Agents must inform clients of failure to obtain requested coverageInsurance agents and brokers get into trouble when they fail to properly communicate with their clients, as the following case from the U.S. District Court for the District of South Dakota demonstrates. The court refused to grant the agent's request for summary judgment in a case in which her client claimed the agent didn't obtain the coverage he requested and then didn't inform him that she had failed to do so. The court said the truth of the matter would have to be determined by a trier of fact.

In 2001, a South Dakota rancher decided he needed to switch his livestock policy because of prior losses and increased premium charges. He asked his insurance agent to find replacement coverage. He told the agent that he had sold most of his ranch and that many of his cattle would be located elsewhere. He also told her that he needed "proper" or "good" coverage on the cattle.In November of that year, the agent obtained a livestock policy through a general agent. The policy included theft coverage but excluded loss from "wrongful conversion and/or embezzlement."In September 2002, the rancher discovered that a large number of his cattle were missing from a third-party feedlot, where he had been keeping them. It was later determined that the feedlot owner was responsible for the cattle's disappearance.The rancher submitted a claim to his insurance company for $419,450 in stolen cattle, as well as for consequential damages, including loss of calf crops. The carrier denied the claim, citing the exclusion for wrongful conversion or embezzlement.The rancher successfully sued the insurer in a federal district court, but that decision was overturned in 2005 by the 8th U.S. Circuit Court of Appeals, which found the policy's exclusion unambiguous and enforceable: "Where an entity has lawful control of the property and then converts or embezzles that property, coverage is not provided. … That is exactly what happened here." [ODaniel v. NAU Country Ins., 427 F.3d 1058, 1060 (8th Cir. 2005)]. The rancher subsequently sued his agent, the general agent and the insurer in federal district court for fraud and deceit, misrepresentation and negligent procurement.The court first considered the case against the agent, starting with the fraud and deceit charge. Citing another case, it said the first element of a deceit claim is a representation made as a statement of fact, which is untrue and intentionally or recklessly made with the intent to deceive for the purpose of inducing the other party to act upon it. The second element is the other party's reliance upon the untrue statement of fact, and the third is resulting injury or damage. The court added that, generally, questions of fraud and deceit are questions of fact that are to be determined by a jury.The agent moved for summary judgment, claiming that she never told the rancher that he would have theft coverage under all circumstances. The rancher acknowledged as much but said she did represent to him that he had theft insurance on his cattle while they were located off his premises in feeder and pasture arrangements.The agent countered that the statement was not a misrepresentation, since the policy did in fact "cover physical loss due to theft." However, it also excluded wrongful conversion or embezzlement.The district court, citing the 8th U.S. Circuit Court's decision in the rancher's initial suit against the insurance company, noted that "the term 'theft' may, under some circumstances, include conversion." The district court also noted that the agent's alleged statement was different from the language of the insurance policy. While it provided coverage for livestock located on land leased or rented by him, the agent's alleged statement referred to feeder and pasture arrangements, which implied a third party assuming control over the rancher's cattle.The court said the agent's alleged statement concerning theft in conjunction with feeder and pasture arrangements could include conversion of cattle. Consequently, the court said there was a genuine issue of material fact as to whether the agent misrepresented the coverage to the rancher. It therefore denied her request for summary judgment on the fraud and deceit allegation. For much the same reason, it also denied her request for summary judgment on the negligent misrepresentation claim.In defense of the negligent procurement charge, the agent said that given the ordinary relationship she had with the rancher, she had no duty to inform him about the exclusions in his policy. Further, she said her duty as an insurance agent was to procure insurance consistent with the insured's request, which she said was for "good" coverage for his cattle. She said there was no evidence that she failed to obtain the best coverage available.The rancher asserted that he told the agent he needed insurance coverage for theft of his cattle while they were off his premises in feeder arrangements, but that she failed to provide such a policy. He claimed she led him to believe that he had insurance coverage when in fact he did not, and that he was not notified of a policy exclusion that might adversely affect him. He also asserted that in 1997-1998, he had an insurance policy the agent had procured from a different carrier that provided blanket livestock coverage and did not contain exclusions like those in the policy in force at the time of his loss.The court, citing another case, said an insurance agent has a duty to "procure insurance of the kind and with the provisions specified by the insured" and is liable