By Barry Zalma, founder of Zalma InsuranceConsultants

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Michael Paul and others sued their insurance agents in Minnesotastate court only to have the trial court dismiss their negligenceand contract claims against the insurance agency (the “agency”).The Minnesota Court of Appeal, in  Michael Paul, et alv. Wayne Holmgren D/B/A Wayne W. Holmgren & Sons, NoahInsurance Inc., Vineland-Huntsville Mutual Insurance Co. No.A11-1645 (Minn.App. 06/25/2012) found part of the trial court'sjudgment erroneous and part appropriate.

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In July 2009, the Pauls purchased a house for their daughter andson-in-law, the Helgesons. At the time of the purchase, the Paulsand the Helgesons (the “Pauls”) were aware that the foundationneeded to be repaired or replaced. The Pauls met with an insuranceagent at the agency to obtain insurance to cover the house. Theagency is an independent insurance agency that places insurancepolicies with several different insurance companies, includingVineland-Huntsville Mutual Insurance Co. (“Vineland”). The Paulsinitially requested a homeowners' policy. Because the Helgesons didnot own the house, they did not qualify for such a policy. Theagency procured a renters' policy for the Helgesons and a “namedperils” dwelling-owners' policy for Mr. and Mrs. Paul. Vinelandplaced both policies. The dwelling-owners' policy included an“increase of hazard” provision, stating that Vineland would “notpay for loss if the hazard is increased by any means within thecontrol or knowledge of any insured.”

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Related: Read Zalma's previous column “20/20Hindsight.” 

In November 2009, the Helgesons hired Wayne Holmgren to movethe house to a new foundation. On Dec. 23, 2009, the house fellfrom a dolly while it was being moved and was a total loss.Following the loss, appellants discovered that Holmgren did nothave proper insurance to cover moving the house. The Pauls thenmade a claim for the loss under the dwelling-owners' policy.Vineland denied coverage stating that the loss was not caused by aperil specifically covered by the policy. The Pauls filed suitagainst Holmgren, Noah and Vineland. They claimed that Holmgren wasnegligent and breached his contract. Appellants alleged negligenceand breach-of-contract claims against the agency for failing toprocure insurance to cover the house move. They also filed abreach-of-contract claim against Vineland for its denial ofcoverage under the dwelling-owners' policy.

Vineland and the agency moved separately for summary judgmentand the district court granted both motions. The trial court foundthat, by attempting to move the house, it was undisputed that thePauls had increased the risk of hazard. The loss was therefore notcovered by the policy. 

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The Pauls appealed the entry of summaryjudgment, arguing that genuine issues of material fact remain as towhether Noah's agent breached his duty and whether thedwelling-owners' insurance policy should be reformed. 

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The Pauls asserted a negligence claim against the agency forfailing to provide coverage for moving the house. In a decisionreleased after the district court issued its order, the SupremeCourt recognized a claim for negligent procurement of insurancecoverage. Graff v. Robert M. Swendra Agency Inc., 800N.W.2d 112, 116 (Minn. 2011). 

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To prove a claim for insurance agent negligence the plaintiffsmust prove:

1. That the agent owed a duty to the insured to exercisereasonable skill, care, and diligence in procuring insurance
2. A breach of that duty
3. A loss sustained by the insured that was caused by the agent'sbreach of duty.

The Pauls contended that the district court misapplied the lawregarding an insurance agent's duty by requiring them todemonstrate that they requested coverage for moving the house.Because appellants made no “specific or general request” for suchcoverage and no evidence showed any “special circumstances”creating an affirmative duty, the district court granted summaryjudgment for Noah regarding whether its agent breached his duty ofcare in procuring insurance.

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Related:Read another column by Barry Zalma “When Lawyers Err.”

An insurance agent in most states has the duty to exercise thestandard of skill and care that a reasonably prudent person engagedin the insurance business will use under similar circumstances.Generally, this duty has been seen as limited to acting in goodfaith and following the insured's instructions. The insuranceagent's duty to act reasonably, however, is not contingent on aspecific or general request from the insured for a certain type ofcoverage. If special circumstances exist, then the insurance agentmay possibly be under a duty to take some sort of affirmativeaction, rather than just follow the instructions of theclient.

An agent may thus have an affirmative duty to offer additionalcoverage when the agent is aware that the insured needs coveragefrom a specific threat

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In opposition, the Pauls submitted an expertaffidavit of an insurance agent who had worked in the insuranceindustry for 38 years. The expert affidavit stated the standard ofcare required of the agency to: 

1. Tell appellants that Vineland's policy would not providecoverage for moving the house
2. Procure the necessary coverage for moving thehouse 
3. Inform the Helgesons that he was not sure whether thedwelling-owners' or renters' policies would cover damage incurredfrom moving the house. 

The court of appeal concluded that the Pauls sustained theirburden in opposing summary judgment by producing evidenceconcerning the standard of care governing an insurance agent inthese circumstances.

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“Increased Risk” Exclusion

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Finally, the Pauls argued that the district court abused itsdiscretion by denying coverage under the policy's “increased risk”exclusion. Specifically, they contend that because the agency wasaware that the house would be moved, moving the house was not an“increased risk” as defined by the policy. The court of appealfound that the argument is unpersuasive. The dwelling-owners'insurance policy stated it would not pay for loss if the hazard isincreased.

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Related: Read the column “Who Reps Whom?” by BarryZalma.

The “increased risk” exclusion is not based on an insurer'sknowledge of the risk, but rather whether the insured's actionsincreased the risk. Moving the house was clearly a hazard withinthe control or knowledge of the insured. The trial court properlydetermined that “[s]uch an action so obviously increases the riskof hazard that it would be an inappropriate question for a jury todecide.” The district court did not abuse its discretion ingranting Vineland's motion for summary judgment because appellants'actions increased the risk of hazard and the policy did not coverthe loss.

Insurance agents and brokers, when advised by an insured thatthey will do something that increases the hazard normal to adwelling policy, but does not ask for different coverage, can, asthis case points out, place the agent or broker's assets at risk ifthey do not take affirmative action to cover the risk or advise theinsured that such a risk is not one they can issue. Of course, ifthe house mover had obtained competent coverage, this suit wouldnot have been filed.

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The insureds lost most of their case, perhaps because of theirown negligence in obtaining insurance coverage and retaining a lessthan competent house mover, but were given a chance by the court ofappeal to prove that the agent had knowledge of the increase orchange in hazard—moving a house is about as obvious as it canget—and did nothing to get appropriate coverage or warn that nonewas available.

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A simple note in the file that they knew about the move and gavethe proper advice would support a defense verdict as will theinability of the Pauls to prove they told the agent they weremoving the house to a new foundation.