How often does an insurance agent deliver a policy to a client and assume that the client will read it and let him know if there’s a problem? How often does an insurance client assume that the agent knows best what coverage is needed and has obtained it? What happens when both those assumptions are faulty? In the case of an Ohio agent and his commercial client, the answer was a lawsuit.
The client had a business in which he bought, renovated and managed real property. One of his employees had the responsibility for managing the process for obtaining insurance and working with insurance agents, though the company’s principal made the final decisions. The principal told her to find a new insurance agent to handle the coverage for the properties. She in turn identified three or four agents and requested quotes from them.
This established a routine in which the employee contacted the agents whenever her employer purchased a new property and requested quotes. Normally, she would award the business to the agent with the lowest price. Crucially, her employer never told her to tell the agents he relied on them to determine the types of coverage he needed. He accepted their statements that they were working to find the best coverage to meet his needs.
The agent involved in this case provided the employer with several quotes over the course of a year. He took note of the coverages that his client rejected and began deleting those coverages from his quotes.
When the client bought a particular piece of property, he instructed his employee to get the usual competitive quotes. He gave her the minimum information necessary to obtain quotes on the property, and she did not visit it. The two-story main building had one floor partially below grade with the first floor windows at ground level. She contacted the agents, requested the desired coverages and deductibles, and asked for “the necessary coverage” but not specific coverages.
The agent in this case visited the property before preparing a quote. The proposal did not include water backup coverage; the client did not request and had in fact rejected it in the past, and it was the agent’s experience that it was rarely purchased. The client did not read the proposal but accepted it anyway. This was the third property the agent insured for this client.
A few weeks later, the agent sent the policy to the client. Both the employer and employee testified that they did not read it.
Two months after that, a water pipe on the property backed up and the property flooded. The agent submitted a claim on the client’s behalf, but the insurer denied it because the policy did not include water backup coverage. The court decision does not state the amount of the damage, but it was likely in the high five or six figures. The client sued the agent, claiming negligent placement and misrepresentation. The agent moved to have the complaint dismissed, and the trial court agreed, finding that the agent did not have a legal duty to recommend water backup coverage to his client. The client appealed.
The appellate court ruled in the agent’s tavor. The court found the relationship between the client and agent to be an ordinary business relationship, with no fiduciary duty on the part of the agent. The agent did not realize the insured was relying on his expertise for water backup coverage. Lastly, the agent knew that the employer was the decision-maker, the court said, and he knew that the employer knew about water backup coverage and did not request it.
Both sides assumed too much in this situation. If there is anything the agent might have done differently, it would have been to specifically warn the client that the policy did not include water backup coverage, since the first floor was partly below grade. The agent assumed the insured knew he didn’t have this coverage, and the insured assumed he did. A cover letter accompanying policy might have avoided the entire dispute.
Effective communication with the insured is the key to avoiding errors and omissions claims. The more the agent clearly states to the insured, the better.