The Prior Dealings Problem

Bruce A. Campbell.

It is not uncommon for a customer who sustains an uncovered risk to point the finger at an insurance agent and assert that the agent should have advised the customer to purchase additional insurance so that there would not be an uncovered risk.

Virtually every agent strives to retain policy renewals. On the plus side, a renewal of a good risk provides a regular stream of income to the agent. The challenge, however, is making certain that as policies are renewed the agent does not get lulled into a false sense of complacency. It is not uncommon for a customer who sustains an uncovered risk to point the finger at an agent and assert that the agent should have advised the customer to purchase additional insurance so that there would not be an uncovered risk. The potential exposure that arises because of the ongoing relationship with an insured is thus worth exploring.

Generally, under Texas law, an insurance agent has no legal duty to recommend a line of insurance to a customer merely because the agent has knowledge of a customer’s potential need for additional insurance. For example, in McCall v. Marshall, 398 S.W.2d 106 (Tex. 1965), the owner of an automobile dealership, brought suit against an insurance agency after several vehicles were damaged in a fire that occurred on a second dealership lot. The basis of the suit was the alleged failure of the insurance agency to properly handle the insurance coverage of the dealership. At trial, evidence was introduced showing that the owner of the dealership told the agent of the second lot, but failed to request that the second lot be added to the policy. The customer introduced evidence that he generally sought the advice of the agent on the types of coverage available, but that the customer alone decided as to the total dollar amounts of insurance that he wanted. The agent argued that, although it had dealt with the dealership for seven years, it had no duty to provide additional coverage for the secondary lot, and therefore he could not be negligent in failing to provide such coverage. The customer argued that since the agent had been notified of the second location, the agent was negligent as a matter of law in failing to extend full coverage to that location. Ultimately, the Texas Supreme Court held that the facts of the case failed as a matter of law to impose a duty on the agent to provide additional coverage. The Court pointed out that the agent did not have a duty to procure additional insurance for the insured because there was no specific request by the insured for additional coverage. The Court also pointed out that the agent had not placed coverage with a carrier that had become insolvent. Nor was this a case in which the agent failed to renew the policy or to notify the insured that his policy had lapsed. The Court stressed “no legal duty arises on the part of an insurance agent to extend the insurance protection of his customer merely because the agent has knowledge of the need for additional insurance of that customer, especially in the absence of evidence of prior dealings where the agent customarily has taken care of his customer's needs without consulting [the customer].” However, the language used by the Texas Supreme Court begs the question of whether it would have reached the same decision in light of evidence indicating prior dealings in which the agent took care of the customer’s insurance needs without consulting the customer.

Since the Texas Supreme Court reached its decision in McCall, a Texas Court of Appeals has implied that prior dealings between an agent and the insured may be highly important in determining if an agent has liability. In Pickens v. Texas Farm Bureau Ins. Co.,¹ the Court of Appeals looked at an appeal from a summary judgment rendered on a plaintiff’s cause of action arising from the insurance company’s alleged failure to give adequate advice regarding levels of liability coverage available on the plaintiff’s homeowner’s insurance policy. In reaching its decision, the Court of Appeals looked at whether there was any evidence of Farm Bureau taking care of the plaintiff’s insurance needs without consulting the plaintiff. However, the Court of Appeals stated “[h]ere, there is no evidence that [Farm Bureau] ever took care of the [Plaintiff’s] needs without consulting them.” The decision seems to imply that if there had been any factual indication of the insurance agency taking care of the plaintiff’s insurance needs without consulting the plaintiff, the agency could have created a legal duty that did not previously exist.

