Tennessee Supreme Court Deals Blow to "Duty To Read" and Broadens Agent Liability
July 2011
In many jurisdictions, the governing rule
is that purchasers of insurance have a duty to read their insurance policies
(including applications), and failure to do so, with few exceptions, is a
barrier to asserting claims against an insurer or agent.
by Tim Ryles,
Ph.D.
Tim Ryles Consulting
Tennessee courts, for example, have characterized failure to read a
contract before signing it as "gross negligence"1 and
held that "an insured has a duty to read and verify contents of his
application for insurance before signing it."2
While the rule may clear court calendars, its effect is not always fair to
policyholders. In Morrison v. Allen, 2011 Tenn. LEXIS 89 (Feb.
16, 2011), by its Supreme Court, Tennessee became the latest state whose
highest court has chipped away at this rule. Although the case involves a
life insurance policy, its relevance to agent liability is not limited to
that single line of insurance and may be a harbinger of expanding agent
liability in general.
Background of the Case
Howard and Kristen
Scott Morrison had a $300,000 term life insurance policy purchased in 2000.
After developing a social relationship with two insurance producers, Paul
Allen and Jody Roberts, the Morrisons determined that they had insufficient
insurance coverage. After the Morrisons discussed their concerns with Allen and Roberts
in late January 2004, the two agents agreed to shop the market for the Morrisons and provide financial planning services as well. The agents
collected personal information pertaining to underwriting factors from both
Howard and Kristen during the January meeting.
On February 10, 2004, the
agents recommended a $1 million term life policy for Howard and a $250,000
term life policy for Kristen from American General Life Insurance Company.
The premium for both policies was less than the cost for the soon-to-be
replaced $300,000 policy from another insurer. This policy was outside the
2-year period of contestability.
In a subsequent telephone conversation to
complete the applications on behalf of the Morrisons, Mr. Allen spoke with
Kristen. He did not speak directly with Howard.
Producers Allen and
Roberts mailed a packet of materials, including the applications, to the Morrisons for signatures. The applications contained question 17E: "In the
past 5 years, have any proposed insureds been charged with or been convicted
of driving under the influence of alcohol or drugs or had any driving
violations?" The agents had checked "No" as the answer. Among the paperwork
Howard signed, the following statement appeared:
I have read the above
statements or they have been read to me. They are true and complete to the
best of my knowledge and belief. I understand that this application: (1)
will consist of Part A, Part B, and if applicable, related forms; and (2)
shall be the basis for any policy issues. I understand that any
misrepresentation contained in this application and relied on by the Company
may be used to reduce or deny a claim or void the policy if: (1) it is
within its contestable period; and (2) such
misrepresentation materially affects the acceptance of the risk. [Emphasis
added.]
On page 4 of Part A, Howard's signature appeared in attesting to
the following statement: "I certify that the information supplied by the
proposed insured(s)/owner has been truthfully and accurately recorded on the
Part A application."
On February 27, 2004, the Morrisons signed the
applications in the places the agents had marked with "sticky notes."
Neither Howard nor Kristen read the application documents; no cover letter
accompanied the paperwork, and no oral instructions were given by phone.
Kristen later testified, "It was obvious that Jody and Paul had done
everything for us, and all we had to do was sign."
On May 7, 2004, a nurse
traveled to the Morrison residence to gather their medical history, conduct
a physical examination, and otherwise complete the application process.
Morrison answered "Yes" to the following question: "In the past 5 years,
have you had a moving violation or your driver's license restricted,
suspended, or revoked?"
The case record is silent as to any follow-up
phone contact by insurance company underwriters to verify whether the agents
had accurately recorded information on the applications.
American General
approved the policies, and there is no indication in the record that any
post-issue field underwriting occurred upon delivery to either confirm the
accuracy of the underwriting information or determine whether the Morrisons
had experienced any changes in health status. Neither applicant read the
policies. Moreover, there does not appear to have been any requests by the
Morrisons about acquiring an incontestable replacement policy, nor did the
agents advise the Morrisons that the incontestable clause started anew under
the American General policies. Neither agent negotiated a separate fee in
addition to the commissions for advising the Morrisons.
Two months after
the policies' effective date, Howard Morrison died from injuries suffered in
an automobile accident.
American General denied the death claim based on
the answer to Question 17E in the application when investigation revealed
that Mr. Morrison had a conviction for driving impaired, resulting in
restrictions on his operator's license. Kristen Morrison contended that had
the agents asked the question, he would have answered truthfully, and the
"Yes" answer on the medical schedule confirmed that her late husband did not
intend to conceal his traffic violation. Nevertheless, the insurer denied
the claim because the alleged misrepresentation occurred and the policy was
within the 2-year contestable period.
