Agent E&S Implications Of Nationwide Flood Decision Debated

Mr. Fletcher himself was dismissed as a defendant when the case moved to federal court in Mississippi, but how he handled his dealings with Mr. Leonard is important for a number of reasons, some lawyers and E&O brokers say.

Peter Biging, a partner with the firm of Lewis, Brisbois, Bisgaard & Smith LLP in New York, for example, said the decision absolving Nationwide by Judge L.T. Senter appeared to be a narrow one that could easily have gone the other way, and agents should not assume that they are off the hook for policy and coverage questions.

"I don't think that agents should necessarily take solace in this" and believe they can give sloppy or incomplete advice to clients "without ramifications," he said.

Generally, Mr. Biging said, there is no duty for an agent or broker to provide advice or guidance on coverage unless the agent has a special relationship with the client, having worked with the client for a long period of time, as an example, or unless the agent is asked specifically about the coverage.

In the Leonard case, Mr. Biging said the court was "being careful' and "made a fine distinction" in exactly what Mr. Fletcher, the agent, was asked.

But David P. Rossmiller, an insurance coverage litigator who represents both insurance companies and policyholders at Dunn Carney Allen Higgins & Tongue, LLP, in Portland, Ore., said while the case raises issues about the potential duty of care of insurance agents, it is "potentially less troubling than other cases around the country."

Specifically, "if I was an agent I would be worried far more about the Harts vs. Farmers case," Mr. Rossmiller said, referring to the case decided by the Michigan Supreme Court in 1999.

"What Leonard said for agents was that the agent allegedly said, 'You don't need flood insurance.' That was not a statement of fact. You can't have a basis on the suit through an opinion, because that is not a statement or a misrepresentation of fact."

Mr. Rossmiller explained, "For there to have been actionable misrepresentation, he would have had to say something factual and gotten it wrong."

In general, Mr. Rossmiller said the law is that insurance "agents" do not have a duty of care except in special circumstances because the agent in most cases is not working for the policyholder, but for the company.

Even independent agents are not representing the policyholder, Mr. Rossmiller added. Their duty is to the company.

"The law does not impose on the agent a duty as an advisor in the same way as your financial advisor or your lawyer," he said. "An insurance agent doesn't have the same duty as a lawyer. The customer is charged in an insurance transaction with knowing his own needs."

The Harts case is one lawyers and insurers talk about because it is one in which the court held that "full coverage" is an ambiguous statement that needs explanation, Mr. Rossmiller said. "People most often want the least insurance they can get away with," he observed. "Who could ever know what is the optimal level of insurance?

"Harts is troubling because it raised the bar on when an agent has to respond to an ambiguous request, like giving advice as to what insurance a consumer should buy," he said.

"Those kinds of cases are still in the minority, but there are a number of them out there that are troubling," Mr. Rossmiller said. "But, generally, courts are going to agree that an agent is under no affirmative duty as to what insurance you should get, or how much insurance you need to buy unless there is some agreement that amounts to a contract between the insured and the agent that extends the duty beyond merely taking an order for insurance."

In the Harts case, the Michigan Supreme Court ruled there were "special circumstances" triggered when a customer made a request for "full coverage"–a request, the court ruled, that requires a clarification.

On the other hand, Tonya Hollederer, an assistant vice president at Russell Bond & Co., a wholesaler and managing general agency in Buffalo, N.Y., commented, "I think that the Leonard case has definitely brought to light the need to be more proactive in how you interact with your clients."

As a result of the Leonard case, she said, "as a wholesaler we are trying to bring different coverage options to our brokers to help protect them from potential E&O claims from their clients, where they did not offer a particular type of coverage."

"There is heightened concern as a result of this case," she added. For agents, there is "concern throughout the industry about being blind-sided by not realizing their responsibility to the client."

Adding to the concern is that every state is different, she said, with even states adjacent to each other having widely differing criteria for evaluating potential liability.

The Leonard case was tried in Mississippi and state law does play a role, she said, adding there are other factors involved. "Some states are tougher than others," she said. "My understanding is that even from New York to New Jersey, there is a wide variation over what the duty of care of the agent is."

States vary as to whether an agent has a duty to present all the available options to a client, she said. "One of the issues is that the client knows their business better than an agent can possibly know it, so if there is a change, how is the agent to know unless the client presents it to them?

"It may be difficult for an agent to present all the possible coverages if the agent is not made aware of all the possible exposures," she explained

State courts, she added, are examining whether an agent has the same responsibility as other professionals, like doctors, lawyers, or certified public accountants. "Or, does an insurance agent have a lesser responsibility than that type of professional? Courts are asking," she said.

"It is being reexamined within each company and within each state, and across the board within the industry," Ms. Hollederer said. "It is an exposure for everybody."

Among the reasons the case is important, according to National Flood Insurance Program Administrator David Maurstad, is that about 50 percent of property owners in high-risk flood areas lack flood insurance.

But the issue is not confined to flood insurance, Ms. Hollederer said. She cites as an example employment practices liability, which she termed "an undersold coverage," as a way for agents to protect themselves from E&O liability. "Agents should present this coverage to all their business clients," she said.

"A perfect example would be the client who has a discrimination situation being dealt with by the Equal Opportunity Employment Commission. When the client asks, 'What policy do we report this under,' the agent says, 'Oh, I am sorry, you don't have that coverage.'"

"The agent has the responsibility to present that coverage to the client," she said.

Like other experts, Ms. Hollederer said that that one of the things the courts look at is the relationship between the agent and the client. For example, she said that if the agent collects a fee in addition to a commission, "then the courts may rule that the agent has a higher level of duty of care owed to that client. In that case, the agent is putting himself forth not only as an agent, but also as a consultant."

Other factors examined include how long the insured has been a client of the agent, and whether the client uses multiple agents for their insurance program, or just one exclusively, she said. "If they use just one agent, the courts tend to see that as increasing the level of responsibility."

Ms. Hollederer added, "What we tend to recommend to brokers from the wholesale end is that they are better off presenting the broadest available coverage to the client and then, if the client feels the premium is too high, let the client decide the level of coverage they want. Then document thoroughly that the client has refused the coverage."

Flag: The Ruling

What The Judge Said

In his ruling in Paul Leonard and Julie Leonard vs. Nationwide Mutual Insurance Company, Judge L.T. Senter accepted the fact that Jay Fletcher, a Nationwide agent, told his client he did not need flood insurance. But why shouldn't Mr. Leonard buy flood insurance? The question wasn't asked or answered, according to the court.

Judge Senter found that Mr. Fletcher "did not materially misrepresent" the terms of Nationwide's policy. He wrote:

o "Leonard apparently inferred that Fletcher's reason for advising that he did not need a flood policy was that his homeowners policy would cover…water damage…This was an erroneous inference, and one that might have been avoided had either party…been more articulate in his inquiry or…response."

o "There is no evidence in the record to establish a standard of care applicable to an insurance agent who is asked about the advisibility of purchasing flood insurance."

o "Fletcher and Leonard never had any discussion of specific policy provisions and coverages."