When an insurance agent discusses coverage with a current or prospective client, setting expectations accurately is key. While clients may understand in theory that insurance policies do not cover everything, they might not get what that means in practice. If they expect a policy to do what it cannot do, the agent may wind up in court. This is particularly true with a product that even insurance professionals can find confusing, such as flood insurance.
A Missouri couple owned a home near a river. One year, the river came close enough to flooding their basement that they got nervous. The wife contacted a local insurance agent about purchasing flood coverage. The agent represented an insurer that participates in the National Flood Insurance Program’s “Write Your Own” program. Under the WYO program, private insurers sell flood policies on the NFIP’s behalf, collect premiums, and adjust claims. The NFIP reimburses them for losses and pays them servicing fees.
The wife told the agent about the valuable belongings the family had in their basement, including electronics, hunting equipment, furniture, and kitchen appliances. She specifically requested coverage for the contents in the basement. The agent interviewed her about the home, told her he could obtain an NFIP policy with the maximum limits available, and “specifically promised that the policy would cover all of the contents of their home, including items in the basement.” A copy of the policy was not available during their discussion, but she agreed to buy it, and he obtained the coverage.
A year later, the river overflowed its banks again, and this time it flooded the house, damaging thousands of dollars worth of property in the basement. The insurer offered to pay for damage to the dwelling and most of its contents, but it denied coverage for property in the basement. For the first time, the couple read their insurance policy and discovered that the only basement property that the NFIP policy covers is air conditioners, clothes washers and dryers, freezers and their contents.
They sued their agent, claiming that he had misrepresented the terms of the policy to them. The agent argued that federal flood insurance regulations, which set the provisions of the policy, overrule state tort liability law. The court disagreed, finding that a claim against an insurance agent for negligence in procuring insurance does not interfere with the purpose of the flood program.
The agent also argued that the facts of the case were not in dispute. The couple claimed that, among other things, they justifiably relied on what he told them, and their reliance on his information caused their loss. The agent argued that these claims were not valid and, since the facts were not in dispute, the court should rule in his favor.
To the contrary, the court found that, for several reasons, the couple could have justifiably relied on his information. “A reasonable jury,” the court ruled, “could find on these facts that (agent’s) alleged misrepresentation was a material factor in the Pittmans’ decision to purchase the policy and then forego moving any uninsured contents out of their basement.”
Moreover, the court found that the agent’s misrepresentation was the only reason that uninsured contents were still in the basement when the flood occurred. It also found it reasonable to foresee that the misrepresentation could lead to an uninsured loss. Lastly, it rejected the agent’s argument that the couple should have read their policy before the loss occurred. State law was unsettled as to whether a misrepresentation before a policy is bound could override an insured’s duty to read it. Since the agent could not cite established law on the matter, the court felt a jury should decide the matter.
This agent apparently did not know the NFIP policy well enough to accurately describe its coverage. He could not be expected to know it by heart, but he should have reviewed it as soon as possible after his conversation with the wife. This would have enabled him to contact her again and warn her about the limitations.
Setting client expectations properly helps prevent disappointment when a loss occurs. Agents should always strive to educate their clients on what their coverage does and does not do.