Every question on an insurance application is there for a reason – to enable accurate evaluation of the risk. An agent interviewing a prospective client must get answers to these questions. Skipping questions and making up answers later can land an agent in the middle of a lawsuit.
An agency in Minnesota wrote homeowners and umbrella policies for a new client through Selective Insurance Co. of South Carolina. The client owned an Akita, “a large and powerful dog breed with a noble and intimidating presence.” Selective’s underwriting guidelines stated that it would not provide liability insurance for homes that had Akitas.
The insured did not tell the agent about the dog during the application process for either policy. The two sides disagree about what happened. The agent claimed that the insured answered “no” when he was asked if he owned any animals. The insured testified that the agent never asked the question. The applications submitted to Selective stated that the insured did not own any animals or exotic pets. The agent gave the insured the opportunity to review the applications, but the insured signed them without doing so.
Subsequently, the dog bit a child, and the child’s father sued. The insured sought coverage under both policies. The court’s opinion does not specify the amount of the damages, but since the claim involved the umbrella, it must have been a seven-figure loss.
Selective sued the insured and the claimant, seeking a declaration that it did not owe the insured defense or indemnity because of material misrepresentations on the applications. The insured responded that Selective should be prevented from holding the misinformation against him because the insurer’s agent incorrectly recorded his truthful answers on the applications. He also sued the agent for negligence.
The case went through a jury trial. The jury concluded that:
- The insured provided truthful answers to the agent’s questions, but the agent recorded them incorrectly
- The insured signed the applications without reading them, even though he had the opportunity to do so
- The insured did not misrepresent his ownership of the dog
- The agent completed the applications negligently
Selective and the agent appealed the verdict, though Selective later settled out of court. The agent said the court should not have applied a rule from a prior decision. That decision held that an insurer must honor a policy where:
- Its agent completed the application
- The insured gave truthful answers to the agent’s questions
- The agent recorded the answers incorrectly without the insured’s fault, knowledge or collusion, and
- The insured signed the application without reading it, despite being given the opportunity to do so, relying on the agent’s good faith.
In this case, the agent argued that the rule should not apply when the agent does not ask the relevant question, resulting in the insured not supplying the relevant information. The appellate court disagreed. “The purpose of the … rule is to protect insurance applicants who rely on an insurance agent’s expertise in correctly and accurately filling out applications,” it wrote. The judges also noted that prior decisions do not require “applicants to provide unsolicited information to agents.”
The agent also argued that the insured should bear some responsibility for the situation. However, the court said that, as an appellate court but not the state’s highest court, modifying the rule was outside its authority. The decision of the trial court was upheld.
Insurance agencies take applications for homeowners insurance every day; it is easy to rush through the process and forget to ask all the relevant questions. It is also easy to forget the differences between the underwriting appetites of all the agency’s carriers. Nevertheless, the presence of household pets, particularly dogs, is an increasingly important issue for insurers. Dog-related injuries comprised more than one-third of all homeowners insurance liability payments in 2015. Millions of American homes have dogs. This is a common exposure about which the agency should have asked.
Agencies that are not careful can bind their carriers on risks the carriers do not want. At the least, this can damage relationships with carriers, and, as in this case, may lead to litigation. As frontline underwriters, agencies must ask all the relevant questions and record the answers accurately.