Jane Dotson
Insurance agents are generally not legally obligated to advise their clients on their insurance needs or what coverage they should purchase. However, under certain circumstances, such as when a 'special relationship' exists between the agent and the client, courts may impose a heightened duty of care on the agent, requiring them to offer advice on the types of coverage available and necessary to meet the client's needs. This special relationship can be influenced by factors such as the agent's representations of their expertise, the length of the relationship, the agent's involvement in aiding the client's decision-making, and whether the client paid for the agent's advice. While insurance agents are not seen as personal financial counselors, they do have a general duty to act with reasonable care and diligence in procuring insurance as requested by the client and protecting their interests.
| Characteristics | Values |
|---|---|
| Insurance agent's duty to advise | Generally, insurance agents have no obligation to advise customers on their insurance needs or what coverage they should purchase. |
| Insurance agent's duty of care | Agents are expected to act with reasonable care and diligence in obtaining insurance for their clients. They are not liable for advising on the adequacy of coverage unless a "special relationship" exists. |
| Special relationship factors | Longstanding relationship, agent's expertise, breadth of coverage, involvement in aiding customer's decision, volunteering advice, additional compensation for advice. |
| Common claims against agents | Failure to procure appropriate insurance, failure to notify of inability to procure, procurement of inadequate coverage. |
| Loss prevention measures | Clearly specify services provided and not provided in contracts, avoid misrepresenting expertise, train employees not to offer unqualified advice, obtain detailed forms of client insurance needs, follow up on policy receipt. |
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What You'll Learn
Misrepresenting insurance coverage
Misrepresentation of insurance coverage by insurance agents is a serious issue that can have significant ramifications for the insured. It occurs when an insurance agent makes false or misleading statements about the nature and extent of coverage provided by a policy. This can lead to the insured believing they have coverage for certain risks when, in reality, they do not.
Insurance agents have a duty to act reasonably and use reasonable care to obtain adequate insurance that meets the insured's needs. While they are not obligated to evaluate a customer's insurance needs or advise them on the coverage they should purchase, they must not misrepresent the coverage being provided. Agents who hold themselves out as specialists or experts in a given area are expected to have a higher duty of care and may be liable for misrepresenting their expertise or the coverage provided.
If an insured can demonstrate that their insurance agent misrepresented their policy, they may be entitled to damages for insurance bad faith. This can include recovering a penalty, such as a percentage of the claim's value, and attorney's fees. To protect themselves, insured individuals should carefully review their policies and seek legal advice if they suspect any negligence or misrepresentation.
To avoid allegations of misrepresentation, insurance agents should ensure they are well-versed in the policies they sell and refrain from making false or misleading statements about the coverage provided. They should also be transparent about any limitations in their expertise and avoid holding themselves out as specialists unless qualified to do so.
While the specific duties of insurance agents vary by state, misrepresentation of insurance coverage is generally considered a breach of the agent's duty to act reasonably and in the best interests of the insured. It is important for agents to understand their legal responsibilities and provide accurate information to their clients to avoid potential liability and ensure their clients' protection.
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Failure to procure requested insurance
An insurance agent or broker typically has no obligation to advise a customer on their insurance needs or the coverage they should purchase. However, under certain circumstances, courts are expanding the traditional role of insurance agents and holding them responsible for offering advice on the types of coverage available and necessary to meet a customer's needs. This is especially true when a "'special relationship' exists between the agent and the customer.
An insurance agent or broker who undertakes to procure insurance for a customer has a duty to use reasonable diligence in attempting to place the requested insurance. This includes obtaining adequate insurance to meet the customer's needs and keeping the customer informed of any changes to their policy. Failure to do so can result in the agent or broker being held liable for negligence or breach of fiduciary duty.
For example, in Emerson Electric Co. v. Marsh & McLennan Companies (Mo. 2012), the Missouri Supreme Court held that an insurance broker may be liable for breach of fiduciary duty if they fail to inform a client that the policy procured is not the one requested. Similarly, in Lake County Grading Co. v. Great Lakes Agency, Inc. (Ill. 2d Dist. 1992), the Illinois Court of Appeals found that brokers in Illinois may have fiduciary obligations to inform a proposed insured of all material facts and to procure the requested insurance.
To prove a negligent failure to procure insurance case, it must be demonstrated that the agent or broker agreed to procure insurance for compensation, failed to procure the agreed-upon insurance, and that the plaintiff suffered damages as a result. It is important to note that an insurance agent or broker may not be held liable for failure to procure or maintain adequate insurance coverage if the insured did not specifically request the specified insurance coverage.
To avoid potential claims and lawsuits, insurance agents and brokers should take certain precautions, such as having each customer sign a contract that clearly specifies the services that will and will not be provided, avoiding misrepresenting their expertise, and ensuring that customers specify in writing the coverages they are requesting.
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Special relationships
The existence of a "special relationship" between an insurance agent and a client can affect the degree of the agent's legal responsibility to the insured. A "special relationship" can be established when certain conditions are met, and it imposes a heightened duty of care on the agent to provide advice and guidance beyond simply procuring the insurance requested by the client.
In the case of Marsh in Florida, the Court recognised that a "special relationship" existed between an agent and a customer when certain factors were present. These factors include:
- The agent making representations about their expertise.
- The agent making representations about the breadth of coverage obtained.
- A longstanding relationship between the agent and the customer.
