A recent Louisiana decision, Isidore Newman School v. J. Everett Eaves Inc., No. 2008-1368, 2009 La. App LEXIS 1469 (La. App. 4 Cir., Aug 5, 2009), underscores the need for insurance agents and policyholders to fully discuss insurance needs when selecting types and amounts of coverage. Insurance agents generally have a duty to exercise reasonable care and competence in obtaining and communicating information to policyholders. Interestingly, this case also demonstrates that business policyholders have a similar duty as well.
The case involved an insurance agent who sold insurance to a private school for 16 years before Hurricane Katrina struck in 2005. At issue, was the relatively limited amount of business interruption coverage. The form sold had a limit of $350,000, inclusive of both business income and extra expenses. Apparently, the coverage limit was raised once during the sixteen years from $250,000 to $350,000, based on an explanation by the agent of what the coverage provided. The agent allegedly told the school’s business managers at that time that the coverage protected the school against the risk that it would incur extra expenses while it was fixing physical damage.
Following Hurricane Katrina, the school was closed for several months. The school lost significant income as a result of lost tuition. The school sued the agent for error and omissions of failing to advise school personnel that business income/extra expense coverage included tuition loss. Allegedly, the requested limits would have been much higher had the full explanation of coverage benefits been provided.
The matter went to a trial court which found that the insurance agent breached the standard of reasonable care by failing to fully inform the school of the full nature of the coverage and the need to select higher limits in consideration of the school’s one source of revenue–tuition. The damages were found to be $3,166,606.
That is not the end of the story or lesson of this case, however. As is often the situation in agent negligence cases, there is usually the issue of comparative negligence. I once tried a case before a jury where both the agent and my client said the agent failed to purchase theft coverage under a commercial policy. While some may wonder why a trial was necessary when the agent admits such a failure, most states place a duty on the policyholder to read the policy. In that case, my client had the policy for two years. Had he read the policy, he would have learned of the mistake. Thus, the jury had to consider the issue of my client’s failure to read the policy in comparison to the agent’s blunder.
Similarly, in the Louisiana case, the school’s business managers could have done a number of things to obtain the full understanding of coverage–including simply reading the policy. The court found the school 70% comparatively negligent, and reduced the total award by that percentage.
The lessons from the case are clear for agents and policyholders:
- Policyholder Must Communicate Needs;
- Agents Should Communicate Coverages Available–Usually Followed up With Written Information so Policyholders Do Not Get the Wrong Impression;
- Agents Should Investigate Needs of Clients–Use Checklists Which are Copied for Verification to Policyholders.
Insurance agents perform a vital function in the insurance marketplace and especially with businesses. I am not a fan of internet marketing and placement of insurance because agents can provide much better and detailed explanations of various coverages needed by different businesses.
For instance, our law firm carries an extraordinary amount of coverage for valuable papers and data restoration, which might not be important to a butcher shop. Yet, a butcher shop may need a utility services endorsement, spoilage coverage, and equipment breakdown coverage to properly protect its large investment in refrigerated meat. Insurance agents are trained to investigate those needs and make policyholders aware of those coverages which prevent economic calamity.
My advice is for policyholders to listen to insurance agents about the products that are available. Agents need to spend more time with clients and establish a relationship where insurance is looked upon as a necessary hedge against unthinkable consequences.