Companies and their producers may end up in different venues because of provisions
in federal laws creating the National Flood Insurance Program (NFIP) and the
nature of the pleadings. Under federal law, matters related to improper administration
or adjustment of claims under the NFIP are issues falling exclusively under
federal jurisdiction. Questions relating to procurement of flood insurance fall
within the state's authority.
A recurring theme of agent cases is the allegation (denied by agents) that
"My agent told me I didn't need flood insurance." In Carr v. David Denison and Nationwide Mutual Fire Insurance, for example,
the Carrs contend that agent Denison specifically advised them against purchasing
flood insurance. Relying on this advice, the Carrs did not purchase flood insurance
and suffered losses during Katrina. Other cases contain similar charges.
Perhaps the best known case is Leonard v. Nationwide.
In Leonard, the agent advised against purchasing
flood insurance "unless they (the Leonards) lived in a flood prone area (Flood
Zone A) where flood insurance was required in connection with mortgage loans."
Since there was "no evidence in the record establishing the standard of care
applicable to an insurance agent who is asked about the advisability of purchasing
flood insurance," the court drew no conclusions about agent negligence. Further,
the court could find no evidence in the record pertaining to the "standard of
care for the training of insurance agents who are authorized to sell and interpret
flood insurance policies." The decision does not address the issue as to whether
the agent's actions should have been addressed in state as opposed to federal
Standards Applicable to Agent Liability
Leonard may represent a roadmap for plaintiffs
who harbor ill feelings about agent conduct. For example, Leonard suggests that to hold agents liable for
negligence, insureds are advised to present evidence of agent training about
the flood insurance program, agent duty to advise, and general standards of
care expected of insurance producers in Mississippi.
Tests for agent liability may be viewed as a continuum. At one extreme is
agent as order taker in which the agent—purchaser relationship is strictly a
commercial one and liability for negligence is extremely unlikely. At the other
extreme is a fiduciary role in which the agent's duty is to act in the best
interest of the insured. A fiduciary relationship will most likely support a
liability allegation. At some point along the continuum is a "special relationship"
with an insured. This is "A nonfiduciary relationship having an element of trust,
arising especially when one person trusts another to exercise a reasonable degree
of care and the other knows or ought to know about the reliance." (Black's
Law Dictionary, 7th ed.)
Black's defines reasonable care as
"the degree of care that a prudent and competent person engaged in the same
line of business or endeavor would exercise under similar circumstances."
According to Webster's New World College Dictionary, prudent means "capable of exercising
sound judgment in practical matters, esp. as concerns one's own interests; cautious
or discreet in conduct, circumspect, not rash." Competent means "well qualified; capable;
The definition of reasonable care is in the conjunctive (prudent and competent).
While defenses of "it is custom and practice in the industry" are often raised
on behalf of agents, i.e., the agent acted as everyone else in the business
of selling insurance acts, unless custom and practice conform to standards of
prudence and competence, this defense will probably fail. Persons who doubt
this only need to recall New York Attorney General Eliot Spitzer's attacks on
a widespread custom and practice in the industry relating to contingent commissions.
Other examples abound.
The actual character of the agent-insured relationship, however, is a fact
driven determination based on the nature of the relationship and not necessarily
on how long the parties have dealt with one another. The pursuit of several
questions aids in determining where the relationship rests along the continuum.
Is the agent independent or captive? Independent agents exercise more
discretion and may be viewed as agents of the insured more often. Captive
agents who own stock in their companies or who benefit from employee benefit
programs may be attacked for conflict of interest.
Is the agent a broker? (Brokers typically represent the insured and must
satisfy a heightened standard of duty to the insured.)
Did the agent receive a fee for advice given to the insured? Additional
fees trigger a likelihood of liability.
Does the agent advertise that he is an expert or specialist? Agents often
refer to their professionalism without considering the implications. Professionals
are held to a higher standard than nonprofessionals. Further, it is not
necessary for an agent to be a professional. Merely leading people to believe
an agent assumes a professional status may be sufficient. My guess is that
Web pages and Yellow Page ads are receiving close scrutiny in Mississippi.
Has the agent made insurance decisions for the policyholder in the past?
Did policyholder expressly assign certain duties to the agent or insist
upon certain endorsements? An instruction to be sure that "I am fully covered"
or to secure flood insurance for my home and contents" if not done can spell
trouble for agents.
Did the agent conduct a risk analysis to determine what coverage to suggest?
A positive response to this question can harm an agent's defense.
