Many businesses operate under the assumption that their insurance agent has an affirmative duty to inform or advise them about the availability or sufficiency of insurance coverage. Companies may believe for years that they have "full coverage" or the "best policy" based on that misunderstanding. It is only when a loss occurs that an insured may discover that they do not have the extent or type of coverage they thought they had. When this occurs, it is natural to scrutinize the advice provided by the insurance agent regarding the adequacy of coverage. In recent years, however, courts (including the New Hampshire Supreme Court) have made it clear that the duty of insurance agents is limited. As a result, the better time to scrutinize the advice of an insurance agent is before purchasing or renewing coverage.
The Duty of the Insurance Agent
Insurance agents owe their clients a duty of reasonable care and diligence. This means, for example, that they could be liable for negligently misrepresenting the qualities or coverage of a particular insurance product. Where a specific request is made for a particular type of insurance coverage, an insurance agent owes a duty to the insured to procure such coverage. Beyond the general duty of reasonable care and diligence, an agent generally does not have an affirmative, continuing obligation to inform or to advise an insured regarding the availability or sufficiency of insurance coverage. Courts have reasoned that insureds are in a better position to assess their assets and the risk of loss to which they may be exposed. These courts have also noted that decisions regarding the amount of insurance coverage are personal and subjective, based upon a trade-off between cost and risk. An insurance agent is in no better position than the insured to predict the extent of damage that the insured might incur at some time in the future. Ultimately, imposing a broad duty on insurance agents to advise insureds regarding the sufficiency of their insurance coverage would remove any burden from the insured to take care of his or her own financial needs and expectations in entering the marketplace and choosing from the competitive products available. This would turn insurance agents into risk managers with guarantor status.
Despite this general rule, most courts, including the New Hampshire Supreme Court, acknowledge that the existence of a "special relationship" could impose upon an insurance agent an affirmative duty to provide advice regarding the availability or sufficiency of insurance coverage. What is this "special relationship" and how is it created?
Creation of a "Special Relationship" with an Insurance Agent
An insured can demonstrate a special relationship by showing that there exists something more than the standard relationship between an insurance agent and the insured. This will depend upon the particular relationship between the parties and is determined on a case-by-case basis. An insured may have an express agreement with his/her insurance agent to provide advice regarding the availability or sufficiency of insurance coverage. The insured and insurance agent may have long established relationships of entrustment in which the agent clearly appreciates the duty of giving advice. The insured may pay the agent additional compensation for advice that is apart from the premium payments. An insurance agent may hold him or herself out as a highly skilled expert and the insured may rely on this representation. Some courts also recognize a special relationship when the insured relies upon an agent's offered expertise regarding a question of coverage, or where there is a course of dealing over time putting the agent on notice that his advice is being sought and relied upon. Whatever the circumstances, the existence of the special relationship requires a fact-specific inquiry, making documentation of that relationship of paramount importance.
Specify Your Request For Coverage
When an insured makes a specific request for a particular type of insurance coverage, an insurance agent owes a duty to the insured to procure such coverage. An insured, however, must make a specific request for a particular type of coverage in order to impose a duty upon an agent to procure that particular coverage or to inform the insured that such coverage is excluded. A request for "full coverage," "the best policy," or similar expressions does not place an insurance agent under a duty to determine the insured's full insurance needs, to advise the insured about coverage, or to use his or her discretion and expertise to determine what coverage the insured should purchase. Likewise, an insured's request for "insurance coverage from A to Z, second to none," does not make an insurance agent liable when the policy excludes a particular type of coverage. Courts will not impose a duty upon insurance agents to know all of an insured's needs, to procure suitable coverage, and to inform an insured of every facet of the coverage based upon an insured's broad general request for coverage.
Here again, the factual circumstances surrounding the request for coverage are relevant. If the insurance agent's knowledge concerning the basic operations of the insured's business is expansive, the agent may have a duty to advise the insured about suitable coverage. It is better to determine and document this at the time insurance is being purchased than to try to recreate it years later following a loss.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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