Insurance agents who offer automobile insurance may have a
legal duty to advise their clients about the adequacy of the coverage
they choose.
Such a duty arises whenever a “special relationship" is formed
between the agent and the insured.
In 1999, the Michigan Supreme Court decided Harts v. Farmers
Ins. Exchange (see full case summary on page 2). In Harts,
the court ruled that a special relationship is formed, and agent
liability triggered, when one of the following factors is present:
• the agent misrepresents the nature or extent of the coverage
offered or provided;
• the insured makes an ambiguous request that requires clarification;
• the insured seeks advice and the agent gives advice that is
not accurate; or
• the agent assumes an additional duty by either an express
agreement with or promise to the insured.
Note: the court did not list the length of the relationship
between the agent and the insured as a factor in determining
whether a special relationship was formed.
To avoid potential liability, agents should cover all their bases
whether they think a special relationship has been formed or
not. This means, at a minimum, offering coverage in clear,
unambiguous terms, and documenting all requests or rejections
of coverage.
‘Harts' and Beyond
In Harts, an agent was sued by his clients for
allegedly failing to offer underinsured motorist
coverage. The court ruled in the agent's favor,
finding that a “special relationship" was never
created and, therefore, that he did not have to
advise them of the adequacy of their coverage.
However, in so ruling, the court created the
aforementioned four-part test. The significance
of this ruling, from an agent's perspective, is
that there is now a road map to follow when
looking to avoid potential agent liability.
Since the Harts case was decided, several
decisions have been released that have confirmed
Harts as the controlling case in terms of
agent liability in Michigan.
In 2000, the Michigan Court of Appeals
decided Bahri Ltd. v. Estate Underwriters and
Assocs., Inc., et al. and Scarsella Tile & Marble
v. Sanders. In Bahri, the court used the test outlined
in Harts to reverse a trial court decision
that released an agent from liability because no
long-term relationship existed. In Scarsella, the
court affirmed a trial court's dismissal of an
insured's claim against an agent on the ground
that the insured failed to show a duty on the
part of the agent to search for lower premiums.
In 2001, two more relevant cases were
decided: Hanke v. Webb and Muganis v. Citizens
Ins. Co., et al. In Hanke, a claim against an
agent was dismissed because the application
signed by the insured indicated that he wanted
actual cash value coverage. However, in Muganis,
the court refused to dismiss a claim against
an agent because there was an unresolved factual
question as to whether a special relationship
had been formed under Harts.
Finally, last year, Cadger v. Smith was decided.
In that case, the court found a request for “full coverage" or “across the board coverage"
to be ambiguous, requiring the agent
to clarify the extent of coverage.
Each of these post-Harts cases demonstrates,
in its own way, the potential for
agent liability under Harts.
Other Considerations
In modifying the special relationship
rule, Harts wiped out a great deal of prior
case law.
However, there were several decisions
prior to Harts that agents should still be
aware of.
In Mate v. Wolverine Mut. Ins. Co, the
son of an insured's ex-wife was killed in
an auto accident. Although the insured's
ex-wife and her son were driving the
insured's car with his permission, they
were not covered under his underinsurance
policy because they did not reside in
his household. The insured sued the agent,
claiming the agent was negligent in advising
his ex-wife and her son about the
shortcomings in their coverage. However,
because there was no evidence that the
agent advised the decedent regarding coverage
or even knew the decedent existed,
the Michigan Court of Appeals found that
no special relationship was formed and the
agent had no duty to advise about the
adequacy of coverage.
The 6th Circuit has also weighed in
with some important decisions. In Molecular
Tech. Corp. v. Valentine, the court
made clear that where a special relationship
exists and the uninsured/underinsured
coverage is inadequate, the injured
party may allege constructive fraud or
innocent misrepresentation if the insurer
made an affirmative misstatement of fact
to the insured regarding the coverage in
place. And in Platsis v. EF Hutton & Co.,
the court held that a claim for innocent
misrepresentation does not require scienter
(knowledge) of the falsity of the misrepresentation.
Finally, in Auto Owners Ins. Co. v. Michigan
Mutual Ins. Co., the Michigan Court of
Appeals held that an insurance company
subrogee of injured automobile passengers
could sue an independent agent under both
third-party beneficiary and negligence theories
for the agent's failure to procure
insurance for the vehicle as requested by
the owner. The company could sue under a
third-party beneficiary theory because the
intended beneficiaries of the alleged contract
included unspecified passengers. And
it could sue under a negligence theory
because an agent owes a duty to those who
would foreseeably benefit from the insurance
contract or be injured by the agent's
failure to procure insurance.