To what extent did the policyholder rely on the agent in selecting coverage?
Reliance, of course, is usually essential for plaintiffs to win.
Should the agent have known that the insured relied on her opinions and
recommendations? This is another hurdle facing plaintiffs and highlighting
the necessity of examining the nature of the insured and agent relationship.
Is there a longstanding business or personal relationship between the
agent and the policyholder? A "yes" adds to the probability of liability.
How many other policies have been sold to the insured by the same agent
or agency? This question may be a measure of the intensity of the relationship
How many meetings and discussions occurred between the agent and insured
on the policy in question? Similar in nature to the preceding question.
What is the insured person's level of sophistication about insurance?
And are the insurable risk exposures reasonably within the common understanding
of the insured, or do they require special knowledge? Greater dependence
on the selling agent increases the probability of establishing a special
Did the agent make use of any illustrations or other materials during
the sale? This is a double-edged sword. Failure to present evidentiary materials
about the policy and coverages may be construed as negligence. Presenting
documents that have a capacity or tendency to deceive, on the other hand,
may prove equally disadvantageous for agents.
Did the agent receive any special training on any of the potential risk
exposures? Failure to train suggests negligence. Moreover, if an agent received
training but her conduct failed to show that it took, the training entity
(usually an insurer) may be off the hook, but the agent will have a problem
Answers to these questions will assist fact-finder juries to determine whether
the relationship is one in which the agent can be held liable for failure to
meet the requisite standard of care.
Additional Sources Addressing Agent Standards of Care
Recent developments in agent training, especially the emphasis on mandatory
courses covering principles of ethical behavior, may create problems for agent
defendants. Agents are required to take continuing education courses. The course
materials and the instructors are approved by the state Departments of Insurance.
In essence, an agent's schooling represents a form of state action. Consequently,
what agents are taught, as suggested by the court in Leonard, should be of interest to the courts. Certainly, the printed
material on which this training is based will likely be subjects of discovery
and close analysis as Katrina cases proceed. To illustrate its relevance to
Judge Senter's suggested queries in Leonard,
I cite the following examples from The Market
Conduct Handbook for Agents published by BISYS Education Services which, inter alia, includes the following admonitions
Agents have professional and fiduciary responsibilities to insureds.
Agents have a duty to evaluate a client's insurance needs and to make
proper recommendations about insurance (Note: The term "client" implies a more than casual relationship between insureds
and agents. Professionals have clients; nonprofessionals have customers.)
Failure to cover an insured's need, thereby creating a gap in coverage,
can result in a valid legal claim against an agent.
Erroneous advice that something is covered when it is not can result
in a valid claim against the company, which, in turn, can recover from the
An agent must clearly explain policy provisions including what is covered
and what is not, to ensure that there are no misunderstandings at claims
After meeting with a client, agents should always document the final
outcome as a record of what was discussed, what was recommended, and what
the client chose to buy.
In some respects, the standards appearing in the training material on ethical
practices are ahead of common law relating to agent conduct. In effect, then,
there may be two sets of standards; what the common law of the state recognizes
and what the state-approved training materials teach. To use a track and field
analogy, the former is a low hurdle; the latter, a matter for pole vaulters.
A Closing Example
As indicated above, some plaintiffs allege that an agent advised them that
they did not need flood insurance. Assume for sake of argument that the basis
for the recommendation is that the property was not located in Zone A. One problem
with the recommendation is that NFIP's publication, "Myths and Facts about the
National Flood Insurance Program," begins with the following: "WHO NEEDS FLOOD
INSURANCE? EVERYONE." (Emphasis added.) NFIP further reports that 20 to 25 percent
of all NFIP paid claims are for property outside areas with the most significant
risks of flooding.
With this information available to agents, would a prudent and competent
agent recommend against buying flood insurance? Are these facts material? Should
a prudent and competent agent know these facts? Shouldn't a prudent and competent
agent at least share the NFIP information with clients? Is an agent who is unaware
of this information incompetent, thereby failing the competency test, and unable
to act prudently as a result? If an agent is aware of this information but does
not disclose it, is that an affirmative act of omission? My guess is that if
courts are open to examinations of agent training materials (as the language
in Leonard suggests) a broadened sense of duty
may be imposed on Mississippi agents. Introducing evidence about agent training
may further serve to bring common law and regulatory sanctioned standards more
closely in alignment.
For more information, see the September 2007 article, Rethinking Concurrent Causation and the Flood Exclusion:
Further Comments on Katrina-Related Coverage Disputes.