From the December 2011 issue of American Agent & Broker •Subscribe!

No Duty to Benefit Consult

Unless compensated as a counselor, an agent’s responsibilities are limited

Insurance agents have a duty to fulfill the requests of their principal. Insurance agents, at least in Iowa, have little or no duty to the beneficiary of a life insurance policy. In Michele M. Pitts v. Farm Bureau Life Insurance Co. and Donald Schiffer, No. 1-535, 11-0117 (Iowa App. 10/05/2011), the Iowa Court of Appeals was asked to resolve who is entitled to the beneficiaries of a life insurance policy.

Michele M. Pitts appealed a district court order granting defendants’ motion for summary judgment on claims of negligence, negligent misrepresentation and respondeat superior. She filed several tort claims against her husband’s insurance agent and insurer for failing to designate her as the sole beneficiary on her husband’s life insurance policy. The district court granted summary judgment in favor of the defendants. On appeal, Pitts asserted the trial court erred because of genuine issues of material fact that precluded summary judgment.

Michele married Thomas Pitts. At the time of the marriage, Thomas had a son and a daughter from prior relationships. Thomas paid child support for his daughter and maintained a life insurance policy for her benefit through Farm Bureau Life Insurance Co.

Related: Read Zalma's previous column" Fired Up."

Thomas initially told his insurance agent, Donald Schiffer, to pay the first $50,000 of insurance proceeds to his daughter, and the balance, if any, to Michele. Later, he changed the amounts, directing that only the first $35,000 go to his daughter and the balance go to Michele.

Michele alleged that when Thomas’ child support obligation ended, Thomas told Schiffer to change the beneficiary designation so that Michelle would receive all of the insurance proceeds. She further asserted that Thomas and Schiffer separately told her that this change was made.

Thomas died. Following his death, Michele went to Schiffer’s office with her parents. She asserts Schiffer again told her she would receive the full amount of the insurance proceeds, but while she was completing the paperwork, Schiffer received a phone call in which he learned that Thomas’s daughter would receive the first $35,000 of Thomas’s insurance proceeds. Michele received the remaining $74,000.

Related: Read another column by Barry Zalma "False Statement Voids Policy."

The defendants moved for summary judgment. The district court granted the motion, concluding that Thomas Pitts could only change the beneficiary designation if he submitted a written, signed request as the owner of the policy and it is undisputed that Pitts did not execute a written request to make plaintiff the primary beneficiary. Michele appealed.

Michele’s petition alleged that Schiffer was negligent in several respects, including "in failing to take action to change the beneficiary designation upon Thomas J. Pitt’s request" and "in representing to Thomas J. Pitts and Michele M. Pitts that the designation had been changed."

Michele also asserted Schiffer owed her a duty of care and genuine issues of material fact exist as to whether he was negligent in exercising that duty. Michele’s argument that she is a third-party beneficiary is premised exclusively on tort theories. She did not raise contract theories to support her claim for relief.

Duties of the Agent

Generally an agent owes his principal the use of such skill as is required to accomplish the object of his employment. If he fails to exercise reasonable care, diligence, and judgment in this task, he is liable to his principal for any loss or damage occasioned thereby.

Related: Read the article "Cert Uncertainty" by Barry Zalma.

It is for the fact finder to determine, based on a consideration of all the circumstances, the agreement of the parties with respect to the service to be rendered by the insurance agent and whether that service was performed with the skill and knowledge normally possessed by insurance agents under like circumstances. Some of the circumstances that may be considered by the fact finder, the trial judge, in determining the undertaking of the insurance agent include:

  1. The nature and content of the discussions between the agent and the client
  2. Any prior dealings of the parties
  3. The knowledge and sophistication of the client
  4. Whether the agent holds himself out as an insurance specialist, consultant, or counselor
  5. Whether the agent receives compensation for additional or specialized services.

Unless an insurance producer holds himself out as an insurance specialist, consultant or counselor and receives compensation for consultation and advice apart from commissions paid by an insurer, the duties and responsibilities of an insurance producer are limited. Therefore, the scope of Schiffer’s duty to his clients was "to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured" unless he held himself out as an insurance specialist, consultant or counselor and received separate compensation for these services. Schiffer owed Thomas Pitts the general duty of care and further concluded the defendants were entitled to judgment as a matter of law on Michelle Pitts’ negligence claims.

In her petition, Michele Pitts alleged that "Schiffer represented to Thomas J. Pitts and Michele M. Pitts that the beneficiary designation on Thomas J. Pitts’ life insurance policy had been changed such that Michele M. Pitts would be the sole beneficiary, provided she survived Thomas J. Pitts." She further alleged the representation was material and false and Schiffer was negligent in making it. Michele Pitts was unable, however, to prove that Shiffer held himself out as a specialist, consultant or counselor and received compensation for his advice. Therefore the district court granted summary judgment for the defendants on her claim and the Court of Appeal affirmed the trial court’s decision.

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