Insurance transactions depend on the accuracy of the provided information. Clients must provide accurate information to agents, who must, in turn, provide it to insurers. Otherwise, any of the parties to the transaction may make decisions they would not have made had they known the truth.
As the intermediary between the insured and the insurer, the agent must be especially careful to determine the facts and relay them accurately to one party or the other. Legal trouble awaits agents who act carelessly or with bad intent.
A Mississippi agent sold a life insurance policy in the 1990s to a man who named his wife as beneficiary. The couple split in 2009, but the policy remained in force until the summer of 2015, when it lapsed for non-payment of premium. Four months after the lapse, the agent called on the ex-wife to discuss reinstating the policy. She brought along a reinstatement form containing several questions for the ex-wife to answer. Two of the questions were:
- Had the ex-husband used tobacco within the prior twelve months?
- Had he used tobacco within the prior five years?
The couple had been separated for six years. The ex-wife testified during the court discovery process that she told the agent she did not know whether he was a tobacco user or not. Nevertheless, the reinstatement form showed the “no” boxes checked in response to both questions.
The answers were untrue. Eleven days before the policy lapsed (and four months before the meeting in question), the insurer had obtained medical records on the insured that showed he “had a history of social tobacco use.” Apparently, the conflict between these records and the reinstatement form was not discovered at the time. The insurer reinstated the policy.
A year later, the insured was killed in a car accident. The insurer denied his ex-wife’s claim under the life insurance policy on the grounds that she had made material misstatements. Specifically, she stated that he did not use tobacco when their records showed that he did.
The claimant sued the insurer and the agent. The court opinion did not reveal the amount of the claim, but it was likely for hundreds of thousands of dollars since she found it worth pursuing a lawsuit. Among other things, she accused the agent of acting in bad faith by negligently and knowingly misrepresenting the truth. She also charged the agent with intentional infliction of emotional distress, saying that the agent knew the truth about the tobacco use and completed the reinstatement form falsely “to intentionally undermine the validity of the policy, and ultimately to deny her otherwise valid claim.”
The suit was moved from state court to federal court. The agent asked the court to dismiss all of the claims against her. The judge refused.
He pointed to two earlier Mississippi cases. One held that an insurance agent who offers client advice must exercise reasonable care in doing so. The other held that an agent cannot be held liable for negligence unless she acts with gross negligence, malice, or reckless disregard for the insured’s rights. The case had described “reckless” as “careless, heedless, inattentive; indifferent to consequences.”
The judge said that the allegations against the agent were more serious than “mere negligence.” He ruled that the agent had not met her burden of proving that the ex-wife had no reasonable basis for predicting that she would win in state court. Accordingly, in February 2019 he sent the case back to state court for further proceedings. It seems likely that the agent’s errors and omissions liability insurer will settle the case.
It is impossible to tell from the court opinion whether the agent knowingly tried to sabotage the ex-wife’s future insurance claim. At the very least, however, she should not have answered “no” to the tobacco questions without determining the truth. Life insurers base their underwriting decisions on factors such as tobacco use. She must have known that an inaccurate answer to those questions might cause problems later on, though she could not have foreseen how soon a claim would arise.
All parties to an insurance transaction rely on the information provided. Agents must always strive to ensure that the information they provide is correct.