damages should be trebled when the misrepresentations were not committed “knowingly.”

This blog will focus on the first issue regarding the agents misrepresentations and the liability of insurance company.

Kenneth Harrell, a duly-appointed agent for Celtic Life Insurance Co.  He met Coats at Coats place of employment for the purpose of selling insurance.  Coats stated that he wanted a policy providing benefits for psychiatric care that would be equal to or better than the $20,000 coverage provided by his current policy.  Coats explained that he needed such coverage because his oldest son had previously required psychiatric care, and he was concerned that his younger son might require similar care.  Harrell responded that he understood Coats’ needs fully, having experienced similar financial difficulties in providing psychiatric care for his own son.

Harrell subsequently proposed that Coats purchase a specific policy written by Celtic— a policy that provided a maximum lifetime hospitalization benefit of $1 million.  Harrell did not point out that psychiatric benefits under the policy were limited to $10,000.

Coats asked his business manager, Paula Englemann, to review Celtic’s brochure and discuss the matter further with Harrell.  Engleman noticed the $10,000 limit on benefits for psychiatric care, and questioned Harrell about its meaning. Harrell assured her that the $10,000 limit applied only to out-patient psychiatric care.  Based on that representation, Englemann recommended to Coats that he purchase the Celtic policy, and Coats agreed.

During the following August, Coats’ son was admitted to Shoal Creek Hospital for psychiatric care.  Coats filed a claim for his son’s treatment; but despite Harrell’s continued assurances that the in-hospital psychiatric treatment was covered by the $1 million hospitalization limit, Celtic paid only $10,000 of the $27,000 in medical expenses.

Coats filed this suit seeking relief under article 21.21 of the Texas Insurance Code and the Texas Deceptive Trade Practices-Consumer Protection Act (DTPA), Texas Business & Commerce Code, Sections 17.41-.63.  After hearing the evidence, the jury made the following findings:

(1) Harrell made misrepresentations concerning the terms, benefits, provisions, or conditions of the insurance policy such as to be a producing cause of damages to Coats, but he did not do so knowingly;

(2) Harrell had authority to explain, on Celtic’s behalf, the benefits of the insurance policy; and

(3) Harrell did not have the authority of Celtic to make representations concerning the insurance policy’s terms, benefits, provisions, or conditions which were outside the scope of the written document.

The jury also found that $17,000 would fairly and reasonably compensate Coats for his damages.

The Court made the following finding in ruling for Coats:

An insurance company is generally liable for any misconduct by an agent that is within the actual or apparent scope of the agent’s authority.  This rule is based on notions of fairness: since the principal has selected the agent to act in a venture in which the principal is interested, it is fair, as between him and a third person, to impose upon him the risk that the agent may exceed his instructions.

Celtic does not contend that Harrell’s representations were so absurd that no reasonable person could have believed Harrell was acting within the scope of his authority. Nor does Celtic assert any other challenge to the jury’s finding that Coats had authority to explain the policy.  Thus, under common-law rules of agency, Celtic is liable for the representations Harrell made in explaining the policy.

Celtic’s liability is not affected by the finding that Harrell lacked authority to make representations outside the scope of the written document.  In determining a principal’s vicarious liability, the proper question is not whether the principal authorized the specific wrongful act; if that were the case, principals would seldom be liable for their agents’ misconduct.  Rather, the proper inquiry is whether the agent was acting within the scope of the agency relationship at the time of committing the act.  The misrepresentation in the present case was made in the course of explaining the terms of the policy—a task the jury specifically found to be within the scope of Harrell’s authority.  Thus, Celtic cannot escape liability on the basis that it did not authorize particular representations concerning the policy.

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