Moving Forward
While it is never easy to predict the
future, Harts appears to be firmly
entrenched, and the law regarding agent
liability is more predictable because of it.
So what does this mean for agents?
In a nutshell it means you should learn
and understand the rules that apply when
advising clients, and that you should
always stay current with the law. A quick
review every now and then will help you
protect yourself and your clients.
Auto Law ‘Snapshot’
The ‘Special Relationship’ Rule
The following cases, dating back to 1999, have changed the law
in terms of the “special relationship” rule, i.e., the rule that
imposes on agents a duty to advise an insured of the adequacy
of insurance coverage.
1999
Case:
Harts v. Farmers Ins. Exchange
Facts: Insureds sued their auto agent claiming he had not offered underinsured motorist coverage. Ruling: Agent wins because there was no “special relationship” created and thus he did not owe them a duty to advise them of the adequacy of their policy. In the decision, the Michigan Supreme Court detailed four factors, any of which would create the special relationship necessary. The factors are: 1) the agent misrepresented the nature or extent of the coverage offered or provided; 2) the insured made an ambiguous request that required clarification; 3) the insured sought advice and the agent gave inaccurate advice; or 4) the agent assumed an additional duty by either express agreement with or promise to the insured.
Impact On Insurance Agents: This case modified the special relationship rule and provided a road map for other courts to follow when determining whether an agent is liable to an insured.
Case:
Scarsella Tile & Marble v. Sanders.
Facts: Insured (a small business) sought workers’ compensation coverage. Unable to obtain coverage in the standard market, the agent placed coverage with the Michigan Workers’ Compensation Placement Facility. A little more than two years later, the insured sued the agent, claiming he was overcharged by more than $10,000.
Ruling: The trial court granted the agent’s motion to dismiss. The Michigan Court of Appeals affirmed, finding that the insured failed to show that a duty to search for lower premiums has been established. In so ruling, the Court of Appeals relied, in part, on Harts.
Impact On Insurance Agents: The importance of Harts becomes more evident.
2000
Case:
Bahri Ltd. v. Estate Underwriters and Assocs., Inc. et al.
Facts: Insured’s market and apartment building were damaged in a fire. The market was covered, but the apartment building was not. The insured sued the agent.
Ruling: The trial court dismissed the case, finding there was no special relationship because there was no long-term relationship between the parties. The Michigan Court of Appeals reversed and remanded the case to the trial court for further consideration in light of the test outlined in Harts.
Impact On Insurance Agents: This was the first time an appellate court reversed a ruling for an agent based on the Harts test.
2001
Case:
Muganis v. Citizens Ins. Co., et al.
Facts: Insured’s auto policy included $300,000 in uninsured and underinsured motorist coverage. After a an auto accident with an underinsured motorist, he claimed the agent told him his underinsured coverage was “in addition to” any benefit he received from the underinsured motorist. However, the policy had a set-off provision. Still, the insured sued the agent and the insurance company.
Ruling: The court denied the agent’s motion for summary disposition, finding that there was an unresolved factual question. Impact On Insurance Agents: This “on-point” ruling demonstrates that an insurance agent can face liability when advising on um/uim coverage.
2001
Case:
Hanke v. Webb
Facts: Insured’s mobile home was destroyed by fire, but his policy only covered actual cash value. He sued the agent, claiming that he told the agent he wanted the “best coverage available” for his home.
Ruling: The trial court granted the agent’s motion for summary disposition, finding that the application signed by the insured indicated that actual cash value was the type of coverage he wanted.
Impact On Insurance Agents: This case demonstrates the importance of documentation.
2002
Case:
Cadger v. Smith
Facts: Insured had an uncovered loss on her vehicle and sued
the agent, claiming she asked for “full coverage” or “across
the board coverage.”
Ruling: The court found this to be an ambiguous request that
required the agent to clarify the extent of coverage. It refused
to dismiss the case based on Harts.
Impact On Insurance Agents: This decision highlights the
importance of avoiding ambiguous statements when discussing
coverage and documenting what is offered. It also once
again confirms the potential for agent liability under Harts.
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