In their ordinary business relationships with clients, agents are not fiduciariesThe Ohio Court of Appeal recently provided some comfort to insurance agents and brokers regarding their responsibilities to clients with whom they have ordinary business relationships. This case demonstrates that insurance agents and brokers who wish to avoid litigation should make it clear to clients:

–That they are not a fiduciary for the insured.–That they are simply carrying out the client's instructions and make no guarantees about the adequacy of the insurance.–That they do not provide expert advice concerning the adequacy of limits.–That an insured should carefully review the policy wording and declarations to determine that the policy limits are adequate.–That an insured who is unsure of the adequacy of his or her limits should retain an expert in repair and reconstruction who can determine how much coverage is needed.–That agents should protect themselves by carefully documenting the nature of their agent-client relationships.In 1984, an Ohio couple built a house for approximately $120,000. They later put on an addition that included a sunroom and a deck. That brought the house's size to 2,240 square feet. The couple's insurance agent arranged full replacement cost coverage on the house. Four years later, the couple's agent retired and was replaced by another working for the same insurer.In 2002, the house was destroyed by fire. At the time, the couple's homeowners policy provided $132,000 in dwelling coverage and $72,710 for personal property.The policy stated: "If the amount actually and necessarily spent to repair or replace the dwelling is more than the Coverage A-Dwelling Limit of Liability, we will pay up to a maximum of an additional 20% of the Coverage A limit for the additional costs."The insurer paid $160,622.40 for the dwelling, $74,818.87 for the contents, $56,177.50 for additional living expenses and $11,542.60 for demolition and landscaping. The couple rebuilt their former home at a cost of approximately $260,000.Subsequently, the couple sued the insurer, alleging breach of contract for failing to completely pay their claims and breach of duty to act in good faith and to deal fairly in the handling and payment of their claims. The couple also alleged that the insurer breached its fiduciary obligation, since their new agent was negligent in advising and counseling them about their insurance needs and in determining coverage.The insurer filed a motion for summary judgment, which a trial court granted. It also dismissed the couple's complaint with prejudice. The couple appealed.The appeals court noted that the couple alleged that their agent owed them a fiduciary duty, which the agent breached. Citing another case, the appeals court noted that a fiduciary relationship exists when a "special confidence and trust is reposed in the integrity and fidelity of another and there is a resulting position of superiority or influence, acquired by virtue of this special trust." [In re Termination of Employment (1974), 40 Ohio St.2d 107, 115, 321 N.E.2d 603.]The appeals court also cited another case that stated, "Generally the relationship between an insurance agent and his client is not a fiduciary relationship, but rather, an ordinary business relationship."The appeals court said that based on its review of the record, there was no evidence that a fiduciary relationship existed between the couple and their insurance agent or that it was anything other than an ordinary insurance agent-client relationship.In his deposition, the agent testified that he regularly reviewed the policy limits with the couple, usually via telephone. The agent said the husband would call him.The court said there was no evidence that the couple, both educated people, placed any more reliance on the agent than an insured usually does. While the agent and the husband served together on the boards of some nonprofit organizations and were both involved in school-district activities, the court said there was no evidence that the two had a close relationship. Communications between the two had been limited.The court found there was insufficient evidence to establish that the couple "placed extraordinary reliance" on the agent or that they communicated to the agent that they were doing so. Nor was there evidence that the agent understood that the insureds were placing any special trust or confidence in him or that he had any position of superiority or influence with respect to them.Finding that the agent did not owe the couple a fiduciary duty, the appeals court next considered whether the agent was liable for ordinary negligence. The court noted that an insurance agent has a duty to exercise good faith and reasonable diligence in obtaining insurance that a customer requests. The customer, meanwhile, has a duty to examine the policy, know the extent of its coverage and notify the agent if the coverage is inadequate. The court cited another case that stated, "An agent or broker is not liable when a customer's loss is due to the customer's own act or omission."The appeals court noted that the couple testified that neither of them read the policies or declaration pages as they received them from the insurer. The court noted that the wife testified that she never looked at the amount of coverage listed on the declaration page but said, "I just assumed that it would cover the full (loss)." When asked whether it was their testimony that "you looked at the insurance policy, saw that it provided full replacement coverage and really didn't pay attention to the numbers?", both appellants responded in the affirmative. There was no evidence that either advised the agent that the amount of insurance on the house was inadequate or that they asked him to procure more.Any loss that the couple suffered was due to their own omission in failing to examine their own coverage, the appeals court said. Therefore neither the agent nor the insurer was liable. The court said there was no evidence that the agent who initially sold insurance to the couple failed to inspect their property before fixing the insurable value. There was no ongoing duty for the new agent to do so.Consequently, the appeals court upheld the trial court's ruling in favor of the agent and the