Duties of Insurance Agents to Their Customers

I.          Duties Of An Insurance Agent

            There is a lot of confusion regarding what an insurance agent does and their responsibilities to their clients. This blog post will outline the basic responsibilities that insurance agents have to their customers.

            A.        Duty To Procure

            Perhaps the oldest and most discussed duty on the part of an agent is the duty to procure a policy for an insured. In Burroughs v. Bunch,[1] suit was brought by the insured against the agent for failing to obtain an insurance policy on a house which was under construction. The court of appeals then stated the controlling law as follows:

An insurance broker agreeing to obtain insurance has a legal duty to obtain same and if he cannot do so to notify his principal of failure.[2]

            The rule was later emphasized by the Beaumont Court of Appeals in Scott v. Conner.[3] The court stated the law as follows:

It may be laid down as a general rule that a broker or agent who, with a view to compensation for his services, undertakes to procure insurance on the property of another, and who fails to do so, will be held liable for his failure to do so.[4]

            Additionally, in Rainey-Mapes v. Queen Charters, Inc.,[5] the jury found that the agents had agreed to procure a policy free of a particular type of exclusion and were negligent in failing to do so.[6] Therefore, negligence in failing to procure insurance applies not only in failing to procure a policy all together, but in failing to procure a policy of the type requested by the insured.[7]

            The fact that the agent or broker may exercise reasonable diligence in attempting to procure the insurance will not relieve the agent or broker of liability where he has failed to notify the insured of his inability to obtain insurance.[8] In the Powell case, the court of appeals held that:

The rule seems to be settled that if an insurance agent or broker, with a view toward being compensated, undertakes to procure insurance for another and, through fault and neglect, fails to do so, he will be held liable for any damage that results thereby. The failure of an agent or broker, even after the exercise of reasonable diligence to procure insurance, to notify the insured of the agent’s inability to obtain insurance, will likewise impose liability upon him. [Citations omitted.] Obviously, then, an insurance agent has a duty to his client, not to advise the client that he is covered by insurance if he is, in fact, not so covered. The suit is not upon any oral contract of insurance. It is a negligence action. The mere fact that workmen’s compensation coverage on only part of Narried’s business could not be obtained was no defense to the theory of this action. If it could not be obtained after the agent had undertaken to procure the insurance, the failure of the agent to notify the insured of his inability was actionable.[9]

            The basis for imposing liability in this situation is that the agent induced the insured to rely upon his/her promise to procure insurance. As a result the plaintiff reasonably assumed he was insured, when he was not, against the cause which caused his loss.[10]

An agent must also keep clients informed as to progress of application, particularly where client could have avoided risk until coverage was secured.[11] There is also a duty to inform the client if an agent is unable to place the requested insurance.[12]

            Lastly, in order to establish causation of damages, a plaintiff must establish the availability of an insurance policy that would have provided the requested coverage.[13] If no policy would have provided the requested coverage, then a failure to procure insurance cannot be proven.[14]

            B.        Duty To Keep Insured Informed

            Texas courts have held that an agent has a duty to keep his or her clients fully informed so that they can remain safely insured.[15] The Texas Supreme Court, in May v. USAA, recognized a duty on the part of an agent “to keep his or her clients fully informed so that they can remain safely insured.”[16] Additionally, in Trinity Universal Ins. Co. v. Burnette, the court held that an agent has a duty to renew policy, replace it, or notify client of non-renewal.[17] Most commonly, an agent will satisfy this duty by informing an insured of a non-renewal, lapse or cancelation of insurance.

            This issue typically arises in the context of policy expiration dates. In Kitching v. Zamora,[18] the issue before the court was whether an insurance agent could be held liable for failing to keep a customer informed about the expiration date of the customer’s insurance policy. The Texas Supreme Court held that:

An insurance agent, who receives commissions from a customer’s payment of insurance policy premiums, has a duty of reasonably attempting to keep that customer informed about the customer’s insurance policy expiration date when the agent receives information pertaining to the expiration date that is intended for the customer.[19]

            Additionally, this duty to keep an insured informed has been extended to other parties as well. In the Corn case, a mortgage company was a named insured under the policy and also paid the premiums. The holding in the Kitching case was extended when the court held that:

