(1) the agent misrepresents the nature or extent of the coverage offered or provided, (2) an ambiguous request is made that requires a clarification, (3) an inquiry is made that may require advice and the agent, though he need not, gives advice that is inaccurate, or (4) the agent assumes an additional duty by either express agreement with or promise to the insured.5
Some of these four factors tend to bleed over into the others, sometimes making it difficult to determine whether a duty is owed. However, some courts appear to be looking through a conservative lens in analyzing whether the pending claim meets any of these factors. For example, at least one Michigan court has determined that the failure to advise the insured of a notice of cancellation was not a breach of duty under Harts.6
The trend over the last few years is for courts to look at the legal relationship between the parties to determine duty and liability. In the published decision of Genesee Foods Services, Inc v. Meadowbrook, Inc7 the Michigan Court of Appeals put an emphasis on the insurance agency’s status as an independent agency, meaning that it represented numerous insurance companies in placing accounts. Genesee Foods distinguished Harts and its four-prong test in holding that Harts only applied to captive or exclusive agents where the agent is typically the agent for the insurer. This often involves situations where the agent is an employed salesperson for the insurer.
Independent Agent as Fiduciary to the Insured
Citing long-established Michigan case law that such an independent agent is the agent for the insured rather than the insurer,8 the court in Genesee Foods applied a fiduciary duty standard, holding that the “agent has the obligation to obtain the most comprehensive coverage available for the insured.”9 The fiduciary duty standard exposes the independent insurance agent to major risk given the court’s reference to “the primary fiduciary duty of loyalty” and “the most comprehensive coverage available.”
In looking to basic principles of fiduciary law in Michigan, a fiduciary duty arises when the relationship between the two parties is “of such character that each must repose trust and confidence in the other and must exercise a corresponding degree of fairness and good faith.”10 This fiduciary factor has been a consideration weighed by numerous recent courts in analyzing insurance agent duties.
Since Genesee Foods, a number of unpublished cases have attempted to further refine the standard.
In the 2011 case of Nokielski v Colton11 the Michigan Court of Appeals expressly held that the Harts standard applies equally to the independent agent and to the captive agent. Another panel reached the same conclusion in the 2014 case of Richardson v Grimes.
Other courts have stressed that independent agents owe fiduciary duties as enunciated in Genesee Foods but that such a duties are not unlimited. For example, in Deremo v TWC & Associates, Inc.,13 the court determined that although such a broad sweeping duty of fiduciary care was owed by the agency, it satisfied that duty by asking the insured for additional information which was never provided.
In a November 3, 2015 opinion, John Hohensee v Nassar Insurance Agency, Inc,14 the Michigan Court of Appeals considered a claim that an insurance agent misrepresented the scope of coverage resulting in a substantially lesser payment from the insurer than should have been made following a fire. In that case, the limit of insurance for the building was $500,000 yet the reconstruction costs were determined to be $842,948. After the insured decided not to rebuild, the insurer paid $236,148 which was less than it would have paid had the insured rebuilt. The insured sued the agent claiming that the terms of the policy had been misrepresented in that “agreed value” ultimately did not mean he would get the full $500,000 policy limit.
The court held that a negligence cause of action was not viable because no duty was owed nor was the loss the proximate cause of any negligence by the agent. Although the defendant was an independent agent, the court applied the Harts standards and determined that there was no duty to advise of coverage adequacy as there was no special relationship.15 In addition to applying Harts, the court also looked to whether there was a fiduciary duty owed, i.e. did the agent use “reasonable diligence and care to procure insurance as requested by the insured.”16 The court did not reference in its opinion the principle of Genesee Foods17 that the fiduciary duty
required the agent to obtain the most comprehensive insurance available for the insured.
Extending the Duty to an Additional Insured
Insurance agents may also owe duties to parties which are not their clients. In a vigorously defended case that was ultimately decided by the Sixth Circuit Court of Appeals, it was held that an insurance agent could also owe a duty to an additional insured listed on the policy.19 Recently, however, the Sixth Circuit Court of Appeals declined to extend this rationale to a duty of an insurance agent to an injured third party claimant.20
Should the Insurer Be Included as a Defendant?
In cases involving errors or omissions of independent insurance agents, the insurer is usually not a viable defendant absent an independent theory for breach of contract or in unusual circumstances, for an independent tort. The reason for this is the principle previously discussed that the independent agent is the agent for the insured. This means that acts or omissions of the agent are generally not binding upon the insurer, even though there is a separate contract between the insurer and the agent.
