From the December 2012 issue of American Agent & Broker • Subscribe!

No Harm, No Foul

In spite of multiple errors, agent escapes $5 million verdict.

Axiomatic rules of the insurance business:

  1. No agent should ever sell insurance for which he or she is unlicensed
  2. No agent should obtain insurance for a client from a non-admitted insurer without first advising the insured of the hazards of insuring with a non-admitted insurer
  3. No agent should acquire insurance for a client with an insurer in financial difficulty
  4. No agent should misrepresent coverages obtained or the quality of the insurers to the client.

Sometimes even when all rules are broken and a stupid mistake is made by an agent who acquires insurance for which he is not licensed, when the agent fails to explain to the insureds that the insurance he bought was with a financially unstable surplus line insurer, the agent does no harm. The insured, suing the agent, was still required to prove the actions of the agent caused the insured damage. In George E. Guidry and Dwight W. Andrus Insurance Inc v. Environmental Procedure, Inc. and Advanced Wirecloth Inc. No. 14-11-00090-CV (Tex.App. Dist.14 09/13/2012) the Texas Court of Appeal, on the second appeal from the parties, resolved the dispute on the basic elements of negligence.

Related: Read Zalma's previous article, "Strictly Business."

Two companies sued the insurance agent and agency that procured their insurance from 1991 to 1994. The insured companies asserted that the agent sold them insurance in Texas from a non-admitted carrier. They also claimed the agency neither had a license or training to procure insurance from a non-admitted insurer. The companies alleged that one of their insurers became financially unstable, and that the agent’s failure to disclose this lack of stability harmed them when the insurer initially did not contribute anything toward settling claims against them related to patent infringement and unfair competition.

The non-admitted insurer ultimately reached a settlement with the insured companies. Regardless, the companies alleged that the insurer was financially unable to pay their claims although it had paid the amount of the agreed-upon settlement. The companies successfully argued to a jury that the agent sold them “bad insurance” and therefore was liable to them for the full $5 million that they asserted the insurer should have contributed to the settlement of the claims against them, together with punitive damages, and attorneys’ fees. The agent and his employer challenged the judgment.

Coverage Suit

A declaratory-judgment action was filed by an insurer that is not a party to this case, but the insureds added claims against many other insurers for reimbursement of the costs of defending and settling earlier litigation. For the purpose of this suit, the only relevant insurer involved in the coverage suit was Ocean Marine Indemnity Co. (OMI). OMI provided the insureds $5 million in umbrella coverage for the one-year period from Oct. 1, 1992, through Sept. 30, 1993. OMI disputed coverage and in 2001, the insureds settled their claims against OMI for $500,000.

Broker-Liability Suit

The coverage suit was followed by the broker-liability suit. In 2003, the insureds sued the brokers, alleging that they were liable for the costs of defense and settlement of the third-party litigation to the extent that any of these expenses were or should have been covered by insurance but remained unpaid.

The trial court granted partial summary judgment in the brokers’ favor on the insureds’ claims of negligence, negligent misrepresentation and violations of a Texas statute. The remaining claims were tried before a jury in 2005. The trial court granted a directed verdict in the brokers’ favor on the insureds’ claims for breach of fiduciary duty and rendered judgment on the jury’s verdict in the brokers’ favor on the insureds’ fraud claims. On appeal, the appellate court reversed the summary judgment, but affirmed the judgment in all other respects.

OMI was a Louisiana insurance company and was admitted to do business there, but Guidry sold the insureds the policies in Texas, and OMI was not admitted to do business in Texas. The insureds faulted Guidry not only for placing their umbrella coverage with a surplus-lines carrier, but in particular, for obtaining insurance from OMI.

When Guidry procured the insurance, OMI was eligible for admittance to the business of insurance in Texas and had a rating of “A-” in Best’s Insurance Reports, most commonly referred to at trial simply as Best’s.

Related: Read "Risky Building" by Barry Zalma.

Agent's Errors

It was undisputed that Guidry is not licensed to sell insurance in Texas; that he is not licensed to sell surplus-lines insurance anywhere; that OMI is a surplus-lines carrier; that the cover note did not contain the warning required by statute; and that Guidry did not disclose any of this information to the insureds.

Based on the testimony presented, a reasonable jury also could conclude that Guidry did not attempt to procure insurance from an admitted carrier before placing the insurance with a surplus-lines carrier; did not look at Best’s report on OMI; and did not review the Louisiana edition of Surplus Lines Reporter.

Insured's Obligation

To prove causation of damages from the failure to place the coverage with an admitted carrier, the insureds had to prove that an admitted carrier would have contributed more to the Derrick settlement than OMI did. Without such evidence, the insureds could not show that Guidry’s failure to place the insurance with an admitted carrier caused the insureds to receive anything less than they otherwise would have done.

To make such a showing, the insureds had to present evidence that (1) they could have obtained insurance from an admitted carrier, and (2) the admitted carrier would have paid more toward the Derrick settlement than OMI did.

To prove that Guidry’s failure to hold the proper licenses caused them to receive a lower contribution to the Derrick settlement, the insureds had to produce evidence that they would have received more if their umbrella insurance had been purchased through a licensed agent. There was no such evidence.

Related: Read the column "No Foundation" by Barry Zalma.

Based on the jury’s finding that Guidry misrepresented an insurance policy or the financial condition of an insurer, the trial court awarded the Insurers attorneys’ fees of $350,000 and exemplary damages of $1 million, as found by the jury. A plaintiff who does not recover actual damages cannot recover attorneys’ fees under the Insurance policy or exemplary damages.

No evidence supported the insureds’ claim that their insurance agent’s acts or omissions caused them to be paid less in indemnity for the Derrick settlement than they otherwise would have received. The Court of Appeal, therefore, reversed the trial court’s judgment and rendered judgment that the Insureds take nothing by their claims.

This case proves that luck sometimes overcomes lack of skill, experience, knowledge and license. No matter how badly Guidry serviced his clients his error did not damage them. Escaping this judgment was based upon the skill of his insurer and the lawyers retained by it to defend Guidry and his employer. He should be happy that the Court of Appeal were fans of the late Chick Hearn, the radio announcer for the Los Angeles Lakers, who coined the phrase, “No harm, no foul.” Although not codified, if the plaintiffs can’t prove they were damaged, they should receive nothing, no matter how negligent their agent.

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