An insurance agent who receives a commission from the payment of the insurance policy premium by the named mortgagee in the policy, knowing that the mortgagee pays for the coverage and whose servicing of the policy includes notification to the insured of the expiration and nonrenewal of the policy, has a duty of reasonably attempting to keep the mortgagee informed about the policy expiration date and nonrenewal.[20]

            C.        Duty In Selection Of Company

            The duty to exercise care in the selection of company has been recognized by Texas courts, particularly in the context of the solvency of the insurers. In Higginbotham & Associates, Inc. v. Greer, the court held that an agent could not be held liable for losses resulting from an insurer's insolvency if the insurer was solvent at the time that the policy was procured, unless the agent or broker subsequently learned or should have learned of facts or circumstances adversely affecting the security of the coverage and failed to take reasonable steps to protect the insured at a time when such steps could have been taken.[21] More specifically, an agent should check the insurer's rating with services such as the National Association of Insurance Commissioners' Report, or Best's Insurance Report, and to avoid placing coverage with an insurer that has received an unfavorable rating.          

            D.        Duty To Acquaint Oneself With Insured’s Business

            At least one court has held there is a duty on the part of the agent to acquaint him or herself with the insured’s business. In Frank B. Hall & Co. v. Beach, Inc.,[22] the insured was a trucking company primarily engaged in the business of hauling and rigging oilfield equipment. The insured’s agent procured a policy with an exclusion for “lifting and rigging” and a definition for the term “in transit” which placed damage suffered by the insured outside of coverage. In addressing the duty owed by the agent, the court of appeals held that an agent’s admitted ignorance of the insured’s business was sufficient factual basis to support a jury’s finding of negligence.[23]

[1] Burroughs v. Bunch, 210 S.W.2d 211 (Tex.Civ.App.—El Paso 1948, writ ref'd).

[2] Id. at 214.

[3] Scott v. Conner, 403 S.W.2d 453 (Tex.Civ.App.—Beaumont 1966, no writ).

[4] Id. at 457.

[5] Rainey-Mapes v. Queen Charters, Inc., 729 S.W.2d 907 (Tex.App.—San Antonio 1987writ dism'd by agr.).

[6] Id. at 913.

[7] See May v. United Services Association of America, 844 S.W.2d 666 (Tex. 1992); Critchfield v. Smith, 151 S.W.3d 225 (Tex.App.—Tyler 2004, pet. denied); Talamantez v. State, 790 S.W.2d 33 (Tex.App.—San Antonio 1990, pet ref’d).

[8] Powell v. Narried, 463 S.W.2d 43, 45 (Tex. Civ. App.--El Paso 1971, writ ref'd n.r.e.)

[9] Id. at 45.

[10] May, at 669.

[11] Gulf-Tex Brokerage v. McDade and Associates, 433 F. Supp. 1015 (S.D. Tex. 1977).

[12] Sonic Systems Intern., Inc. v. Croix, 278 S.W.3d 377 (Tex. App. Houston 14th Dist. 2008), reh'g overruled, (Mar .5, 2009) and review denied, (May 28, 2010) (duty to inform the client promptly if unable to place requested insurance); Zuniga v. Allstate Ins. Co., 693 S.W.2d 735 (Tex. App. San Antonio 1985) (same).

[13] Metro Allied Ins. Agency, Inc. v. Lin, 304 S.W.3d 830 (Tex. 2009).

[14] Trinity Universal Ins. Co. v. Burnette, 560 S.W.2d 440 (Tex. Civ. App. Beaumont 1977, no writ).

[15] Id.

[16] May v. United Services Ass'n of America, 844 S.W.2d 666 (Tex.1992).

[17] Trinity Universal Ins. Co. v. Burnette, 560 S.W.2d 440 (Tex. Civ. App. Beaumont 1977, no writ).

[18] Kitching v. Zamora, 695 S.W.2d 553 (Tex.1985).

[19] Id. at 554.

[20] Horn v. Hedgecoke Ins. Agency, 836 S.W.2d 296, 299 (Tex. App.--Amarillo 1992, writ denied)

[21] Higginbotham & Associates, Inc. v. Greer, 738 S.W.2d 45 (Tex. App. Texarkana 1987, writ denied).

[22] Frank B. Hall & Co. v. Beach, Inc.,733 S.W.2d 251 (Tex.App.—Corpus Christi 1987, writ ref’d n.r.e.).

[23] Id. at 261.