Despite interaction with client, agent found to have noduty to procure coverage
An architect in Utah decided to form his own firm in 1987. Hisbusiness grew considerably; between 1995 and 1997, he madesubstantial investments in equipment and office furnishings, whichprompted an interest in obtaining business insurance. He contactedan insurance agent who previously had provided the architect'spersonal-lines insurance, including auto and umbrella policies andcoverage on the architect's home, boat and recreational vehicle.This agent and the architect had conducted most of their businessover the telephone, talking every couple of months. A conversationgenerally consisted of the architect's request for personal-linesinsurance coverage, followed by the agent's fulfillment of eachrequest, without detailed discussion of different types ofcoverages, according to the case notes.

When he contacted the agent to obtain business insurance, thearchitect told the agent to place business and fire coverage on hisequipment and the contents of his office. According to thearchitect, the agent replied that he would “take care of that” andwould come out to look at the equipment.

About five months later, a fire destroyed the building housingthe architect's firm. The loss totaled $1,143,855.50, $940,000 ofit from the loss of architectural plans and other valuable papers.While watching the building burn, the architect called the agentseeking confirmation that coverage had been placed. He said theagent replied, “We talked about it, but we never did anything aboutit.”

The architect sued the agent, his agency and the direct-writerinsurer the agency represented for breach of contract to procureinsurance and negligent failure to procure insurance. The trialcourt granted the agent's motion for summary judgment. A statecourt of appeals reversed that decision. The agent then appealed tothe state supreme court.

Was there a contract to buy insurance? Not according to thecourt. “We conclude that no contract of insurance existed between(the architect and the agent),” the court said. “They did notdiscuss any of the elements essential to an insurance contractexcept that (the architect) 'wanted business and fire coverage onthe equipment and the contents' of his architectural business.Where a person seeks to enter into a contract of insurance with aninsurance company or its agent, it is understood that thenegotiations will not ripen into a contract until the partiesarrive at an agreement as to all of the elements which areessential to an insurance contract, including the subject matter tobe covered, the risk insured against, the amount of the indemnity,the duration of the coverage and the premium. There was no mention,except fire, of the types of risks (the architect) wanted covered,the amount of indemnity, the duration of coverage, or the premium.Therefore, there was no meeting of the minds on which to base acontract of insurance.”

Another issue was whether an oral contract to procure insuranceexisted. The court continued: “Obviously, liability for failure toprocure insurance could not arise unless the agent had sufficientlydefinite directions from his principal to enable him to consummatethe final insurance contract…. An express agreement is notnecessary; the scope of the risk, the subject matter to be covered,the duration of the insurance and other elements can be found byimplication.”

In this case, the court found that the agent did not havesufficiently definite directions from the architect to consummatethe final insurance contract. The architect had requested businessinsurance and fire coverage for the contents and equipment of hisfirm. To procure business insurance, the agent needed to know thetype of coverage the architect desired, such as loss of income,earthquake, employee dishonesty, money and securities, and theft.Depending on the types of coverage desired, the agent needed toknow the value of all furniture and equipment, accounts receivableand building improvements. The agent also needed to know the sizeof the desired deductible, when the architect wanted coverage totake effect, why the architect had previously not insured hisbusiness, whether there had been any prior losses and, crucially,the value of architectural documents and other valuable papers. Theagent could not turn to any of the architect's previous policies toobtain this information because all of those policies werepersonal-lines policies. Furthermore, the court noted, thearchitect failed to give the agent authority to ascertain some ofthe essential facts. He merely made a general request forinsurance, which fell short of such a grant of authority. “Creationof a contract to procure insurance requires that the agent know orhave ready access to the information needed to procure theinsurance or be able to imply the terms from prior dealings,” thecourt said. “If the insured gives authority to the agent to obtainsome information, he must do so explicitly.” Another issue in thiscase was whether the agent assumed a duty to procure insurance whenhe allegedly told the architect “he would take care of that” andwould come out and to look at the equipment after the architectcontacted him. The court cited a case [Alford vs. Tudor Hall andAssocs., Inc., 330 S.E.2d 830, 832-33 (N.C. Ct. App. 1985)] holdingthat “a court must look to the conduct of the parties and thecommunications between them, and more specifically to the extent towhich they indicate that the agent has acknowledged an obligationto secure a policy. Where an insurance agent or broker promises, orgives some affirmative assurance, that he will procure or renew apolicy of insurance under circumstances which lull the insured intothe belief that such insurance has been effected, the law willimpose upon the broker or agent the obligation to perform the dutywhich he has thus assumed. Further, if the parties have had priordealings where the agent customarily has taken care of thecustomer's needs without consultation, then a legal duty to procureadditional insurance may arise without express and detailed ordersfrom the customer and acceptance by the agent.”

The court said that the agent's alleged statement that “he wouldtake care of that” and would come out to look at the equipment “isnot a bare acknowledgment of an obligation to procure insurancebecause the statement that 'he would come out and look at theequipment' indicated that (the agent) needed to gather moreinformation or do other work before procuring a policy. A bareacknowledgment occurs when an agent confirms coverage pending theissuance of a formal policy.”

The court held that the agent's comments “failed to rise to thelevel of a promise to procure insurance and were insufficient tolull (the architect) into believing a policy had been procured,because they lacked the requisite specificity. An agent mustaffirmatively assure the insured that a policy will be procured orhas been procured. (The architect) argues that their prior dealingslulled him into believing (the agent) would procure insurance.Rather, (the architect) lulled himself into believing he had aninsurance policy. No reasonable and experienced businesspersonwould believe the conversation here gave rise to a duty to procureinsurance when considered in light of its brevity and the lack ofany specificity for such a complex and customized type of policy.Even if (the agent's) comments lulled (the architect) intobelieving (the agent) would procure a policy, the fact that (thearchitect) never completed an application, never received a bill orpolicy and was never contacted by (the agent) in the five monthsafter the conversation should have put (the architect) on noticethat he did not yet have a policy. Failing to examine one's mail isnot a defense.” The court also found it relevant that the caseconcerned commercial insurance. “A significant distinction existsbetween business insurance policies and personal insurancepolicies,” the court said. “The ease of procuring an auto orhomeowners policy contrasts sharply with the customization requiredfor a business policy.”

The court concluded: “A contract to procure insurance may arisewhen the agent has definite directions from the insured toconsummate a final contract; when the scope, subject matter,duration and other elements can be found by implication; and whenthe insured gives the agent authority to ascertain some of theessential facts. A duty to procure insurance may arise when anagent accepts an application; makes a bare acknowledgment of acontract covering a specific kind of casualty; lulls the otherparty into believing a contract has been effected through promises;and has taken care of the insured's needs without consultation inthe past…. The court of appeals erred when it failed to determinethat the telephone conversation between (agent) and (client)created neither a contract nor a duty to procure insurance. Wereverse.” (Note: Agents and brokers should not rest easier justbecause of the outcome in this case. I don't think juries or courtsin every state will always be this sympathetic to agents andbrokers.) Harris vs. Albrecht, 2004 UT 13 (Utah 02/06/2004) 2004 UT13, 2004.UT.0000033 (www.versuslaw. com).

Readers may fax Don Renau at (502) 897-1533. His e-mail addressis [email protected].