insurer.Horak v. Nationwide Insurance Co., 2007 Ohio 3744 (Ohio App. Dist.9) 07/25/2007.An example of how agents can wind up in the middle of a tug of war over venueWhen insurance companies are sued, they often seek to bring the case into federal court, believing it to be a more favorable venue for them than the state courts. Plaintiffs, on the other hand, often name local defendants–particularly insurance agents and their agencies–in such litigation to ensure the cases are heard by a state court, which they believe will be more sympathetic to them. Defendants then counter that these additional defendants were "fraudulently joined" in the lawsuit in an effort to justify state jurisdiction. This important case from the federal district court for northern Georgia demonstrates how these disputes can play out. The court also made it clear that insurance agents and brokers who wish to avoid this type of litigation should not hold themselves out as experts on whose expertise the insured should rely. It is essential that all files be documented to establish–if true–that the insured relied upon his or her own knowledge and did not rely totally on the agent or broker.In 1984, 1986 and 1989, a Georgia doctor bought three disability insurance policies from an insurer through a licensed insurance agent. The doctor's practice was in obstetrics and gynecology. Part of it involved performing laparoscopic surgery.The doctor said that at the time he bought the policies, the agent told him he would be covered for the rest of his life if he was unable to perform surgery fully. The terms of these policies, however, stated that the doctor would be covered for life only if he was totally disabled by injury prior to the age of 65 or by sickness prior to the age of 55.In November 2001, the doctor was diagnosed with Dupuytren's contracture, a condition that causes a person's fingers to draw in toward the palm. Based on this diagnosis, the physician treating the doctor determined that the doctor was disabled from performing his occupation. In January 2002, at the age of 62, the doctor submitted a claim for total disability based on his condition. In December of that year, the insurer approved the claim. In early 2004, however, the insurer claimed that the disability was due to sickness rather than injury, thus qualifying the doctor only for benefits until the age of 65 and disqualifying him for lifetime benefits. The doctor contended that his disability qualified as an injury, rather than as an illness, under the policies.In December 2006, the doctor filed an action in a Georgia superior court, asserting claims against the insurer, the agent and the agent's employer, a financial-planning agency. The defendants removed the case to a federal district court, claiming that the insurance agent had been fraudulently joined in the proceeding to give the state court jurisdiction. The doctor, meanwhile, moved to have the case remanded to state court, contending that he had alleged several valid claims against the local agent and the financial planning firm and that consequently a state court was the proper venue. Among the doctor's claims against the agent or his employer were negligence, failure to procure insurance, breach of contract and breach of fiduciary duty. The insurer, meanwhile, contended that the doctor had fraudulently joined the agent and financial planning firm in the litigation.The federal court explained that to prevail on an allegation of fraudulent joinder a defendant must show, after drawing all reasonable inferences from the record in favor of the plaintiff, that there is no reasonable basis for expecting that state law might impose liability on those joined to a case. If there is even a possibility that a state court would find that the complaint states a cause of action against any one of the resident defendants, the federal court must find that joinder was proper and remand the case to state court.The defendants contended that this claim could not succeed, because it was barred by the statute of limitations and also failed as a matter of law. As to the statute of limitations, the parties agreed that the relevant period was four years, but disagreed over when this period began to run. The federal court noted that the Georgia Supreme Court had held that a statute of limitations does not start until "the time when the plaintiff could first have maintained his action to a successful result" [Hoffman v. Insurance Co. of North Am., 241 Ga. 328, 329 (1978)].In Hoffman, the state supreme court addressed a claim by an insured against his agent for failing to procure insurance. The court stated that to determine when the statute of limitations begins to run, one first must determine whether the act causing the damage is, in and of itself, an invasion of some right of the plaintiff, thus constituting a legal injury and giving rise to a cause of action. If so, the statute begins to run from the time the act is committed, however slight the actual damage may then be. On the other hand, if the act causing the damage is itself not unlawful, and a recovery is sought only on account of damage subsequently resulting from the act, the statute of limitations begins to run only when the damage is sustained.The court noted that an action in tort for negligence depends upon the presence of damages. Therefore, it can't be maintained until the principal suffers a loss. So in the case at hand, the federal court said that under Georgia law, the statute of limitations did not begin to run until the insurer refused to honor the doctor's claim. "The court is further persuaded by the rationale of other state courts that have addressed negligent procurement claims and reached the same conclusion," it said.With that hurdle overcome, the court addressed the claim's merits. It said that the general rule in Georgia is that an insurance agent who negligently fails to procure insurance may be held liable for any resulting loss. However, an insured generally has an obligation "to read and examine an insurance policy to determine whether the coverage desired has been furnished."The court noted two exceptions to the rule, where either (1) the agent has held himself out to be an expert and the insured has reasonably relied on his expertise in