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Agency Prevails in “Full Coverage” E&O Lawsuit, However its Reputation Suffers



When an insurance agent's client asks for "full coverage" on a home, what does she mean? Does her agent have a responsibility to ask? Does the agent have an obligation to calculate the home's replacement cost and recommend limits of insurance? Is she responsible for the shortfall if the client's limits were insufficient? An Indiana court had to answer these questions after an explosion destroyed a home.

A married couple originally asked an agent they knew from church to obtain their insurance. They were building a home, and they needed a builders risk policy. He obtained a policy with a limit equal to the cost of construction. Once the home was finished, he used a replacement cost estimator to determine the amount of coverage needed to rebuild it. He obtained a homeowners insurance policy in that amount. The policy renewed the next year with an increased limit. 

Shortly after, the agent left the insurance business. One of his assistants became an agent with another agency. She solicited his former clients, including this couple, and placed coverage for many of them. She placed the couple's coverage with a new carrier (her new agency did not represent the previous one) and with a higher limit. The policy renewed three years later with the limit increased again. 

The wife later testified that she told her new agent to obtain "full coverage" on the home. However, the agent never used a replacement cost estimator to calculate full coverage. She also did not ask the client what she meant by "full coverage." The only conversation the two ever had about limits was four years into the relationship, when the wife informed the agent that a shed was to be built on the property. She wanted to arrange coverage for the shed. The agent advised an increase in coverage, and the client accepted.

During the shed's construction, the contractor accidentally cut a propane line. The broken line leaked gas into the home's basement. The gas ignited, causing an explosion that destroyed the home and its contents. When the couple submitted the claim to their insurer, they learned that their home was insured for $88,000 less than the cost of rebuilding. They sued the contractor, the agency, the agent, and the insurer. The suit accused the agent of failing to follow industry standards in determining the appropriate amount of coverage. The agent moved to have the case dismissed.

The trial court, noting that the insurance carrier did not require its agents to use the replacement cost estimator, found that the agent did not have a duty to advise her client on the right amount of coverage. The judge said that the clients and agent did not have "an intimate, long-term relationship that would be required to create a duty to advise" on the proper amount of coverage. "Very simply,” the judge wrote, “(client) was aware of the amount of coverage, was paying premiums based upon said coverage and the relationship between (the clients and the agent) did not create the duty to advise (clients) regarding the amount of insurance needed."

The couple appealed to a higher court. However, this court also found that there was not a relationship that would have required the agent to provide specific advice about limits. The court said, "an insured's expectation of 'full coverage' is not enough to impose a duty on an agent to provide advice to an insured regarding the amount of coverage that should be purchased." The couple's case was dismissed.

The couple was stuck with $88,000 in uninsured losses, and the agent probably lost multiple current and potential clients and suffered damage to her reputation. What could she have done to avoid this? 

•When her client asked for "full coverage," she could have asked what that meant to the client.

•She could have used the replacement cost estimator and presented several options from which the client could choose.

•She could have advised the clients to review each renewal policy and contact her to discuss concerns.

The agent won and lost at the same time. If she had dug a little deeper with her clients, she might have avoided a painful episode and kept them happy.




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