Agent’s E&O Exposure Limited by Mass. Supreme Judicial Court Case

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The Case: Caron v. Horace Mann Insurance Company, 466 Mass. 218 (2013)

The Importance Of This Decision For Agents:

This decision reduces the potential liability of agents arising from claims that the policy contains terms to which the insured did not agree.  The decision reaffirmed the old, but sometimes forgotten, rule that the insured and not the agent is responsible for reading the policy and objecting if the coverage is not what the insured wanted or expected. 

Agent Takeaways:

1. In this case, the Supreme Judicial Court reaffirmed the simple proposition that an insured has to read a new policy when he or she receives it.  The Court cited as current law a 1929 case stating: [An] “insured is presumed to have assented to the terms of [a] new policy if it is retained without reading or read without complaint and rejection.”
2.  Agents can do their insureds a great favor by emphasizing the following point; When a new policy is received the insured is going to have to live with the policy terms if they do not read it and correct any problems.
3. If an agent does not know or is not sure about how a policy works, it is best that the agent keep quiet and check the answer.  In the present case, had there been a discussion of the coverage misunderstanding between the insured and the agent, the result in this case might have been different.  For an independent agent, mistakenly binding your carrier as a result of expressing to an insured an incorrect understanding of what the policy terms are can result in the carrier being bound and the agent having an E&O claim brought by the carrier.

The Facts Involved In This Case:

This case arose out of a homeowner’s claim involving personal injuries sustained when an American Bull Dog, owned by Alan and Mrs. Fowler, bit the plaintiff, Scott Caron, in the face.

The Fowlers had a homeowner’s policy issued by Horace Mann Insurance Company (Horace Mann) with a personal liability indemnity limit of $500,000.  In addition, the policy also had, an animal liability endorsement,  that reduced that $500,000 indemnity limit to $25,000 for dog bite claims (animal liability endorsement). This endorsement has been standard on all Horace Mann homeowner policies since 2000.

Horace Mann defended the damage suit against the Fowlers for the dog bite.  After a jury trial, the Fowlers ultimately were ordered to pay just over $250,000 for personal injuries suffered by Mr. Caron and the loss of consortium suffered by his wife.

Horace Mann paid its $25,000 indemnity limit as full payment due under the policy based on the animal liability endorsement.  The Fowlers retained counsel and negotiated a settlement with the Carons that released them from the remaining $225,000 on the judgment in exchange for an assignment of the Fowlers’ rights against Horace Mann.

The Carons then sued Horace Mann as assignees of the Fowlers. They alleged, among other claims, that the Fowlers and Horace Mann were mutually mistaken as to the animal liability endorsement applying to the policy, and thus that the policy should be reformed by striking the animal liability endorsement so that the full indemnity limit would apply to satisfy the unpaid judgment.

The insured and the selling agent both believed that the policy would provide $500,000 in indemnity for a dog bite .

When the Fowlers applied to Horace Mann they had a Mass. FAIR Plan policy because of a prior loss.  The FAIR plan was expensive.  As soon as their prior loss ceased to be an underwriting issue, the Fowlers sought a more affordable policy in the voluntary market.

On March 2006, Mrs. Fowler met with Barbara Bode, Horace Mann’s agent. The meeting, held at Ms. Bode’s office, was to prepare an application for homeowner’s insurance through Horace Mann. Ms. Bode requested a copy of the declarations page for the Fowlers’ FAIR plan policy; the declarations page indicated that the personal liability limit was $500,000. Ms. Bode asked Mrs. Fowler if she owned certain specific breeds of dog, and Mrs. Fowler answered, “[N]o.” Mrs. Fowler added that she owned an American Bull Dog (which was not among the breeds Ms. Bode had named). Mrs. Fowler did not express any concern as to the potential risk for the American Bull Dog breed, nor did she ask any questions about coverage for dog-related claims.

Ms. Bode printed Mrs. Fowler’s completed application form which they both subsequently signed. Mrs. Fowler then gave Ms. Bode a check for $310, representing forty percent of the total premium cost. The policy was substantially less expensive than Mrs. Fowler’s then-existing FAIR plan policy. Ms. Bode provided Mrs. Fowler a “Verification of Coverage” sheet, showing personal liability limits of $500,000, and informed Mrs. Fowler that a full policy would be mailed to her.

