It is probably natural for insurance producers to seek out family members as potential clients. The feeling may be that, if an agent cannot convince a relative to buy from him, who can he convince? Most families have some problems they handle with varying degrees of success, though. If an insurance agent knows about a certain problem that could impact the relative’s coverage, and does not address it, things can get ugly.
An agent in upstate New York assisted his brother-in-law with the purchase of life insurance in 2011. The insured completed an application that included a medical questionnaire. The agent submitted it to an insurer, who issued a $5 million term life policy with the insured’s wife named as beneficiary. In 2013, less than two years into the policy term (that is, before the contestability period expired,) the insured died in a hotel room during a business trip. Authorities determined that the cause of death was “most likely due to complications arising out of excessive alcohol consumption.”
Two years later, the insured’s widow submitted a claim for the life insurance proceeds. The insurer investigated and determined that her husband’s answers on the medical questionnaire were not entirely factual. He had addictions to alcohol and drugs, and his answers misrepresented that fact. The insurer declined to pay the $5 million benefit on the grounds that it would not have issued the policy had it known about his chemical dependencies.
His wife sued the insurer, the agency, a company affiliated with the agency, and the producer. She sought the life insurance proceeds plus damages, alleging that the agent “knew of decedent’s alcohol and drug abuse and failed to advise her that, as a result of such abuse, decedent would not meet the underwriting guidelines to obtain life insurance.” The agent, who was married to the deceased man’s sister, asked the court to dismiss the suit, as did the other defendants.
The trial court dismissed some claims but not others, prompting all parties to appeal. The appellate court modified the ruling and sent the case back for further proceedings. After the evidence discovery process was completed, the insurer, agencies and producer again asked the court to dismiss. This time, the court agreed, and the widow appealed.
The appellate court affirmed the trial court. They ruled that the agent’s duty was to his client (the insured); he would be liable to the beneficiary only if the bond between them was so close as to approach a contractual relationship. The relationship between the agent and the widow, they found, was not that close. She was not involved in buying the policy and did not discuss it with the agent until long after it had been issued. The couple had never used the agent’s services before. Thus, despite the fact that they were relatives, the court decided that the agent did not owe her a duty of care.
The agent won this dispute, but he did not handle this situation well. The court opinions do not say he disputed the widow’s claim that he knew about the man’s addiction problem. It seems likely that he should have known an insurer might not issue a $5 million policy on the life of a drug addict. Either he knowingly submitted an application with misrepresentations on it, or he should have been surprised at the offer of coverage. As a licensed life agent, he knew the policy was contestable for two years.
Insurance agents are frontline underwriters for their carriers. When they fail at that job, they invite trouble, and that trouble can land them in a courtroom.