This is the second article in a four part series based on real cases describing some of the special circumstances that could enlarge the errors and omissions liability of an agent to his or her Insured. You can view the first article here.
The Agent as a Claims Adjuster
The general duty that an agent owes to an Insured is the duty to use reasonable care, diligence, and judgment in procuring the insurance requested by the Insured. Agents, however, often unwittingly enlarge the duty they owe to an Insured through actions they take above and beyond the call of duty. Unfortunately, this usually occurs when the agent goes out of their way to help or advise an Insured.
Under the law, certain “special circumstances” may give rise to additional or greater duties owed to the Insured. Breach of these duties could subject the agent to liability and damages. As such, agents should beware of taking actions that create these special circumstances because as the saying goes, “No good deed goes unpunished.”
The Case: Schwartz v. Travelers and Mazonson, Inc., 50 Mass. App. Ct. 672 (2001)
Can an agency be liable for handling an Insured’s claim?
The National Weather Service labeled the October 31, 1991 Halloween storm the “perfect storm”. Hurricane-like winds and 40-foot waves at sea pushing wave wash onshore destroyed over 100 homes along the Massachusetts coast with damages topping $200 million. Five Massachusetts coastal counties were declared Federal disaster areas. The story of the ill-fated Gloucester swordfish boat, the “Andrea Gail” and its six lost crewmen at sea in the storm became the subject of a best-seller and a very successful movie, both not surprisingly called “The Perfect Storm.”
As the Appeals Court in this case wryly stated, this storm resulted in a less than “perfect” experience for the Insured, who sued his insurer and agent, as the result of an unpaid loss.
This particular Insured’s home had exposure on three sides to the Atlantic. The storm’s wave action pushed sea water into the Insured’s home and caused extensive damage to the basement area of the house. The Insured had a separate flood policy that paid for the water damage. However, a dispute arose with his homeowner’s insurer over the further damage suffered in parts of the house’s living areas, and adjacent structures on the property. The Insured alleged that the damage had been caused by the wind and rain, but his homeowner’s insurer claimed this loss had been caused by wave wash flooding excluded by the policy.
When the insurer paid some damages for the adjacent building but denied the bulk of the claim for wind and rain damage, the Insured sued his insurer and his agent.
The suit against the insurer alleged breach of contract and unfair claim practices. The suit against the agency, however, alleged breach of contract based on an “actionable agency relationship with his insurance broker regarding settling claims against the insurer.”
The Appeals Court held in this case of first impression that: “We conclude that there is no reason to exempt the claims settlement process from the duties for which insurance agents could be found liable, as a result of special circumstances.” In other words, the Court found that agencies could have liability for assisting Insureds in settling policy claims were the agency took on greater liability as the result of special circumstances.
The special circumstances, as found by the Appeals Court, were that the Insured had obtained insurance with respect to this property and other family and business insurance requirements for over 15 years at the time of the loss. Most importantly, when the Insured reported the loss to the agent, the Insured alleged that he asked, and the agency agreed, to assist in processing the claim. The agency’s representatives reported the loss, both verbally and in writing, to the homeowner’s insurer, relaying, according to the Insured, incorrect information. The agency’s president, along with another agency principal personally came to Insured’s home to view the damage and give advice. The agency’s president responded to telephone calls and letters that the Insured sent to him concerning the claim, passed information along to the homeowner’s insurer, and attended at least one meeting with the homeowner’s insurer and the Insured.
The Appeals Court held that there was sufficient evidence to create a jury question, whether the agency’s actions, and the long-standing business relationship with the Insured , created the “special circumstances of assertion, representation and reliance,” giving rise to an obligation to process the Insured’s claims under the insurance policies, and if such an obligation existed, whether there was a breach.
However, in this case, the Appeals Court decision that the Insured had shown sufficient evidence to get to a jury on[pullquote]“We conclude that there is no reason to exempt the claims settlement process from the duties for which insurance agents could be found liable, as a result of special circumstances.”[/pullquote] the agency’s alleged contract to handle the claim with the insurer did not help the Insured. Besides producing evidence to show that the agency made a contract to handle the claim and the agency’s breach of that contract, the Insured had to show that the agency’s breach had caused the Insured damages.
The evidence put forward by the Insured did not show that the agency’s breach, if proven, caused the Insured any damage. In fact, the agency had (fortunately) suggested that the Insured retain a public adjuster, which he did. The public adjuster and Insured then had brought to the homeowner’s insurer’s attention Insured’s claim for wind and rain damages. This public adjuster pressed the wind and rain theory of damage throughout his employ by Insured. The misinformation that the Insured alleged that the agency relayed to the homeowner’s insurer regarding the wind and rain aspect of the loss got corrected by the public adjuster within a few days and the effect agency report had on the homeowner’s insurer’ failure to investigate was immediately dissipated. Also, the Insured decided five months after the loss to bypass the public adjuster and the agency and deal with the homeowner’s insurer directly. On this evidence the Appeals Court concluded that: “the record does not support any theory under which a jury might find that Insured was damaged by any failure of the agency to process [the Insured’s] claim or to assist in the settlement process.”
The Appeals Court found that since the Insured’s case lacked the essential element of damage caused by the agency’s breach of contract it affirmed a judgment in favor of the agency.New Duty. As the Appeals Court stated, Massachusetts law had never addressed the question of whether an insurance agent had liability after selling a policy for the handling of a post-sale claim. Agents should recognize that as a result of this decision an insurance agency, if not careful, can become liable for damages arising out of assisting an Insured with a policy claim.
Potential Liability. In this case the Court found that the agency’s alleged breach did not cause any loss to an Insured. But if a Court did find a causal relationship, the potential liability could be the value of the claim and any legal costs occasioned by the agency’s breach of contract or negligence.
Agent Takeaway:
- An implied contract or understanding to assist an Insured in processing a policy claim can arise from a special relationship with the Insured. Such a special relationship regarding an Insured’s claim can impose on the agency a number of unexpected obligations that give rise to the agency having liability in contract or for negligence regarding the Insured’s claim.
- An agency that assists Insureds on claims, especially large property claims, should consider codifying the scope of its services in an express agreement, so there is no misunderstanding with the Insured as to the agency’s limited role. E.g. The agency is not acting as the Insured’s public adjuster or claim advisor.
Next week, we will take a look at different case in which an agent might find themselves with additional duties resulting from their Insured’s claim.
Kara Larzelere
Kara Larzelere joined ForbesGallagher in 1994 and concentrates her practice in insurance and corporate matters. She advises insurance companies and insurance agencies on a variety of matters of concern including issues of regulatory compliance, insurance coverage, liability, employment law, organizational structure and acquisitions. Ms. Larzelere represents businesses and individuals in bringing and defending liability claims and represents insurance companies and commercial entities in complex business and insurance litigation. In addition, Ms. Larzelere has briefed over a dozen appeals before the Massachusetts Appeals Court and the Massachusetts Supreme Judicial Court on varied issues including fiduciary duty law, consumer protection, and indemnification.