During this meeting, in which the application was prepared and signed and the deposit premium paid, Ms. Bode and Mrs. Fowler did not explicitly discuss coverage for animal bite claims.

However, there was no dispute that when Mrs. Fowler purchased the policy she mistakenly assumed that the policy provided the full $500,000 in liability coverage for claims involving animal bites, including her American Bull Dog. There was also no dispute that Ms. Bode had the same mistaken believe at the time the policy was negotiated.  She believed that the $500,000 liability indemnity limit would apply for dog bite claims if the dog was not one of the listed excluded breeds.

When Mrs. Fowler received the full policy, she “skimmed” through it. The policy contained the standard Horace Mann animal liability endorsement that reduced the indemnity for claims arising from certain animal bites, including the Fowlers’ American Bull Dog to $25,000, and expressly excluded coverage for other listed breeds of dog.

On summary judgment, the Superior Court found mutual mistake and struck the animal liability endorsement from the policy based upon mutual mistake.  The mutual mistake the Superior Court found was that in this case, Mrs. Fowler intended to purchase and  believed that she had purchased a policy that provided personal liability coverage up to $500,000, similar to the personal liability coverage she had received under the FAIR Plan.  Ms. Bode also believed she had sold a policy that provided up to $500,000 in personal liability coverage.

As a result, both the insured and the agent had the same mutual misunderstanding of the insurance contract’s terms.

In Massachusetts, an insured may be able reform the terms of an issued policy if the insured can prove that at the time of contracting, both parties were laboring under the same misapprehension as to a particular, essential fact; that the minds of the parties have met and reached a prior existing agreement that the written policy fails to express.

In this case, however, unexpressed mutual misunderstanding did not amount to “mutual mistake” sufficient to reform the policy’s written terms. Rather, the question the Court answered here was: Where an insured and an agent labored on the same misunderstanding as to an indemnity term of the policy to be issued did that shared view of how much coverage the policy would provide for a specified peril amount to a “mutual mistake”?  The Court answered: “No”.

What the Court said:

The Court ruled that although Mrs. Fowler mistakenly believed that the policy provided up to $500,000 for claims resulting from a dog bite, nothing in the record suggested that Mrs. Fowler expressed this understanding to Ms. Bode, Horace Mann’s agent.  Mrs. Fowler did not ask Ms. Bode any questions regarding the extent of coverage for animal bite claims. Again, even though Ms. Bode testified that she also mistakenly believed the policy would provide up to a $500,000 limit for a dog bite claim, she never conveyed that understanding to Mrs. Fowler nor even discussed coverage for dog bite liability with her.

The Court said there was no dispute that, under the policy as written, coverage for claims arising from a bite by the Fowlers’ dog was limited to $25,000. There also was no dispute that Horace Mann fully intended the animal bite animal liability endorsement to be included in the policy and to limit the Fowlers’ indemnity coverage for animal bite claims to $25,000. The Court noted that the Horace Mann’s underwriting criteria made the animal liability endorsement mandatory for all Horace Mann homeowner policies.

The Court agreed with the Carons that legally the contractual intent of the insurance agent who negotiated with the insured is what is binding and not what the agent’s insurance company might have intended. However, the Court disagreed with the Carons that the unexpressed intent of the insurance agent in making the contract could establish legal intent.

The Court said that the agent’s misunderstanding as to the application of the animal liability endorsement was never communicated to Mrs. Fowler.  That Mrs. Fowler silently harbored an assumption that the policy would provide the full $500,000 in liability coverage for “any incident at all” could not be the basis for reformation of the policy.

The Court finally ruled that the undisputed material facts demonstrate that Ms. Bode and Mrs. Fowler never discussed animal liability coverage. As such, their independent mistakes as to such coverage were in no way mutual as there was no express agreement between them as to this term of the policy.

As a result, the Supreme Judicial Court reversed the Superior Court judgment and entered judgment for Horace Mann on the mutual mistake claim.