An excerpt from the article “Insurance Agent and Broker E&O: Developments in the Law on the ‘Duty to Advise’” by Peter J. Biging, published in the April 2012 edition of the PLUS Journal.

PLUS members can read this entire article on the PLUS website – you must be logged-in to the site to view this content.

Case Law Where Duty Was Imposed

While the above cases are each good examples of how courts have carefully considered efforts by insureds to impose a retroactive duty to advise upon their agents/brokers and refused to so, other recent cases show how the circumstances can be found to impose
such a duty, and consequently expose the agent/broker to liability for the uninsured portion of their client’s loss.

In Mladineo v. Schmidt, the Mladineos were a couple who had purchased a “hurricane policy” for a home they had purchased in Ocean Springs, Mississippi. After Hurricane Katrina hit, they suffered severe flood damage. Relying on the coverage provisions
and exclusions set forth in the policy, the insurer (Nationwide Property & Casualty) denied coverage for damage caused by flooding. The Mladineos thereupon sued the insurance agency and individual agent that had sold them the property coverage, as well as the insurer. As respects the agency (the Felsher Agency) and the agent (Schmidt), the Mladineos asserted

claims for, among other things, failure to procure, negligence, and negligent misrepresentation.

In support of their claims, the Mladineos alleged that they had asked Schmidt whether the hurricane policy would cover all wind and water damage caused by a hurricane, and were assured that it would. Additionally, they alleged that Schmidt had advised 
them that since the property was not located in a fl ood zone, their mortgage lender would not require them to procure fl ood coverage. However, subsequently they learned that, in fact, the rear portion of the property was located in a fl ood zone. They alleged that had they been properly advised of the fact that the hurricane policy would not cover water damage or that their property was partially located in a flood zone, they would have purchased fl ood coverage.

At the conclusion of discovery, the trial court dismissed the Mladineos’ claims on summary judgment, holding that the hurricane policy’s language made clear both that there was no coverage for flooding resulting from high tides or storm surges, and that loss resulting from flooding was excluded. The
trial court held that the insured had a “duty to read” the policy and “imputed knowledge” of the policy’s terms and conditions. Because they had received the policy and had it 4 months prior to the loss, and because, as a result, they were imputed to have knowledge of the policy terms as a matter of law, they could not claim that the coverage requested was not obtained,
and their reliance on any alleged misrepresentation made by the agent was per se unreasonable.

On appeal, the Mississippi Supreme Court reversed in part. As to the negligence claim, the Court held that: “Even actual knowledge and understanding of every word, phrase, and idea of the policy does not preclude the possibility that they may have bought more extensive coverage absent Schmidt’s alleged negligence.”

As to their failure to procure claim, the Court held that the fact that the Mladineos had received their policy with ample time to review it prior to the loss made it impossible for them to succeed on this claim. The Court explained that receipt of the policy without objection constituted acceptance of the policy that had been procured. As a consequence, it was not the failure to procure the correct policy that could thereafter be said to have proximately caused the uninsured loss. It was the “silent acceptance” of the policy that was the proximate cause. Further, with regard to the negligent misrepresentation claim, the Court held that the “duty to read” and the “imputed knowledge” doctrines worked to make it unreasonable for the Mladineos, as a matter of law, to rely on any representations contrary to the policy terms that were allegedly made by Schmidt.

This case shows that even where a “duty to advise” should generally not exist, careless comments upon which coverage decisions arguably could be said to have been based can have the impact of creating a “duty to advise”, or at least make the question of whether such a duty existed a jury question. Further, as the court parsed the claims out, a negligence claim can be pursued even where the court has found that the insured could not pursue a “failure to procure” or “negligent misrepresentation” claim with regard to the coverage actually procured.

While a number of the recently reported decisions with regard to the “duty to advise” have involved property insurance, a significant decision on this subject was issued in 2010 in the context of a D&O policy. In National Association of Investors Corp. v. DobsonMcComber Agency, Inc.,20 the plaintiff (NAIC) was a non-profi t corporation established to provide its members with investment education. Defendant
Dobson-McComber Agency (DMA) was an independent insurance agency for 50 years. Defendant Daniel Tiedgen (Tiedgen) was an executive vice president at DMA who had been responsible for NAIC’s account for 15 years.

DMA had first procured Chubb directors and officers (D&O) coverage for NAIC in the 1990’s, and NAIC had renewed the coverage each year thereafter. Th e policy provided $1 million in coverage, and since 1998 contained an “insured vs. insured” exclusion which had been included when employment practices liability coverage was added by NAIC.

In May 2004, expressing concern about the sufficiency of the coverage and whether there were any coverage gaps they should be concerned about, NAIC’s VP of Finance sent the account representative at DMA an email asking if he could make a presentation to the Board of Trustees, or have Chubb come in, to answer questions like:

  • who is specifically covered
  • how much coverage is enough
  • what are the circumstances under which organizations like ours would/could be sued
  • is there a common plan to follow if some individual or group decides to sue the board, individuals on the board, the organization overall, etc.

Tiedgen agreed to give the presentation, and stated it was not necessary to bring in a representative from Chubb. In making this statement via email, he included a “risk analysis of coverage for D&O liability” which did not mention the “insured vs. insured” exclusion, and thereafter he gave a presentation to the Board during which he distributed a color-coded chart depicting “NAIC entities, exposures as we understand them and coverage as currently constituted” which also made no mention of the “insured vs. insured” exclusion. Subsequently, NAIC was sued by a former board member who alleged he had been unlawfully removed from the board. Notice of the claim was given to Chubb, but Chubb denied the claim based on the “insured vs. insured” exclusion. NAIC then brought suit against DMA and Tiedgen alleging negligence.