Insurance agents need to be careful when answering hypothetical questions from would-be customers about coverage. If someone asks whether they have coverage for a certain type of loss, the wise agent will ask the insurance carrier or check the policy. Another agent got sued over an answer he gave off the top of his head.
A Texas man owned and occupied a home. For unspecified legal reasons, he deeded the home to his parents but continued to live in it. His father applied for and paid for a homeowners insurance policy. The policy named both parents as insureds but did not name the son. The agent later testified that it was his intention to have the policy name the parents and the son, but it “didn’t get issued that way.” At the time, the son asked his parents’ insurance agent if he needed renters’ insurance. The agent told him “it was unnecessary to purchase renter’s insurance since the contents of the home were covered under the (parents’ homeowners policy.)”
A fire destroyed the home, including its contents. The parents received a full settlement from their insurance company. However, the company denied coverage for the son’s claim for his damaged property because the policy did not name him as an insured. In testimony, the agent later admitted that he didn’t look at the policy, so he didn’t realize the son’s name was not on it.
The court opinion did not state the amount of the loss, but the son probably lost all furniture, clothing, electronics and other typical household items. The loss was likely six figures or more.
He then sued the agent for negligence, claiming that the agent had a legal duty to provide the insurance he needed. The agent moved for a verdict in his favor based on the law, and the trial court agreed. The son appealed.
The appellate court upheld the lower court’s ruling. An agent, the judges wrote, does not owe a legal duty of care to an insurance buyer unless there is privity, a legal term meaning that two parties have a contractual relationship. The judges found no such relationship between the agent and the son “with respect to any policy that would provide coverage for (his) belongings.”
They also rejected the son’s claim that past transactions made him the agent’s customer. They noted that he neither applied for nor paid for additional insurance, and the policy he purchased for his parents provided the promised coverage. While they acknowledged that the son asked the agent’s opinion about the need for renter’s insurance, they said that was not enough to create a duty for him to obtain that coverage. They found the agent not liable for the son’s loss.
Although the agent won, he made mistakes that led to the situation. Without checking the parents’ homeowners policy, he told the son that it covered his belongings. Homeowners policies typically provide little coverage for property belonging to someone other than the named insureds or members of their households. If the agent did not know that, he should have checked the policy to see if it insured the son. Had he done so, he might have answered the son’s question differently.
The best practice for avoiding an errors and omissions liability claim in situations like this is to get a written coverage opinion from the carrier. Barring that, the correct response would have been to offer a quote in case the parents’ policy did not provide coverage. Leave the purchase decision up to the customer, and it will be harder for that customer to make a claim later.