Kristen Morrison sued the agents and
the insurance company under several theories of recovery. One theory was
that the agents failed to procure an enforceable insurance policy based on
the new policy's incontestable provision, rendering it unenforceable. As is
true in most states, the incontestable clause was among the contract
provisions required by law. The Tennessee Insurance Code states at
56–7–2307(3):
Policy is Entire Contract; Incontestability; Exceptions. A provision that the policy shall constitute the entire
contract between the parties, and shall be incontestable after it has been
in force during the lifetime of the insured for a specified period, not more
than two (2) years from its date, except for nonpayment of premiums and
except for the conditions of the policy relating to naval and military
services in time of war.
The Issue before the Court
The court
framed the basic issue as whether the widow Kristen Morrison could recover
from the agents who failed to procure a life insurance policy that could not
be contested by the insurer.
Decision and Reasoning
In deciding
"Yes" to the issue, the court noted that the matter presented an issue of
first impression in the context of an insured's failure to read the policy;
it noted further that whether a duty to read is a sufficient defense for
agents is a "fact intensive inquiry."
Much of the court's opinion rests
on the notion that insurance agents serve "as insurance professionals" along
with "other fiduciaries" and, therefore, should be held to higher standards
than one would normally apply in ordinary sales transactions, adding:
The
basis for our decision … is a breach of contract between
the agent and the applicant for failure to procure a policy not subject to
contest. [Emphasis added.]
The court decided that, in this transaction,
the agents were "hired to buy a policy for their clients" and referred to
the trial court's "finding that the defendants had collectively breached
their employment contract by failing to procure an enforceable life
insurance policy."
Accordingly, Mrs. Morrison established a cause of
action "regardless of any failure to read the applications." The test as to
whether a producing agent can be liable for failure to procure rests on the
following elements:
(1) the agent or broker undertook or agreed to procure
insurance;
(2) the agent or broker failed to use reasonable diligence
attempting to place the insurance and failed to notify the client promptly
of any failure; and
(3) the agent's or broker's actions warranted the
client's assumption that he or she was properly insured.
In this case, the Morrisons hired the agents to acquire a $1 million life insurance policy on
Howard Morrison. The agents undertook that mission, and they failed. The
Morrisons, in turn, relied on the expertise of the agents and assumed they
were properly insured. Since the new policy was contestable, Mr. Morrison
was uninsured if he died during the first 2 policy years. Furthermore, the
agents assumed responsibility for completing the application; thus, under
these circumstances, reasoned the court, when an agent assumes this duty to
ask the questions, the applicant may trust the agent to record answers
correctly and may justifiably rely on the agent's work.
In dismissing the
duty to read defense, the justices expressed disagreement with the
defendants that an agent can be negligent in filling out an insurance
application and yet be shielded from any liability by the signature of the
applicant. In the court's words, "As agents employed by the Morrisons for
their expertise, the defendants may not claim any greater duty on their
clients' part to anticipate and rectify their errors."
The majority also rejected the argument that Mrs. Morrison needed
evidence that the Morrisons contracted for an immediate incontestable
clause, explaining:
If an insured contracts with an agent to procure an insurance
policy and reasonably relies upon the agent, based upon his or her
expertise, to successfully complete the groundwork for procuring the policy,
and the policy is successfully contested by the insurance company due to the
acts or omissions of the agent, the insured has not, in fact, received the
benefit of the bargain. Insurance that is obtained but later voided because
of acts or omissions by an agent is just as worthless as no insurance or
inadequate insurance…. There is no distinction between an agent's
procurement of coverage that is contestable by the insurer and an agent's
failure to procure at all.
Implications of the Decision
First, by labeling the agents as experts who must follow a higher
standard, the court laid grounds for weakening the duty to read principle.
The bottom line, as a result, is that, under current Tennessee common law,
insurance producers must now face the fact that an applicant's signature on
an application does not automatically absolve them of liability when they
fail to satisfy policyholder needs.
Second, a separate fee for providing advice is sometimes cited as a basis
for establishing a heightened sense of an agent's duty to the insured. In
Morrison, however, the court apparently
considered commissions from sales to be adequate consideration to satisfy
terms of an employment contract.
Third, since state law requires the incontestable clause, a question as
to whether it was possible for the agents to acquire an immediately
incontestable policy remains unanswered. Apparently, the defense did not
raise impossibility among its arguments.
Fourth, Morrison deals with an insurance
policy covering a specific, single risk: a man's life. In contrast, property
and casualty policies cover a myriad of risks. Substitute the following
terms for "incontestable" to gain insight into what
Morrison
could mean for property and casualty producers: flood insurance; defense
outside limits as opposed to defense within limits; replacement as opposed
to actual cash value; coinsurance penalty; availability of higher limits for
uninsured motorists; water exclusion; and full coverage. Add to these terms
the hundreds of endorsements that add or subtract coverage for a broader
glimpse of what the future may hold for Tennessee producers, who, under
somewhat unclear circumstances, may be viewed as employees of an insurance
applicant.
Finally, there is a growing emphasis on improving agent quality through
various certification programs and continuing education in a continuous
march toward expertise and professionalism. This is a two-edged sword, as
Morrison establishes. Greater expertise and
professional status also confer greater accountability.
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