identifying and acquiring the correct type and amount of insurance (unless an examination of the policy would have made it "readily apparent" that the coverage requested was not issued) or (2) a special relationship of trust exists, such that it would have prevented or excused the insured from a duty to exercise ordinary diligence. The federal court noted that the doctor said he heavily relied on the agent to identify and procure the correct amount and type of insurance, that he understood that the agent was a specialist who could procure insurance designed to fit the doctor's personal needs, and that he "requested disability insurance that would provide lifetime benefits in the event he was not able to perform surgery, regardless of the cause of the disability."The doctor claimed that he had read the policies and found their language to be ambiguous and confusing. The federal court, however, found that it was readily apparent from reading those policies that the doctor would not receive lifetime benefits for just any cause of disability. Furthermore, the court said, while the doctor claimed to have relied on the agent to identify the proper coverage, it was clear from his pleadings that he knew the type of coverage he wanted before approaching the insurance agent.The court did find, however, that the doctor had sufficiently alleged that a special relationship of trust existed between him and the agent, such that the doctor would have been excused from reading the insurance contract.A confidential relationship exists where either "(1) one party is so situated as to exercise a controlling influence over the will, conduct, and interest of another or (2) where, from a similar relationship of mutual confidence, the law requires the utmost good faith," the court noted in citing another case. But the court also noted that "the mere fact that one reposes trust and confidence in another does not create a confidential relationship" (citation omitted).According to the federal court, the Georgia Supreme Court had never said exactly what is required to prove the existence of a confidential relationship, and lower court holdings had failed to resolve the issue conclusively.Thus, the federal court found that the doctor presented an arguable claim that a special or confidential relationship existed between him and the agent. The doctor's complaint alleged that the doctor knew the insurance agent, as an expert and specialist, for 20 years and relied heavily on his advice and counsel.Consequently, on the basis of the doctor's claim of a special relationship, the federal court granted his motion to remand the case to state court.Saye v. Unumprovident Corp., No. 1:07-CV-31-TWT (N.D.Ga. 08/09/2007).Agent cannot orally modify a policy that explicitly prohibits such actionThis case teaches agents and brokers to avoid making blanket statements about coverage that can come back to haunt them and their E&O insurers. Advice about coverage should be limited to the words of the policy itself. The agent should never attempt to orally amend or modify the contract unless the agency agreement provides such authority or the insurer specifically has authorized a change. Although the agent's remarks in this case did not create liability, his less-than-prudent comments caused him to be a part of a long and contentious lawsuit.A couple's home in Pascagoula, Miss., was substantially damaged in 2005 by Hurricane Katrina. The insureds' home was 12 feet above sea level and less than 200 yards from the Mississippi Sound. The hurricane drove a tidal wave ashore that inundated the ground floor of the insureds' home under five feet of water. Walls, floors, fixtures and personal property sustained extensive damage.The couple filed a claim under their all-risk homeowners policy. It covered all damage to dwellings and personal property not otherwise excluded. Water damage was one of the excluded perils.A policy clause made it clear that damage arising directly or indirectly from an excluded peril wasn't covered "even if another peril or event contributed concurrently or in any sequence to the loss." Such provisions are commonly referred to as anticoncurrent-causation clauses, or ACC clauses. Based on the ACC clause in its policy, the insurer denied the claim.The couple sued. They did not dispute that most of the damage to their property was caused by storm surge. They contended, however, that they were entitled to coverage for such damage because of the actions of their insurance agent.The husband said that when he first bought his policy in 1989, the agent told him it covered all hurricane-related damage. (The agent, in his deposition, said he did not recall such a conversation.) The husband said that in 1998, the agent assured him he did not need to buy a flood insurance policy, because the couple's home was not in an area classified Zone A for flood risk by the Federal Emergency Management Agency. He said the agent also habitually made similar statements to other homeowners clients. The insured said he inferred from the agent's comment that he had coverage for flooding in his homeowners policy. The couple said the agent's statements amounted to negligent misrepresentation. They also said that in believing the agent's comments meant they had flood coverage, they relied on the agent's apparent authority to modify the policy.At a bench trial (decided by a judge, without a jury) in federal district court, the couple offered expert testimony that the total damage to their house exceeded $130,000. The court, however, entered a judgment only for $1,228.16, the amount of damage determined to have been caused solely by wind. It said the water-damage exclusion, which it upheld, precluded coverage for most of the couple's damages.But in a finding with great significance for other Katrina-related claims, the court invalidated the policy's ACC clause as ambiguous. The insurance company appealed that decision to the Fifth U.S. Circuit Court of Appeals. It also appealed the district court's rejection of the insurer's contention (in a motion for partial summary judgment) that its policy could not be modified by statements attributed to its agent. (The trial court nonetheless had ruled that in this case the agent did not materially misrepresent the policy