This is the last article in a four part series looking at the special circumstances involving the potential errors and omissions liability of an agent to his or her Insured.
An Agent’s promise to follow up on an Insured’s Application
In either competing for or in maintaining an insured’s business, an agent often may find themselves stating that an insured’s application for coverage will merit the agent’s personal attention; or that the agent will seek to expedite the application process for the insured; or the agent will give the processing of the application his or her personal attention. In most cases, such feel-good statements have no real legal effect and merely amount to what could be called “seller’s talk”.
In certain instances, however, an insurance agent who makes such a statement involving a particular type of application might instead create a “special circumstance” giving rise to additional or greater duties owed to the Insured. More, a breach of these assumed and enhanced duties could subject an agent to unexpected liability and unanticipated damages.
The Case: McCue v. Prudential Ins. Co. of America, 371 Mass. 659 (1976).
Mr. and Mrs. McCue had a 28-year relationship with Prudential Insurance’s debit agent, Mr. Shaw. During his long-term relationship with them, Mr. Shaw made monthly visits to collect premiums on the seven policies the Prudential had issued to the McCues. One of the policies Prudential had issued to the McCues provided limited health insurance benefits. Unbeknownst to Mr. Shaw, the McCues decided to drop the limited Prudential policy and to apply for a more comprehensive health plan through Blue Cross-Blue Shield.
Not surprisingly, when Mr. Shaw heard about this business going elsewhere he met with the McCues to advise them that Prudential had a policy comparable to, if not better suited to them than, the Blue Cross-Blue Shield plan for which they were applying. At the meeting, Mr. Shaw convinced the McCues to drop their application for a Blue Cross-Blue Shield policy and, to instead, apply through him for a comprehensive Prudential health policy.
Mr. Shaw assisted the McCues in preparing Prudential’s application and accepted the first month’s premium. The application itself stated, “We will do everything possible to expedite the processing of the application.” Mr. Shaw also took the McCues’ limited health policy for cancellation upon the issuance of the new policy.
Mr. Shaw did explain to the McCues that a statement from the plaintiffs’ family doctor was required to complete the application but, that a physical examination was not. Although the request to the McCues’ physician would come directly from Prudential’s underwriting department, Mr. Shaw advised the McCues that he personally would contact[pullquote]The Supreme Judicial Court found that there was sufficient evidence to find that, although Mr. Shaw was an agent of Prudential, “special circumstance of assertion, representation and reliance” existed that would abrogate the usual rule that an agent owes an insured no general duties to procure insurance.[/pullquote] the doctor to expedite the submission of the mandatory medical report.
Mr. Shaw advised the McCues that he believed that they would have approval for their new policy within approximately forty-five days of the application’s submission. No one advised the McCues that Prudential actually had an internal underwriting rule to reject any application not completed within forty-five days.
When the McCues’ family physician statement did not arrive within forty-five days of the date of the application, Prudential’s underwriting department issued an automatic rejection letter on the incomplete application to the both the McCues and Mr. Shaw. Mr. Shaw took no action to discuss the rejection letter with the McCues although Prudential instructed him to update and resubmit the application to restart the forty-five day underwriting cycle pending receipt of the physician’s report.
Approximately, one month after the rejection letter was issued and Mr. Shaw’s receipt of Prudential’s instruction for him to have the McCues resubmit their application, Prudential received the missing physician’s statement. The next day Prudential reissued its instructions to Mr. Shaw, to contact the McCues to resubmit the application for the contemplated insurance that would now have a higher premium based on the physician’s statement. Mr. Shaw neglected to get the new application signed and a new deposit premium from the McCues before the McCues went on vacation. The McCues went on vacation without having been given the opportunity to submit the approved application. While on vacation, Mrs. McCue became ill and subsequently was diagnosed with leukemia.
Upon their return, the McCues promptly completed and submitted the new application and informed both Mr. Shaw and Prudential of Mrs. McCue’s diagnosis. Prudential thereupon refused to issue a policy and tendered back the deposit premium.
The McCues sued both Mr. Shaw and Prudential for the handling of their insurance application and for Prudential’s refusal to issue a policy. The McCues won the lawsuit.
At trial, a jury found that the defendants (Prudential and Mr. Shaw) had violated their agreement to employ reasonable efforts to complete the McCues’ application for a health insurance policy and that they also had not abided by their duty to complete the plaintiffs’ application with reasonable care. By stipulation, Prudential agreed to accept all responsibility for Mr. Shaw’s actions and filed an appeal of the judgment entered on the jury’s verdict.
On appeal to the Supreme Judicial Court, the Court affirmed that the failure of the agent to handle properly the policy application process created a legal liability to the insured.
The Supreme Judicial Court found that there was sufficient evidence to find that, although Mr. Shaw was an agent of Prudential, “special circumstance of assertion, representation and reliance” existed that would abrogate the usual rule that an agent owes an insured no general duties to procure insurance.
The special circumstances that the Court highlighted as sufficient to create liability included the 28-year relationship between Mr. Shaw and the McCues with regard to their insurance needs. In addition, the number of policies that Mr. Shaw had sold to the McCues and the confidence that they placed in him. Also, and perhaps more importantly, Mr. Shaw had told Mrs. McCue that he personally would contact the doctor to expedite submission of the required report and apparently did not do so. This representation along with his failure to handle the application procedure in a proper and timely manner also weighed in favor of liability. The Court ruled that he ignored the explicit instructions of Prudential by failing to contact the McCues promptly to provide them with an appropriate explanation of the rejection of the first application and to give the McCues an immediate refund of the advance premium. He also failed to visit the McCues for the month before they went on vacation to obtain a new application, as instructed by Prudential.
The Court ruled that, “In all, we feel that the evidence as viewed most favorably to the McCues supports a finding of special circumstances warranting recovery…”
New Duty. This case may arise out of the classic debit agent system, but Massachusetts courts still cite it as precedent regarding ‘special relationships’ or ‘special circumstances’ that create extended liability for insurance agents. In fact, in all three prior articles in this series, the court decisions discussed in The Agent as General Contractor, The Agent as Claims Adjustor and What Happens When Agents Unwittingly Act Like Insurance Advisors cite the McCue case as controlling law.
Potential Liability Where there is a loss that would have been covered if an application had been properly made or submitted, an agency generally has no liability unless the agency had a special relationship with the Insured and failed to take actions out of the ordinary course of its business. In that exceptional case, the Insured can seek damages equal to the value of the coverage that the insured would have had under the policy if it had been properly issued. In the McCue case, there were no claims under G.L. c. 93A, § 9 against the agent for multiple damages or G.L. c. 176D, § 3(9) against the insurance carrier for unfair claim practices. Any similar complaints filed today would likely expose an agency or insurance career to this added risk.
Agent Takeaways:
- Making representations to an existing or potential insured regarding policy issuance or taking on the responsibility of fulfilling application requirements out of the ordinary course of the agency’s business might result in liability if the insurance is not in force before a claim occurs and includes a claim that the unissued policy would have covered.
- Insurance agents should always recognize that a significant percentage of errors and omission claims result from the application process. Massachusetts courts have found that liability can exist for agents failing to apply for adequate limits, adequate coverages or to adequate insurers. The best advice for an agency to avoid such claims is in asking all pertinent questions and documenting all the insured’s answers and requests and to deal with quality insurers.
