Insurance agent mistakes can be a big cause of litigation.
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.
An insurance agent has / serves two masters – the insured, his customer and the insurance company.
The insurance agent’s legal responsibilities to the client arise out of: (1) common law theories of negligence, and (2) an implied contract to procure insurance for the insured.
The insurance agent’s legal responsibility to the insurance company arise out of (1) the common law theories of negligence, and (2) the written contract that ties the agency to the insurance company.
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.
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.
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 in the 1977, Texas Supreme Court opinion, Trinity Universal Insurance Company v. Burnette. “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.”
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 not 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.