Caught in the Middle: When Agent Representations Lead to Liability

Questions often arise as to the context and circumstances in which an agent can be liable for misrepresenting coverage, or failing to obtain adequate or appropriate coverage for a customer. When an “all-risk” policy does not cover a loss, is the agent at fault? If the agent fails to tell a customer who requests a liability policy that they should also purchase property coverage, has he breached a duty? This is an area of law that remains in flux, and is also largely dependent on the exact representations, and the nature of the relationship and course of dealing between the client and the agent. Nevertheless, there are some general guidelines.

Some latitude allowed, but…
Agents, like other salesmen, are allowed some latitude in representing their products. General representations, such as that a policy is a good product, will typically not give rise to liability at common law or under the Insurance Code. Similarly, a failure to explain to a customer each and every limitation and exclusion in the policy is generally not a breach of any duty. More specific representations, however, about the nature of the coverage and what is covered can be actionable, if wrong. And, promises that a policy is adequate for a customer’s business, or will respond to a specific loss, or failure to obtain insurance after a pattern of obtaining insurance for the customer, may give rise to liability.

An agent’s liability can arise under numerous theories. At common law, the agent can be liable for misrepresentation, negligence, or breach of a fiduciary duty, if a duty has been created. An agent may also be exposed to liability under the Deceptive Trade Practices Act and the Texas Insurance Code where a misrepresentation is within the terms of those statutes. Where an agency relationship exists with an insurer, the insurer may also be vicariously liable, but will then look to the agent for indemnity.

An agent may also be liable for fraud. Fraud requires a material misrepresentation, made with knowledge of its falsity or made recklessly without any knowledge of the truth, with the intention that it be acted upon, and actual reliance by the other party, resulting in injury or damage. In Johnson & Higgins of Texas v. Kenneco Energy, 962 S.W.2d 507, 526-27 (Tex. 1998), the Texas Supreme Court held that the broker’s representative did not commit intentional or reckless misrepresentation where the representative advised the insured it had contingency coverage but, in fact, the insured did not have the coverage it sought.

In Kenneco Energy, the plaintiff, an oil trading company, sought to increase its contingency coverage on a tanker cargo of fuel oil it was shipping. The company was worried it would be unable to collect on any potential claims filed with its primary insurer, and also wanted to extend coverage on the contingency policy to ensure against loss of profit on the sale of the oil. In the absence of the usual account representative, a cargo claims adjuster handled the attempt to alter coverage. During the meeting, a miscommunication occurred regarding whether the oil sale was a delivery sale or back-to-back CIF sale. Because the sale was in fact a delivery, and not CIF, no contingency coverage was actually available and the claim, when filed, was denied. While the broker clearly misrepresented coverage, the Supreme Court held there was no fraud, because the representative did not understand the distinction between the types of sales. In Transport Ins. Co. v. Faircloth, 898 S.W.2d 269 (Tex. 1995), the court also held there was no fraud where the agent stated an opinion about the value of the claim.

The threshold for a negligent misrepresentation is lower than for fraud. In addition, the insured must establish reliance on any misrepresentation to prove liability and damages. First, for instance, many post-loss misrepresentations cannot give rise to liability, if the insured acted no differently than he would have in the absence of the representation. If, on the other hand, the insured takes action, or incurs expense, based upon a representation, reliance may be established. Similarly, the DTPA requires that the misrepresentation be a “producing cause” of damage, again instilling a reliance element.

Reasonable diligence and other duties
One of the areas in which disputes frequently arise is the failure to procure insurance. An insurance agent who undertakes to procure insurance owes a duty to use reasonable diligence in attempting to place the requested insurance, and should inform the customer if he is unable to do so. Nevertheless, the actual standard is a negligence standard. Thus, if the insurance cannot be placed anywhere, there may be no liability. On the other hand, a failure to obtain insurance after promising to do so, without notifying the customer, will likely lead to liability. The Texas Supreme Court has held, however, that there is no duty to provide coverage that has not been requested. See May v. United Services Ass’n of America, 844 S.W.2d 666, 669 (Tex. 1992).

Other duties may depend upon the course of dealing. For instance, a duty may arise to advise the insured of policy expiration, if the agent typically does so. Similarly, while an agent generally has no duty to explain the coverage provided by a policy, and there is a presumption that the insured should read their own policy, the agent may be liable if he undertakes to explain the coverage, and does so improperly. And, while there typically is no duty to offer additional coverage not requested, a course of dealing between the agent and the customer may give rise to a fiduciary duty, under which the agent has additional obligations.

Finally, in regard to insurer insolvency, Texas courts have held that an agent typically has no duty to guarantee a financial condition or solvency of an insurer from whom he obtains insurance. However, if the agent is actually aware of facts that would have caused a reasonable person to investigate the solvency, his failure to do so, or his failure to advise the insured, may subject him to liability. The standard is stricter in regard to surplus lines, because the statute itself requires the surplus lines agent to make a reasonable effort to ascertain the financial condition of a surplus lines insurer, thereby imposing an additional duty.

Frequently, when coverage disputes arise, the search for someone to bear the loss will encompass the agent, as well as the insurer. While it is impossible to avoid exposure altogether, agents should be aware of the general duties and obligations imposed upon them, and of importance of good communication.

Topics Carriers Texas Fraud Agencies Energy Oil Gas