The Supreme Court of South Carolina ruled that neither an insurer nor an agent had the duty to sell insureds the best flood insurance policy at the best rates in Houck v. State Farm Fire and Cas. Ins. Co., No. 26043, 2005 WL 2351297 (S.C. Sept. 26, 2005).
State Farm issued Standard Flood Insurance Policies (SFIPs), pursuant to the National Flood Insurance Program (NFIP), to Appellants (Homeowners) through its agent, John Mallet.
Under the NFIP, if insureds meet certain criteria, they may qualify for a Preferred Risk Policy (PRP). In 1995, coverage limits under PRPs were increased, and State Farm began inserting brochures in its renewal notices “advising insureds of the increased coverage limits available, as well as reduced premiums” for insureds in particular flood zones. According to State Farm, the Federal Emergency Management Agency (FEMA) did not require companies to notify insureds of the increased coverage available.
Homeowners brought action against State Farm, alleging that “State Farm owed them a duty to advise and inform them of their eligibility for a PRP, and to sell them the less expensive policy.”
While Homeowners agreed that an agent does not have a duty to advise an insured at the time of application, a duty can be implied. The court listed three criteria that are considered in determining if an implied duty has been created: “(a) the agent received consideration beyond the mere payment of the premium, (2) the insured made a clear request for advice, or (3) there is a course of dealing over an extended period of time which could put an objectively reasonable insurance agent on notice that his advice is being sought and relied on.”
Homeowners contended that Mallet received consideration beyond just premiums because the federal government bears the losses associated with the SFIPS, so State Farm incurs no losses. The court said that is true of either the SFIP or PRP and that it does not show that Mallet received anything beyond payment of premiums.
The court also said that no evidence existed that any Homeowners made clear requests for advice.
Regarding the third criterion, the court said that it saw no evidence that it had been met. Insureds testified that they had little or no contact with Mallet. One insured said that she just assumed Mallet was her agent and would find her the best coverage.
Homeowners further argued that, according to State Farm's Flood Insurance Operation Guide, one of State Farm's responsibilities in underwriting flood policies was to confirm eligibility and charge proper rates. Homeowners interpreted “charge proper rates” to mean “charge the lowest rates available.” The court, though, pointed out that the rates for the SFIPs were proper, if not the lowest rates.
The court concluded, “We find as a matter of law that neither State Farm nor agent Mallet owed Homeowners a duty to sell them the best policy at the lowest available price.”