- The agent's involvement in aiding the customer's decision about their insurance needs.
- The agent volunteering advice to the customer.
- The agent receiving additional compensation for advisory services.
Other sources also highlight similar factors that contribute to the establishment of a "special relationship". These include:
- The agent misrepresenting the nature or extent of coverage.
- The agent voluntarily assuming the role of selecting appropriate coverage for the customer.
- The agent holding themselves out as a specialist.
- The existence of a longstanding relationship between the agent and the customer, involving the giving and receiving of advice.
- The customer paying the agent for their advice.
When a "special relationship" is established, courts may conclude that the agent has a fiduciary duty to offer advice and guidance to the customer. This means that the agent has an obligation to act in the best interests of the customer and provide advice regarding the types of coverage that are available and necessary to meet the customer's needs.
It is important to note that the absence of a "special relationship" does not absolve insurance agents of all duties. They still have a general duty of care, which includes acting with reasonable care and diligence in procuring the insurance requested by the insured. Additionally, they must not misrepresent the coverage being offered and must inform the insured of any changes to their policy.
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Fiduciary duty
Generally, insurance agents do not have a duty to advise their clients on their insurance needs. However, this is changing, with courts across the US expanding the traditional role of insurance agents. In some cases, a "'special relationship' between the agent and client may trigger a fiduciary duty of care, requiring the agent to advise their client on their insurance needs.
The existence of a "special relationship" is determined by a multi-factor analysis, including whether the agent made representations about their expertise, the breadth of coverage, the longevity of the relationship, the agent's involvement in aiding the client's decision, whether the agent volunteered advice, and whether the agent was paid for their advice.
In the case of Somnus Mattress Corp. v. Stephen Hilson and Crutchfield & Graves Ins. Agency, Somnus claimed that the agent was negligent in failing to advise them to purchase business interruption and loss-of-profit insurance. The court found that, absent a specific agreement to advise, guide, or direct the insured's coverage, insurance agents do not have a continuing duty to advise their clients on their insurance needs.
To avoid claims of malpractice, insurance agents should ensure that each customer signs a contract specifying the services provided and not provided, avoid holding themselves out as specialists unless qualified, train employees not to offer advice unless qualified, and ensure customers specify in writing the coverages they are requesting.
In summary, while insurance agents do not typically have a fiduciary duty to advise their clients on their insurance needs, this may arise in certain circumstances, particularly when a "special relationship" exists between the agent and the client.
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Failure to notify insured of changes
Generally, an insurance agent has no obligation to advise a customer on their insurance needs or the coverage they should purchase. However, under certain circumstances, courts have expanded the traditional role of the insurance agent, holding that they have a duty to advise customers on the types of coverage available and necessary to meet their needs. This expansion of duties typically arises when a "'special relationship' is established between the agent and the customer.
Failure to notify the insured of changes in coverage is a critical aspect of an insurance agent's duty to advise. An insurance agent owes a duty to inform the insured when a renewal policy contains coverage changes, including any reductions in coverage. This duty to notify extends to informing the insured of premiums due for renewal and the expiration date of the current policy. In the Koski v. Allstate Insurance Co. case, the plaintiff sued the defendant, alleging that they failed to sufficiently notify him of changes to his homeowner's coverage. The court ruled in favour of the plaintiff, stating that the defendant had an obligation to expressly alert the plaintiff of any reductions in coverage.
Courts have also found that insurance agents have a duty to disclose policy terms to their insureds. This includes informing insureds about potential first-party benefits and changes in applicable laws that may impact their coverage. In Ramirez v. USAA Cas. Ins. Co., a California court held that an insurer's failure to inform its insured about potential first-party benefits breached the duty of good faith and fair dealing. Similarly, in Dorothea v. Penn National and Grange, the Supreme Court of Pennsylvania found that the insurers breached their duty by failing to advise the insured of a change in Pennsylvania law that would have allowed her to receive benefits under the policies' liability coverages.
To mitigate the risk of claims arising from failure to notify the insured of changes, insurance agents should ensure that any changes in coverage are clearly communicated to the insured. This communication should be separate from the policy document and highlight any alterations in coverage. Additionally, agents should encourage insureds to review their policies and raise any questions or concerns. By proactively providing clear and timely notifications of changes, insurance agents can reduce potential liability and strengthen their defence against claims of inadequate notification.
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Frequently asked questions
No, insurance agents do not have an obligation to evaluate a client's insurance needs or advise them on the coverage they should purchase. However, they do have a duty to take the appropriate steps to protect their clients from potential risks and liabilities.
A "special relationship" is when an agent has a long-standing relationship with a client, involving the giving and receiving of advice regarding coverage needs. Other factors that indicate a "special relationship" include whether the agent made representations about their expertise and the breadth of coverage obtained, how involved the agent was in aiding the client's decision about their insurance needs, and whether the agent volunteered advice to the client.
Yes, an insurance agent can be held liable for negligence if their failure to use care results in injury or damage to the insured. An agent generally has a duty to act as a reasonably prudent agent would act in the same or similar circumstances.
One of the most common claims is "failure to procure", where the agent has failed to procure appropriate insurance coverage for the policyholder's situation or did not complete the tasks necessary to keep the policy current. Another common claim is "failure to notify", where the agent fails to inform the insured promptly if they are unable to place the requested insurance.
