Down To Cases

Despite interaction with client, agent found to have no duty to procure coverage
An architect in Utah decided to form his own firm in 1987. His business grew considerably; between 1995 and 1997, he made substantial investments in equipment and office furnishings, which prompted an interest in obtaining business insurance. He contacted an insurance agent who previously had provided the architect's personal-lines insurance, including auto and umbrella policies and coverage on the architect's home, boat and recreational vehicle. This agent and the architect had conducted most of their business over the telephone, talking every couple of months. A conversation generally consisted of the architect's request for personal-lines insurance coverage, followed by the agent's fulfillment of each request, without detailed discussion of different types of coverages, according to the case notes.

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

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

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

Was there a contract to buy insurance? Not according to the court. “We conclude that no contract of insurance existed between (the architect and the agent),” the court said. “They did not discuss any of the elements essential to an insurance contract except that (the architect) 'wanted business and fire coverage on the equipment and the contents' of his architectural business. Where a person seeks to enter into a contract of insurance with an insurance company or its agent, it is understood that the negotiations will not ripen into a contract until the parties arrive at an agreement as to all of the elements which are essential to an insurance contract, including the subject matter to be 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 a contract of insurance.”

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

In this case, the court found that the agent did not have sufficiently definite directions from the architect to consummate the final insurance contract. The architect had requested business insurance and fire coverage for the contents and equipment of his firm. To procure business insurance, the agent needed to know the type 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 to know the value of all furniture and equipment, accounts receivable and building improvements. The agent also needed to know the size of the desired deductible, when the architect wanted coverage to take effect, why the architect had previously not insured his business, whether there had been any prior losses and, crucially, the value of architectural documents and other valuable papers. The agent could not turn to any of the architect's previous policies to obtain this information because all of those policies were personal-lines policies. Furthermore, the court noted, the architect failed to give the agent authority to ascertain some of the essential facts. He merely made a general request for insurance, which fell short of such a grant of authority. “Creation of a contract to procure insurance requires that the agent know or have ready access to the information needed to procure the insurance or be able to imply the terms from prior dealings,” the court said. “If the insured gives authority to the agent to obtain some information, he must do so explicitly.” Another issue in this case was whether the agent assumed a duty to procure insurance when he allegedly told the architect “he would take care of that” and would come out and to look at the equipment after the architect contacted him. The court cited a case [Alford vs. Tudor Hall and Assocs., Inc., 330 S.E.2d 830, 832-33 (N.C. Ct. App. 1985)] holding that “a court must look to the conduct of the parties and the communications between them, and more specifically to the extent to which they indicate that the agent has acknowledged an obligation to secure a policy. Where an insurance agent or broker promises, or gives some affirmative assurance, that he will procure or renew a policy of insurance under circumstances which lull the insured into the belief that such insurance has been effected, the law will impose upon the broker or agent the obligation to perform the duty which he has thus assumed. Further, if the parties have had prior dealings where the agent customarily has taken care of the customer's needs without consultation, then a legal duty to procure additional insurance may arise without express and detailed orders from the customer and acceptance by the agent.”

The court said that the agent's alleged statement that “he would take care of that” and would come out to look at the equipment “is not a bare acknowledgment of an obligation to procure insurance because the statement that 'he would come out and look at the equipment' indicated that (the agent) needed to gather more information or do other work before procuring a policy. A bare acknowledgment occurs when an agent confirms coverage pending the issuance of a formal policy.”

The court held that the agent's comments “failed to rise to the level of a promise to procure insurance and were insufficient to lull (the architect) into believing a policy had been procured, because they lacked the requisite specificity. An agent must affirmatively assure the insured that a policy will be procured or has been procured. (The architect) argues that their prior dealings lulled him into believing (the agent) would procure insurance. Rather, (the architect) lulled himself into believing he had an insurance policy. No reasonable and experienced businessperson would believe the conversation here gave rise to a duty to procure insurance when considered in light of its brevity and the lack of any specificity for such a complex and customized type of policy. Even if (the agent's) comments lulled (the architect) into believing (the agent) would procure a policy, the fact that (the architect) never completed an application, never received a bill or policy and was never contacted by (the agent) in the five months after the conversation should have put (the architect) on notice that he did not yet have a policy. Failing to examine one's mail is not a defense.” The court also found it relevant that the case concerned commercial insurance. “A significant distinction exists between business insurance policies and personal insurance policies,” the court said. “The ease of procuring an auto or homeowners policy contrasts sharply with the customization required for a business policy.”

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

Readers may fax Don Renau at (502) 897-1533. His e-mail address is drenau@thepoint.net.