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An Insurance 'Intermediaries' Duty to the Client

The question can then be asked: What are the duties to the client while acting in either capacity?

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Insurance intermediaries are typically classified as either 'agents' or 'brokers'. While agents will generally serve a single insurer, brokers are usually seen as independent contractors who will have a relationship with a number of insurers. It would then appear that there is a distinction in the process of obtaining an insurance policy that will identify in exactly what capacity the intermediary is acting. The question can then be asked: What are the duties to the client while acting in either capacity?

The subject, "Standard of Care, Insurance Agents", has long been a topic that has been the subject of many court cases. One of the earliest in Montana was probably "Gay v. Lavina State Bank" 1921. But, for the most part, the main point of emphasis has been that an insurance agent owes an absolute duty to obtain the insurance coverage which an insured directs the agent to procure. If a broker/agent fails to procure that specific insurance then he or she is liable for damages suffered due to the absence of such insurance. Further, the development of a 'special relationship' can impose a heightened duty on the broker/agent. Circumstances that can emphasis that relationship can be how many years a person/entity has been a customer, how much involvement the agency has in obtaining coverage or was there any kind of a written contract to perform a special task. Naturally, these are all factors that will be viewed by legal counsel for a plaintiff. Because of the close scrutiny of attorney's for the appearance of any misstep by a broker/agent many will take extraordinary precautions in how they advertise or hold themselves out to the public. Kind of a "damned if you do, damned if you don't" situation where the insurance seller retreats for fear of reprisal. Chris Burand, a national known insurance consultant, wrote an excellent article, "The Commoditization of P & C Insurance". The article appears on Virtual University web site. All brokers/agents should read that article.

In a Montana Supreme Court case, "Monroe v. Cogswell Agency & Safeco" (2010) the Court seemingly gave a summarization of where the broker/agent capacity starts. A majority of the Court said that the insurance seller acts as a broker while 'shopping' for insurance and determining with which insurer to place coverage. Once that is determined, the broker becomes an agent for the insurer. The Court referred to this as "a distinct two-step process" and "is at the heart of the agency issue." The Court further stated "although we have not specifically addressed it, our jurisprudence suggests, and other jurisdictions conclude, that for the purposes of agency analysis, an independent soliciting agent only becomes an agent of the insurer during the second step-after it has selected that insurer's specific policy". The heart of the broker/agent duty to the client then obviously is during the broker stage-"shopping" for the coverage and insurer.

This is now where the client has made a specific coverage request. One of the problems some brokers will find is that the request is not specific enough, or the client is too guarded with releasing sufficient information, especially when purchasing business insurance. This is the time when openness should be the greatest! In order for the broker to determine proper coverage, information has to be as complete as possible. By not being thorough with providing information, whether with personal insurance or business insurance, a broker can sometimes be set up to fail-and in court is not the place for that to happen!

Providing information, especially if that information is incorrect, can be another burden for the broker/agent. When an application for insurance is completed specific information is given and is attested to by the applicant as being correct and true. Generally the application contains warranties that act as an inducement to the insurer to accept the coverage requested by the applicant. The application is signed and dated by the applicant. Recently the Montana Supreme Court, in "Bailey v. State Farm/Olson"(2013) made a seemingly controversial ruling regarding an agents duty. According to the Court, certain requested coverage was not secured. A lower court had granted summary judgment to State Farm & Olson. The Supreme Court reversed this judgment and remanded the second issue for further proceedings. Underinsured Motorist Coverage had not been procured by the agent in Montana after the Bailey's moved from Oregon. Stan Bailey had signed both auto applications with the Olson agency that did not include Underinsured Motorist Coverage. The Bailey's had this coverage in Oregon where it was included with Uninsured Motorist Coverage using the same coverage symbol. The Bailey's received new premium and coverage notices from the Olson agency with State Farm for a period of seven years without ever questioning the absence of UIM. Even during a phone call, while making some policy changes, when the absence of UIM was pointed out by an Olson agency employee, there was no acknowledgement by the Bailey's of the need for UIM. Subsequently, a serious accident occurred where the at-fault driver had only minimum liability limits. At that point UIM coverage became very necessary-but was not available. The 2013 court case resulted after the Bailey's appealed the lower court summary judgment. The second issue, which was remanded, had not originally been addressed: The issue of contributory negligence on the part of the Bailey's for failing to read the original applications which did not include UIM.

In "Fillinger v. Northwestern Agency"(1997), the Montana Supreme Court stated "We are persuaded by the reasoning of this line of authority that an insured does not have an absolute duty to read their policy, but their failure to do so may amount to contributory negligence". (emphasis mine).

How would you rule on this second issue?

Article By: Dennis Gambill - The author is an Insurance Litigation consultant. Adjunct professor at EMC for 8 years-Risk & Insurance. 40+ years-both MGA and agency experience.

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