By Barry Zalma, founder of Zalma Insurance Consultants

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

In July 2009, the Pauls purchased a house for their daughter and son-in-law, the Helgesons. At the time of the purchase, the Pauls and the Helgesons (the “Pauls”) were aware that the foundation needed to be repaired or replaced. The Pauls met with an insurance agent at the agency to obtain insurance to cover the house. The agency is an independent insurance agency that places insurance policies with several different insurance companies, including Vineland-Huntsville Mutual Insurance Co. (“Vineland”). The Pauls initially requested a homeowners' policy. Because the Helgesons did not own the house, they did not qualify for such a policy. The agency procured a renters' policy for the Helgesons and a “named perils” dwelling-owners' policy for Mr. and Mrs. Paul. Vineland placed both policies. The dwelling-owners' policy included an “increase of hazard” provision, stating that Vineland would “not pay for loss if the hazard is increased by any means within the control or knowledge of any insured.”

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

In November 2009, the Helgesons hired Wayne Holmgren to move the house to a new foundation. On Dec. 23, 2009, the house fell from a dolly while it was being moved and was a total loss. Following the loss, appellants discovered that Holmgren did not have proper insurance to cover moving the house. The Pauls then made a claim for the loss under the dwelling-owners' policy. Vineland denied coverage stating that the loss was not caused by a peril specifically covered by the policy. The Pauls filed suit against Holmgren, Noah and Vineland. They claimed that Holmgren was negligent and breached his contract. Appellants alleged negligence and breach-of-contract claims against the agency for failing to procure insurance to cover the house move. They also filed a breach-of-contract claim against Vineland for its denial of coverage under the dwelling-owners' policy.

Vineland and the agency moved separately for summary judgment and the district court granted both motions. The trial court found that, by attempting to move the house, it was undisputed that the Pauls had increased the risk of hazard. The loss was therefore not covered by the policy. 

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

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

To prove a claim for insurance agent negligence the plaintiffs must prove:

  1. That the agent owed a duty to the insured to exercise reasonable 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's breach of duty.

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

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

An insurance agent in most states has the duty to exercise the standard of skill and care that a reasonably prudent person engaged in the insurance business will use under similar circumstances. Generally, this duty has been seen as limited to acting in good faith and following the insured's instructions. The insurance agent's duty to act reasonably, however, is not contingent on a specific or general request from the insured for a certain type of coverage. If special circumstances exist, then the insurance agent may possibly be under a duty to take some sort of affirmative action, rather than just follow the instructions of the client.

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

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

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

The court of appeal concluded that the Pauls sustained their burden in opposing summary judgment by producing evidence concerning the standard of care governing an insurance agent in these circumstances.

“Increased Risk” Exclusion

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

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

The “increased risk” exclusion is not based on an insurer's knowledge of the risk, but rather whether the insured's actions increased the risk. Moving the house was clearly a hazard within the control or knowledge of the insured. The trial court properly determined that “[s]uch an action so obviously increases the risk of hazard that it would be an inappropriate question for a jury to decide.” The district court did not abuse its discretion in granting Vineland's motion for summary judgment because appellants' actions increased the risk of hazard and the policy did not cover the loss.

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

The insureds lost most of their case, perhaps because of their own negligence in obtaining insurance coverage and retaining a less than competent house mover, but were given a chance by the court of appeal to prove that the agent had knowledge of the increase or change in hazard—moving a house is about as obvious as it can get—and did nothing to get appropriate coverage or warn that none was available.

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

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