terms. Nor, it said, had the agency made "any statements which could be reasonably understood to alter" the policy terms.)The appeals court ruled in favor of the insurer, upholding its ACC clause. In addition the court rejected the couple's claim that the policy was modified by the agent's statements. The court noted that an agent's representations of policy modification can be binding on an insurer only if the agent has actual or, as the couple claimed here, apparent authority.The court noted that to obtain a recovery based on apparent authority, the plaintiffs had to show that the insurance company acted in such a way as to indicate the agent had authority, that the plaintiffs reasonably relied on this apparent authority and that this reliance was to their detriment.The appeals court found that nothing in the insurer's conduct indicated that the agent was authorized to orally modify policies he sold. The court noted that the couple's policy had an integration clause specifically disclaiming the agent's ability to do so. The clause said in part, "A waiver or change of a part of this policy must be in writing by us to be valid." Second, the court said, the insureds' reliance on the agent's statements was unreasonable in light of the policy language clearly excluding water damage, including damage caused by a flood.The court said that even had the plaintiffs been able to satisfy the elements of a recovery based on apparent authority, their misrepresentation claim still would have fallen outside Mississippi's three-year statute of limitations for such claims. The court said that because the terms of the plaintiff's policy were unambiguous, their claim for negligent misrepresentation accrued from the time the agent made his comments about the lack of need for a flood insurance policy, which he allegedly uttered more than six years before the couple sued.The plaintiffs also attempted to recover under a theory of breach of the insurance contract. The appeals court rejected this approach as well. The court noted that the policy's integration clause, as a matter of law, unambiguously prohibited any oral modification of the contract.The insureds did not allege that the provision permitting only written modification of the policy had itself been modified. Instead, they argued that their pleading of equitable estoppel obviated the need to resort to the integration clause. But the court said that claim ignored the rule that doctrines like equitable estoppel, which allow insureds to procure rights at variance with a written insurance policy, cannot be used to extend coverage not otherwise provided by the policy."Conditions going to coverage or scope of policy of insurance, as distinguished from those furnishing a ground for forfeiture, may not be waived by implication from conduct or action," the court said in citing another case [Morris v. Am. Fidelity Fire Ins. Co., 173 So. 2d 618 (Miss. 1965)].Second, the court noted, Mississippi law requires that oral modification correspond to general rules of contract formation, like the meeting-of-the-minds requirement. The plaintiffs did not contend that the agent said their policy covered all hurricane damage. Rather they maintained that the agent's statements regarding flood insurance led them to infer that their policy covered all hurricane damage. But the appeals court said that inference did not provide the mutual assent necessary to modify the contract. The plaintiffs' additional claim that equitable estoppel does not require mutual assent was irrelevant, the court said, because estoppel cannot create hurricane coverage that does not exist under the policy."Whether the insureds proceeded under a contract or tort claim, their allegation that the agent's comments entitled them to additional coverage was incorrect as a matter of Mississippi law," the court said.The appeals court also ruled that the trial court abused its discretion when, over the insurer's objection, it allowed statements the agent made to five other policyholders to be admitted as "habit" evidence under an applicable federal rule of evidence. The plaintiffs maintained there was enough evidence to show that as a matter of habit and routine, the agent told customers, when asked, that they should not buy flood insurance unless they lived in an area that FEMA determined was flood-prone.The appeals court said that the applicable rule's use of the term "habit" suggested a "regular response to a repeated specific situation" that has become "semi-automatic" (Reyes v. Mo. Pac. R.R. Co., 589 F.2d 791, 794, Fifth Cir. 1979). In this case, the appeals court noted that the agent had about 1,500 customers. It ruled that comments "he purportedly made to five of them over the course of a decade did not remotely qualify as a habit" within the meaning of the evidence rule. The record demonstrated that the agent sold nearly 200 flood insurance policies in the years preceding Katrina, including 12 to policyholders living in the plaintiffs' neighborhood. So the appeals court said the evidence did not suggest that the agent's statements to other policyholders revealed an invariable, reflexive response to inquiries about supplemental flood insurance. The trial court's admission of the statements was an abuse of its discretion, the appeals court said.It thus affirmed the district court's ruling in favor of the insurer while correcting the district court's erroneous reasoning pertaining to the ambiguity of the ACC clause and the relevance of the agent's purported statements under Mississippi law to the interpretation of the policy's coverage.Leonard v. Nationwide Mutual Insurance Co., Fifth U.S. Circuit Court of Appeals, No. 06-61130, August 2007.Barry Zalma, Esq., CFE, is a California attorney. His practice emphasizes the representation of insurers and others in the business of insurance. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He provides expert witness testimony and consults with plaintiffs and defendants concerning insurance coverage, insurance claims handling and bad faith. He has qualified as an expert in state and federal courts in California, Mississippi, Texas and New Mexico, as well as in the Grand Caymans. He can be reached at [email protected]. His consulting practice's Web site is www.zic.bz.