to the insured for damages caused by breach of this duty. Rumpza v. Larsen, 551 N.W.2d 810, 813 (S.D. 1996).The court noted that numerous cases have determined that if an insurance agent is unable to procure insurance coverage according to a client's instructions, the agent has a duty to notify the client of his or her failure to do so. Whether the agent in the case at hand breached this duty, the court said, was a question of fact for a jury to consider.The court said causation may be proved by showing that if the client had been properly informed, coverage could have been obtained elsewhere or that the client could have avoided or reduced the risk. It cited a number of cases demonstrating this point. In Bell v. O'Leary, 744 F.2d 1370 (8th Cir. 1984), a Missouri insurance broker's failure to notify a client of a failure to procure flood insurance was found to be a cause of a subsequent flood loss, because the agent's negligence foreclosed the client's opportunity to consider other options. In Gulf-Tex Brokerage Inc. v. McDade & Assocs., 433 F. Supp. 1015 (S.D. Tex. 1997), an insurance agent was found liable for not notifying the owner of a shrimp trawler of the agent's failure to obtain a navigational extension for the vessel. Had the owner been properly informed, it could have kept the trawler in home waters or recalled it from waters where it had no coverage.In the case at hand, the court said that had the rancher known that the agent was unable to procure the insurance he requested, "there were a variety of options available to him which would have allowed him to protect himself from the potential harm that occurred." Therefore the court denied the agent's motion for summary judgment in relation to the negligent procurement claim, saying that whether the agent breached her duty was a question of fact for a jury.The court next turned to the general agent, which argued that it was entitled to summary judgment because the rancher's agent was not its agent, and therefore her actions could not be imputed to it. The rancher argued that the general agent's summary judgment motion was premature, because he needed to take depositions to determine the precise nature of the relationship between the agent and general agency.The court noted that the evidence indicated that the agent obtained insurance for the rancher from several different companies over the course of approximately eight years. The agent also procured and brokered insurance policies from other sources in addition to the general agent. Further, the agreement between the general agent and the agent stated that she was an independent contractor and not the general agent's employee.While the court found no evidence of an express agreement between the parties to create an actual agency relationship, it noted that it is possible under the law for an "ostensible" agency relationship to exist if a principal "affirmatively, intentionally or by lack of ordinary care" causes a third party to believe another is serving as its agent.The court noted that in his deposition, the rancher never explicitly stated that the agent was an independent agent, but rather stated that he was aware that she was not simply writing insurance policies on behalf of one company. That did not necessarily rule out an ostensible agency relationship between the agent and the general agent, the court said. Further, no evidence was presented regarding representations made to the rancher about the nature of the relationship between the agent and general agent.Since, based on the evidence presented, the court could not determine whether the general agent caused the rancher to believe the agent was its agent, the court denied the general agent's motion for summary judgment. It said genuine issues of material fact regarding the potential ostensible agency relationship between the agent and general agent would have to be resolved.Finally, the court turned to the insurance company's request for summary judgment on the rancher's claims. The court noted that the agent was not an exclusive agent for the insurer, and the parties did not dispute that she solicited policies of insurance from several other insurance companies. In fact, she had obtained an insurance policy from a different carrier for the rancher, so he was aware that she worked for numerous insurance companies. Moreover, the rancher did not tell the agent to obtain an insurance policy from the defendant insurer, but rather merely told the agent what type of coverage he needed and asked her to procure it. He relied upon the agent to examine different options, negotiate with various insurance companies, find the best policy and procure insurance.Additionally, the agent did not have actual authority to bind the defendant insurer to a policy because the contract between the insurer and general agent specifically stated that "local agents shall not be granted binding authority with respect to business covered by (the) contract." Also, the contract stated that any employees or agents of the general agent were not employees of the company. Nor did the agent have ostensible authority because the rancher knew that she did not work solely for the insurer. It even was undisputed that the rancher didn't know the defendant insurer existed at the time the agent procured his policy from it. Based on these undisputed facts, the court ruled that the agent was not an agent of the defendant insurer and so granted its request for summary judgment.O'Daniel v. NAU Country Insurance Co., No. 05-5089-KES (D.S.D. 12/21/2007).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.