No Lie

The best practice for every insurance agent, broker and applicant is to always read every word before signing the application. An applicant who embraces the tedious but important task of reviewing the terms of an insurance application is likely to avoid disputes and litigation. The insurance agent or broker who asks every question on the application for insurance, and ascertains that the applicant understands each question, that the answers on the application are the answers of the applicant and that the applicant understands that the insurer will rely on the information in making its decision to insure, will avoid disputes and litigation.

In Kristen Cox Morrison v. Paul Allen Et Al, No. M2007-01244-SC- R11-CV, filed February 16, 2011, an insurance agent filled out an application for life insurance without asking all of the questions of the person seeking insurance. One of the questions on the application asked: “In the past 5 years, have any proposed insureds been charged with or convicted of driving under the influence of alcohol or drugs or had any driving violations?” The agent caused the application to answer “no” although he knew or should have known the answer was “yes.” Had the applicant seen this question and corrected the answer, the litigation might have been avoided.

In Morrison, the basic facts were that Mr. and Mrs. Morrison obtained life insurance policies on each of their lives from their insurance agents, Roberts and Allen. The agents filled out the applications and sent them to the Morrisons to sign with instructions on where to sign, which they did. Although the applications contained the typical warnings regarding misrepresentations and contained an affirmation that the statements therein had been read, neither of the Morrisons read the applications before signing them. Two months later, Mr. Morrison died. The insurance company then denied Mrs. Morrison's claim for benefits under the policy, alleging misrepresentations in the application (failure to disclose a DWI). After filing suit, Mrs. Morrison ultimately settled her claim with the insurance carrier for $900,000 ($100,000 less than policy limits), but proceeded to trial against the insurance agents, Roberts and Allen. After a bench trial, the trial court awarded a judgment to Mrs. Morrison against the defendant agents for breach of contract and negligence and further found the defendants violated the Tennessee Consumer Protection Act.

Related: Read Zalma's article “Read Your Application”.

Elements of cause of action

The Supreme Court adopted the following elements for a cause of action for failure to procure a policy that could not be contested by the insurer:

1. An undertaking or agreement by the agent or broker to procure insurance
2. The agent's or broker's failure to use reasonable diligence in attempting to place the insurance and failure to notify the client promptly of any such failure
3. That the agent's or broker's actions warranted the client's assumption that he or she was properly insured.

The Supreme Court held “that if an agent undertakes to obtain an insurance policy for an insured, and the policy obtained is contestable due to the acts or omissions of the agent, then the applicant has the same right to recover for failure to procure as he or she would have had if no policy had issued at all.”

The insured must show that he contracted with the agent to procure an insurance policy and then reasonably relied on the agent “to successfully complete the groundwork for procuring the policy.” Accordingly, a cause of action arises “where coverage is denied by the insurer on a policy that is contestable as a result of the acts or omissions of the agent.

Court Absolves Insured

The Supreme Court concluded that an applicant's failure to read an application does not insulate agents from liability. The court stated: “When an applicant applies for an insurance policy and the agent undertakes to fill out the application on his or her behalf, the applicant should be able to trust that the agent will ask the important questions and accurately record the answers to them so that the policy cannot later be successfully contested based on inaccuracies.”

Related: Read the article “Cancellation to Litigation” by Barry Zalma.

The evidence presented at trial showed that the entire application process was marked by inattention to detail and casual attitude toward accuracy on the part of Allen and Roberts. For example, Roberts had seen Mr. Morrison smoke cigars, yet the brokers marked “no” on the application question regarding use of tobacco products. Roberts and Allen knew that Mr. Morrison had an insurance policy and intended to replace it with the new policy, but on the application they indicated that Mr. Morrison had no existing coverage. Allen never asked Mrs. Morrison any questions from the application except for a brief phone call during which he asked for her driver's license and Social Security numbers. He received the rest of her information from Mr. Morrison. Yet Allen certified that he personally saw the proposed insured on the date of the application, asked each question and accurately recorded the answers.

In Tennessee, if an agent undertakes to obtain an insurance policy for an insured, and the policy obtained is contestable due to the acts or omissions of the agent, then the applicant has the same right to recover for failure to procure as he or she would have had if no policy had been issued at all. For the identical reason, if only a portion of the insurance policy is subject to forfeiture due to the acts or omissions of the agent, then the applicant has the same right to recover for failure to procure as he or she would have had if the coverage had been less than that sought.

A cause of action for failure to procure, therefore, may arise where coverage is denied by the insurer on a policy that is contestable as a result of the acts or omissions of the agent. There is no distinction between an agent's procurement of coverage that is contestable by the insurer and an agent's failure to procure at all. When an applicant applies for an insurance policy and the agent undertakes to fill out the application on his or her behalf, the applicant should be able to trust that the agent will ask the important questions and accurately record the answers to them so that the policy cannot later be successfully contested based on inaccuracies.

Related: Read Zalma's article “Writer's Cramp”.

Here, the Morrisons justifiably relied upon the defendants to obtain a viable life insurance policy that the insurer could not contest. The plaintiff testified that the defendants never went over the questions on the life insurance policy in person or on the phone. She specifically recalled that when the applications arrived in the mail, they were in a package containing the Morrisons' paperwork for their college savings plan and their mutual fund, all of which were filled out and all of which had “sticky notes” attached directing them where to sign. There was no cover letter with instructions or correspondence from the defendants. And while Morrison had time to review the completed application and seek clarification as to any of the terms, the plaintiff's testimony that “it was obvious that [the Defendants] had done everything for us and all we needed to do was sign” and that she “had no idea that there were questions on the application.”

This case should convince every insurance agent and broker of the need to spend time with applicants for insurance and avoid litigation by asking every question on the application and ascertain that the answers marked on the application are the answer of the applicant. If not, be ready to defend a lawsuit when the insurer attempts to void the insurance policy because of misstatements on the application.