Insurance Agents Duty to Recommend Adequate Coverage and Potential Insurers Vicarious Liability

Insurance Agents Duty to Recommend Adequate Coverage and Potential Insurers Vicarious Liability

By:  Logan Hughes

Generally an insurance agent who undertakes to procure insurance for another owes the prospective policyholder a duty to exercise reasonable care, skill, and good faith diligence in obtaining the insurance.  The arms-length relationship typically does not involve advising the prospect on the adequacy of coverages or any alternative coverage.  The duty to advise is typically reserved for agents and policyholders that have a special relationship, demonstrated by something other than payment of the customary commission. 

For over thirty years in Indiana, there has been only one reported Indiana decision to find that a special relationship existed between an insurance agent and policyholder, and only two Indiana decisions that found a policyholder had sufficient facts to bring the claim for a special relationship to a jury.  One of those decisions was made by the Indiana Supreme Court on March 12, 2015 and should raise awareness to insurance agents placing specialized risks and insurers issuing the policies.  This is why. 

The scarcity of legal precedent establishing special relationships in Indiana and Indiana’s tradition that intermediaries in the insurance business are agents of the insured while shopping for a policy, are among several likely reasons making it relatively rare for a non-captive agent to create a risk of vicarious liability to an issuer.  The risk seemed to diminish further in 2009 when the Supreme Court cut-off vicarious liability, with a few nuances, in the setting of non-captive agents who did not have authority to issue policies on behalf of an insurer.  But a recent Supreme Court decision allowed both the claim for a duty to advise to proceed to a jury trial, as well as the claim that the issuer be vicarious liable for the duty to advise, if any, borne by the selling non-captive insurance agent.  This may require revisiting the scope of agreements between agent and insurer that pose a threat to create vicarious liability. 

In Indiana Restorative Dentistry PC v. The Laven Insurance Agency, Inc., and ProAssurance Indemnity Co. Inc., et al. No. 49S05-1407-PL-491 (Ind.Sup.Ct. March 12, 2015), the Indiana Supreme Court found that a policyholder had sufficient facts to present a claim for a special relationship to a jury on the basis that a series of merged insurance agencies sold business personal property insurance to the policyholder for 30 years, generally marketed its skill, expertise, and personalized services through third-party mailers, advertised its trade association endorsements, and sent the policyholder annual questionnaires about the coverages sought for renewal.  Remarkably, the policyholder and agent never met face-to-face, the agent received only the customary commission, the policy sold was a “run-of-the-mill business personal property policy,” and the agent did not exercise authority in selecting the coverages to be purchased.  The Court highlighted uncertainty about the nature of the 30-year relationship, which covered specialized prosthodontist equipment, as a basis for allowing the claim to pass summary judgment and proceed to a jury. 

The Court’s Opinion also impacts insurance companies issuing policies to longstanding policyholders.  TheIndiana Restorative Dentistry Court’s affirmed that the existence of a written agreement between the non-captive agent and insurer, minimum production goals of the non-captive agent, and limitations on how the non-captive agent could market to insurer-generated leads was sufficient to present the claim for vicarious liability to a jury. 

The Court’s holding underscores the importance of periodically refreshing the nature and scope of business relationships with longstanding policyholders in writing.  This may reduce misunderstandings in the event of a significant loss.  The holding also highlights that the existence of a written agreement between non-captive agents and an insurance company, may expose the insurance company to vicarious liability for the conduct of the independent agent.