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E&O: Indiana Insurance Agent’s Fiduciary Responsibility Remains Unclear


E&O: Indiana Insurance Agent’s Fiduciary Responsibility Remains UnclearAn Indiana dental practice after incurring $500,000 in damages due to a fire learned that the contents coverage of its insurance policy it had maintained for over thirty years was inadequate to cover the loss. The dental practice sued the insurance agency, claiming it had a “special relationship” with the firm that entitled it to a full review of the adequacy of its coverage. The lower court ruled in the plaintiff’s favor saying the agency violated its fiduciary duty to the client by failing to advise that there was inadequate coverage. But the Indiana Supreme Court on March 12 rejected in part the lower court’s decision.

Indeed the Indiana Supreme Court stated: “On summary judgment review, we hold that the designated evidence supports conflicting inferences on whether the parties enjoyed a special relationship that created a duty to advise. As for the implied contract to procure full coverage, we hold that the record does not show any discussion between the parties on the matter, much less a meeting of the minds. We therefore reverse in part and affirm in part the trial court’s order granting partial summary judgment.”

The facts of the case: In October 2009, a fire destroyed the entire dentist office. The value of the lost office contents was about $704,000-plus, which included equipment and technology used in the practice’s laboratory. The insurer paid $204,00-plus, which was the limit for its office contents under the policy, leaving the practice to pay the $500,000 shortfall.

The practice ended up suing both the agency and the carrier. It alleged breach of contract for agency’s failure to procure either $350,000 in total office contents coverage, specifically, or full coverage for the entire $704,000-plus; it also alleged that the insurance carrier was vicariously liable for the agency’s omissions.

Although the Indiana Supreme Court rejected the “special relationship” alleged by the plaintiff, it did stipulate that the parties may continue to litigate the agency’s duty to advise; the agency’s alleged contractual duty to procure $350,000 in office contents coverage; and the carrier’s vicarious liability for the agency’s alleged wrongdoing.

This case is another in a list of cases that have failed to establish the boundaries of an independent agent’s fiduciary duty. In a recent article in Insurance Business America (IBA), the Indiana case was discussed with Connecticut insurance law professor Peter Kochenburger. In the article, he states, “Often, a court’s decision comes down to semantics. That is to say, an insurance “agent” typically has a lower level of fiduciary duty than an insurance “broker” and the presence or absence of a “special relationship” determines how a court labels an independent agent.

“If you, the policyholder, can establish a special relationship with an agent, you could become a broker and therefore have somewhat of a higher duty,” Kochenburger explained. “That means you’ve worked with the agent for something like 15 years and you rely on them to advise you on a variety of things—not simply to answer their questions.”

In another article in IBA, Kochenburger, who was also counsel to Travelers for 25 years, explains the difference between an agent and broker. An “agent”, he says, “whether independent or captive—is primarily an agent of the insurance company they represent.” In a fiduciary duty lawsuit, liability typically defaults to the insurer if the producer involved is determined to be an “agent.” “Brokers, however, owe their allegiance to the client. In other words, they are an agent of the insured and owe fiduciary duty to that client. This is someone who cannot bind the insurance policy but in fact represents the client as they purchase insurance.”

As you can well see, it’s a complicated and gray area as evident by the mixed court rulings. The smart measures to take is to be sure that best practices are implemented in your agency, including thorough documentation of all coverage presented and declined in addition to client reviews to update coverage amounts, deductibles and policy features. Along with these steps, it’s critical to review that your agency or brokerage Errors & Omissions insurance policy is in order and will respond in the event of a claim.

Axis Insurance Services specializes in E&O insurance coverage and would be happy to review your policy with you to determine if your agency or brokerage is properly insured. Just give us a call at (877) 787-5258.

Sources: IBA, Indiana.gov, Agent’s Duty on Coverage Advice Gets Conflicting Ruling

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Blogged on: March 25, 2015 by Mike Smith
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