The acts of omissions of exclusive or captive agents are generally binding upon the principal insurer and, in such cases, the insurer should be included as a defendant.
Types of Causes of Action
Negligence. The typical underinsured loss analysis of captive agent liability will invoke the four-prong Harts21 test as to whether a duty exists to advise of coverage adequacy. As noted above, this may also be part of the analysis when an independent agent is involved but this has not been settled to date. It is advisable to plead such factually supported claims specifically in the negligence count.
Fiduciary Duty. Pleading in the alternative, it is to consider a separate claim for fiduciary duty where the defendant is an independent insurance agent. This is consistent with Genesee Foods.22 One potential advantage of a fiduciary cause of action is that it may not be subject to a defense of comparative negligence, although the authors are aware of no appellate decisions which have squarely addressed this. It is noted, however, that some Michigan courts analyzing the fiduciary duty of independent insurance agents have done so in the context of “duty” and “negligence,” implying that there would be the potential for a comparative negligence defense.
Breach of Contract. Michigan courts have held that a claim for an insurance agent’s failure to advise is in tort rather than for breach of contract.23 Furthermore, when a contracting party is sued by a non-contracting third-party for negligence, the inquiry is whether defendant owed any independent legal duty to the plaintiff.24 Thus, the breach of contract cause of action will usually be superfluous.
Misrepresentation. Something of a misnomer in the context of an agent case, the misrepresentation count tends to be a weaker theory in the scope of causes of action. Already included as an element in the Harts25 analysis, it typically has fewer teeth given its element of reasonable reliance26 which can often be derailed to the extent of an admitted failure of the plaintiff to read the policy.
Defenses
No duty. The issue of duty is typically the primary defense asserted by insurance agents and Harts27 is often the basis for the defense.
However, courts have also looked to whether an insurance agent has a duty in more remote situations. For example, in Theriault v Al Bourdeau Insurance Service, Inc 28 the Michigan Court of Appeals addressed a fact pattern where the insurance agent for a bar owner did not advise the insured to file a claim with another agency which wrote a separate policy, holding: “It would be inconsistent with that limited duty to hold an insurance agent such as defendant liable in connection with an insurance policy it did not write and an insurance company with which it had no relationship.”29
No Third Party Beneficiary. Generally, insurance agents owe no contractual duty to an injured third party claimant and, for this reason, the third party lacks standing to sue the agent. However, courts have not applied this no duty rule to cases involving automobile accidents, finding that such injured victims are third-party intended beneficiaries of an autoinsurance policy.30
Proximate Cause. Michigan courts have determined that where a plaintiff fails to show that coverage was available to address the coverage gap at issue, causation is lacking, defeating the negligence theory.31 Expert testimony may be needed to establish the availability of coverage.
At least one other court has held that where an insured elected not to rebuild and received a lesser sum from the insurer, causation was also lacking.32
A key defense usually interposed by agents is that the insured should have read the policy and raised any questions
within a reasonable period of time. Along these lines, agents have argued that where the insured does not read the policy, it, not the agent, is the proximate cause of any loss. However, the published opinion of Zaremba Equipment, Inc v Harco National Insurance Company33 held that failure to read the policy is not dispositive on the issue of negligence and instead goes to comparative negligence
Misrepresentation. The insured, being bound to the knowledge of the terms and conditions of the insurance policy,34 usually fails to prevail on a misrepresentation claim given that there can be no reasonable reliance where the insured failed to read the policy.35 This analysis likely also applies to cases where the insurer rescinds the policy for a misrepresentation on the application that the insured signed but did not complete or read.
Other Litigation Considerations
Discovery. Discovery in an agent errors and omissions case follows general procedures, subject to a few nuances. Agents often maintain detailed computerized activity logs which should be requested by name (an expert can assist you with this). These logs may contain vital information on what transpired in a particular case. The underwriting and claims files of the insurer provide relevant documentary discovery as they usually include correspondence from the agent, applications, etc.
Experts. Whether an expert is needed to support an insurance agent errors and omissions claim typically involves determining if something more than an interpretation of the policy language is required. Instead, a case usually warrants an expert where the fact finder requires additional assistance in the explaining of the standard of care of a reasonably prudent insurance agent.
However, even where the practitioner chooses not to retain a testifying expert, a retained advisory expert can provide valuable assistance with formulating causes of action or defenses, seeking appropriate discovery and explaining the availability of coverage.