Outside of Texas, some courts have extended the duties owed by insurance agents when the agent has a history of providing service for the insured. The Indiana Court of Appeals has held that an insurance agent may have a duty to counsel the insured on the availability of additional coverage in light of a long standing relationship.² In United Farm Bureau Mut. Ins. Co v. Cook, Melvin Cook, a surgeon that managed a horse farm, became aware of an opportunity to purchase two horse barns located in Kentucky. Before undertaking to dismantle the horse barns for purpose of moving the barns to Indiana, Cook orally informed his agent of his need for insurance covering the project. During the dismantling of the barns, a crane overturned and Cook was held personally liable for the damage to the crane. Cook then sued his agent to recover the amount he paid for damages to the crane and court costs. The jury found the agent responsible for the uncovered claim. On appeal, the Court of Appeals addressed the agent’s duty to exercise reasonable care. Noting that the relationship between Cook and the agent lasted for over ten years, Cook relied on the agent’s advice in purchasing insurance, and that the agent counseled Cook on the appropriate coverage for Cook’s horse farm, the Court of Appeals stated “[the agent] had an obligation, in light of his longstanding relation with Cook, …to obtain the additional information necessary for coverage.” The Indiana Court of Appeals did not define “longstanding relationship.” More recently, in Wyrick v. Hartfield,³ a case concerning whether a broker had a duty to explain an investment issued by an insurance company to a purchaser, the Indiana Court of Appeals provided some insight into the factors relevant in determining whether a long term relationship exists. Namely, (1) the broker's exercise of broad discretion in servicing the insured's needs; (2) the broker's counseling of the insured concerning specialized insurance coverage; (3) the broker's declaration that he is a highly-skilled insurance expert, coupled with the insured's reliance upon the expertise; and (4) the broker's receipt of compensation, above the customary premium paid, for expert advice provided.

While the Wyrick case involved an investment instead of an insurance policy, the test for whether a “longstanding relationship” exists has been since referenced, albeit not applied, in Court of Appeals decisions regarding insurance policies.

From the left coast, the Washington Court of Appeals has noted the importance of a long standing relationship between an insurance agent and the insured in determining what duties an agent owes the insured.⁴ In Lipscomb v. Farmers Ins. Co. of Washington, the Washington Court of Appeals looked at a case in which the owner of several properties, brought suit against the carrier as well as his agent, after a child was injured in a fire on one of the properties. The customer alleged that the agent was negligent in failing to ensure that the customer had adequate insurance coverage. The agent moved for summary judgment arguing that they did not have a duty to advise the customer to obtain higher liability limits because the agent did not have a special relationship with the customer that created such a duty. The Court of Appeals pointed out that a special relationship exists if (1) the agent held himself out as an insurance specialist and received additional compensation for consulting and advice, or (2) there was a long-standing relationship, some type of interaction on the question of coverage, and the insured relied on the agent's expertise to the insured's. However, in Lipscomb, the Washington Court of Appeals reasoned that the agent did not have a special relationship with the customer because there was no evidence that the agent held himself out as an expert or received extra compensation, nor was there any evidence that the parties discussed the adequacy of the policy limits.

Interestingly, in another decision from the Washington Court of Appeals, the Court had applied these same factors and held that there was a special relationship between an insurer and a broker where the broker had been the insured’s broker for over ten years, the broker sold specialized maritime insurance, the broker managed all of the insured’s policies, and the broker and insured spoke almost every day about insurance risk matters. AAS-DMP Management LP v. Acordia Northwest, Inc., 115 Wash. App. 833, 840 (2003).

Historically, the courts have been reluctant to impose an obligation on insurance agents requiring them to recommend for their customers additional insurance that the insurance agent knew the customer probably needed. Nevertheless, there is a trend to impose on agents a duty to recommend additional coverage for a customer when (1) the agent has exercised broad discretion in servicing the insured's needs; (2) the agent has counseled the insured concerning specialized insurance coverage; (3) the agent has held himself out as being a highly-skilled insurance expert, especially when coupled with the insured's reliance upon the expertise; or (4) the agent has received compensation, above the customary premium paid, for expert advice provided. We will have to wait and see how the courts approach this issue in the future, and when agents will have exposure for not recommending for their customers forms of insurance coverage that they know would benefit their customers.

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¹ 836 S.W.2d 803 (Tex. App. – Amarillo 1992)

² Billboards 'N' Motion, Inc. v. Saunders-Saunders & Associates, 879 N.E.2d 1135 (Ind. App., 2008).

³ 654 N.E.2d 913, 914 (Ind. Ct. App. 1995).

⁴ Lipscomb v. Farmers Ins. Co. of Washington, 142 Wash. App. 20, 174 P.3d 1182 (Wash. App. Div. 1, 2007).