An Agent's Guide
What Is “Full Coverage”?
Insurance policies virtually always contain a very brief insuring clause, frequently no more than two or three sentences, followed by dozens of pages of terms, conditions, exclusions, and definitions. Further, that base policy form is almost always modified by a host of endorsements both adding to and limiting the terms of the policy. The “base policy”, declarations, and endorsements collectively become “the policy.” The insured is virtually never experienced in issues of insurance and virtually always desires to limit his premium cost. Consequently, many endorsed or optional coverages are ignored or rejected. Unfortunately, this stands in stark contrast to the insured’s desire to have “full coverage” following a loss.
The simplest illustration is that circumstance in which following an automobile accident, the insured learns that while he has liability insurance, he does not have comprehensive, collision or rental replacement. Illustrating the same principal; but, at the other end of the spectrum, is the insured who learns that while he has liability insurance for compensatory damages resulting from a catastrophic loss, the policy contains an exclusion for punitive damages. It is a fairly common circumstance in which the insureds in both illustrations blame their agent for failing to secure “full coverage.” This raises the issue of the agent’s alleged negligence. It is a simple though illusive statement that one may not be liable to a second party unless one has and breaches a duty to the second party. The difficult part of this statement is determining what duty an insurance agent has to the insured in the procurement of insurance. The Arkansas Supreme Court answered that question in Stokes v. Harrell, 289 Ark. 179, 711 S.W.2d 755 (1986) when it stated that an agent need only secure precisely the coverage requested by the insured. This is true even when the insured is not knowledgeable concerning insurance issues and may believe he is relying on the agent to secure the appropriate coverage. However, the Supreme Court went on to state that if the insured and agent have a “special relationship” the agent has an obligation to provide the “correct” coverage not just the “requested” coverage.
Of course, the devil is in the details, and one is left to determine what constitutes a “special relationship” between insured and agent. In describing this issue, the Supreme Court stated that a special relationship sufficient to create duties on the part of the agent arises only where there is an “established and ongoing relationship between the insured and the agent over a period of time, with the agent actively involved in the client’s business affairs, and regularly giving advice and assistance in maintaining the proper coverage for the client. In the absence of this type of “special relationship” an “agent may point out to [the insured] the advantages of additional coverage and may ferret out additional facts from the insured applicable to such coverage, but he is under no obligation to do so.” As noted above, if one is under no obligation to perform a task, one can have no liability for failing to perform the task. Consequently, unless the agent otherwise undertakes a duty to investigate the insured’s needs and inserts himself in the insured’s business, the agent’s duty is merely to faithfully record the request made by the insured. Consequently, if the insured fails to ask for the correct coverage, the agent has no liability for failing to provide the correct coverage.
What Constitutes a “Special Relationhship”
As noted by the Arkansas Court of Appeals in Buelow v. Madlock, 90 Ark. App. 466, 206 S.W.3d 890 (2005):
An insured can demonstrate a special relationship by showing that their exists something more than the standard insurer-insured relationship. This depends upon the particular relationship between the parties and is determined on a case-by-case basis.
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The existence of a special relationship presents a question of fact.
At one end of the spectrum is the insured who comes to the agent’s office, completes, signs and submits a form application. At the other end of the spectrum is the insured who invites the agent to its place of business, turns over the books and gives the agent free access to the facilities. In discussing this dichotomy, the Arkansas Supreme Court acknowledged that in “appropriate circumstances” an insurance agent can be held to have a duty to inform an insured about coverage. Those circumstances include situations where “there was an established and ongoing relationship between the insured and the agent over a period of time, with the agent actually involved in the client’s business affairs, and regularly giving advice and assistance in maintaining the proper coverage for the client.” The Court went on to state:
It was reasonable under those circumstances to find a special relationship, where the insured had come to expect and rely on such advice, with a corresponding duty by the agent to advise.
Conclusion
Though difficult in application, the description of an agent’s obligation to the insured is fairly straightforward. The agent’s only duty to the insured is to provide precisely that which the insured requests in clear and explicit terms. However, should the agent choose to involve himself in the insured’s business, the agent may have exposure to liability for failing to procure the appropriate insurance. Stated differently, why don’t I have “full coverage”?
Scott Strauss, a former claims specialist with State Farm Mutual Automobile Insurance Company, leads the Barber Law Firm’s Insurance Coverage Practice Group. You can reach Scott at scotts@barberlawfirm.com..