This is the third 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.
The Agent as an Insurance Advisor
In Massachusetts, there exists a specific license for “insurance advisors” pursuant to Massachusetts General Laws c. 175, § 177B. That statute states that insurance agents can legally perform the functions of an insurance adviser and can give “any advice, counsel, recommendation or information in respect to the terms, conditions, benefits, coverage or premium” of an insurance policy. If, however, the specific advice given by an agent is wrong, that oftentimes results in a determination that the agent may have gone beyond the general duty that it owes to an Insured to use reasonable care, diligence, and judgment in procuring the insurance requested by the Insured.
As such, the giving of specific advice as to particular coverages which exist for an insured can create “special circumstances” that may give rise to additional or greater duties owed to the Insured. Breach of these assumed and enhanced duties could subject an agent to unexpected liability and unanticipated damages.
The Case: Bicknell, Inc. v. Havlin, 9 Mass.App.Ct. 497 (1980)
The Agent that acts as an advisor on a specific coverage for a particular risk
The Insured’s product distribution business had been a large commercial account in an agency that the Agent[pullquote]Massachusetts law has almost always uniformly imposed a higher duty of care in any profession, whether medicine, law, or insurance, where the practitioner claims special expertise[/pullquote] acquired. The Agent retained the Insured’s insurance program after the acquisition based upon the Agent’s representations as to his experience in the insurance business and his promise that the program would be handled “in a highly professional manner.”
The insured stayed with the Agent who then wrote all the Insured’s property and casualty coverages. The Agent freely made recommendations and gave advice to his Insured for particular types of coverage, including blanket coverage, under which the Insured’s commercial stock was covered up to a specified amount. This policy required that reports be generated on the value of commercial stock. The Agent would review these reports to make sure that the Insured was properly reporting in accordance with the policy.
As the business expanded, the Insured added two new warehouses to supplement the single warehouse it had been using. The Insured specifically asked the advice of the Agent on how the reports should be prepared to reflect that the Insured’s commercial stock was now going to continually move between three warehouses. The Agent reviewed the stock reports and advised the Insured to increase the blanket coverage for the commercial stock. The insured accepted and followed his Agent’s instructions.
When the Insured put two additional warehouses into operation and specifically asked the Agent about coverage for them. The Agent advised the Insured that the two new warehouses should have additional coverage of $50,000 thousand each. The Agent placed the coverage with specific location limits for each warehouse. The Agent, however, did not advise the Insured that these limits were specific to each location. Instead, the Agent erroneously believed that the combined values reported to the insurer applied in the aggregate (The total limits of all three location applied to each location separately) assigned to each of the three warehouses. As such, the Agent reported values without the Insured’s knowledge that undervalued the stock at one warehouse by fifty percent.
Only after a loss occurred did the Agent discover how the policy worked when his Insured only received the insured half of the loss. The Agent admitted making “a technical error of judgment due to unfamiliarity with the advantage of blanket, versus specific, coverage on contents.”
The Insured was less sanguine and called the Agent’s “error of judgment” professional malpractice based upon the special circumstances arising from the relationship of the Insured with the Agent and the Agent’s claims of expertise in advising on insurance matters.
Appeals Court agreed that the Agent’s advice created enhanced duty to Insured.
While an agent is only bound to use due care in the implementation of the agency, and in carrying out instructions of the principal-client, the exact nature and extent of the duty owed depends in part, at least, upon the degree of skill which an agent represents that he or she possesses.
In this case, the Appeals Court stated: “If [the agent] holds himself out to the world as possessing certain skill, or if his business is such as to carry with it an implication that he possesses particular skill in effecting insurances, … then his [insured] is justified in relying upon the knowledge which [the agent] professes to possess, and [the agent] is bound to exercise the skill and to use the knowledge which the business requires.”
The Court found the Agent liable for his actions in undertaking to advise the Insured and to make recommendations. This claim of expertise coupled with the erroneous recommendation was but one of many recommendations made by the Agent over a considerable period of time which created “special circumstances of assertion, representation and reliance” for which the Court said created the Agent’s liability for the loss.
New Duty. This decision did not create any particularly new duty for insurance agents. Massachusetts law has almost uniformly imposed a higher duty of care in any profession, whether medicine, law, or insurance, where the practitioner claims special expertise. If an insurance agent acquires an insured because of his or her self-proclaimed expertise they have to understand that they will be judged by a higher and more stringent rule in any malpractice claim against them brought by an insured arising out of their insurance advice.
Potential Liability. In this case the Court found that the Agent liability extended to what the Insured would have recovered if the Agent had obtained the correct limit. In any claim based upon failure to adequately advise the Insured, the damages will consist of what the Insured would have been able to recover from the carrier if the coverage had been properly placed. Additionally, when an agent is representing to his insured an expertise that really cannot be substantiated, the agent runs the additional risk of an unfair business practices suit that could theoretically result in an award of multiple damages and attorney fees to the agent’s wronged insured.
Agent Takeaway:
- The advertising of a special expertise is a powerful marketing tool for any insurance agent, if not any professional. As per this case, however, an agent should remember that what is presented to a potential Insured client should be carefully considered and vetted, so that the agent does not create a special relationship with the insured that substantially increases the liability exposure of the agent unnecessarily.
- If an agency does have a special expertise in a particular area, it would be wise to document that expertise with the insured as to what is and what is not being offered. A simple document that states the agency does not claim any special expertise except in the areas of “X, Y and Z” may suffice and avoid problems if a situation arises where the agency’s acknowledged expertise becomes, in a disgruntled insured’s mind, a general warranty that the agency had special expertise in all areas of insurance.
