Agency E&O Liability for Failing to Procure Coverage

Insurance agents can be sued by their clients for breach of contract or negligence when they fail to procure appropriate insurance coverage. Generally, an insurance agent or broker who undertakes to procure insurance for a client owes an obligation to the client to use reasonable diligence in attempting to place the insurance or notify the client in a timely manner if the agent or broker is unable to obtain the insurance requested. When the agent undertakes to procure insurance for a client, the agent must exercise reasonable care, skill, and good faith diligence in seeking to obtain the insurance.

There are three distinct contexts in which the question of inadequate coverage arises: (1) where the agent does not indemnify the client against a particular risk; (2) where the agent acquires a policy for the client but fails to provide a sufficient amount of coverage; and (3) where the agent fails to provide the client with the best coverage available at the best price.

An example of the first situation can be found in Bayly, Martin & Fay, Inc. v. Pete’s Satire, Inc., 739 P.2d 239 (Colo. 1987) where the agent was held liable to the client for obtaining a multi-peril business insurance policy for the client’s restaurant and bar that did not provide liquor liability coverage as requested by the client.

An example of the second situation can be found in Cusimano v. St. Paul Fire & Marine Ins. Co., 405 So.2d 1382 (La. App. 1st Cir. 1981) where the agent was held liable to the client for procuring an automobile insurance policy that provided the client with $100,000 less in liability coverage.

An example of the third situation is found in Beacon Industries, Inc. v. Walter Kaye Assoc., Inc., 789 F.2d 172 (2nd Cir. 1986) (applying Connecticut law) where the broker was found negligent in obtaining an insurance policy that failed to contain provisions that would have resulted in reducing the client’s premiums. Thus, the insurance agent in Beacon Industries, Inc. failed to provide the client with the best coverage available at the best price.

An insurance agent’s primary function as it relates to a client is to faithfully negotiate and procure the insurance coverage requested by the client in accordance with the client’s instructions. The insurance agent must have an adequate legal reason to justify a departure from the client’s instructions or the agent will be held liable for damages that may arise.

A question can arise as to whether the client’s instructions were clear, explicit, absolute and unqualified. Where the client’s instructions are ambiguous, obscure, or fairly susceptible to different interpretations, the agent may not be held liable in those situations where the agent acted in good faith and on a reasonable interpretation of the client’s instructions. As an example, in Nowell v. Dawn-Leavitt Agency, Inc., 617 P.2d 1164 (Ariz. App. 1980), the agent was held not responsible for his failure to procure flood insurance for the client’s property in a situation where the client instructed the agent to obtain the “best policy” to cover the property. The court noted that the instruction given by the client was too ambiguous to give rise to a duty on the part of the agent to obtain specific coverage, such as flood insurance, as opposed to a general peril policy which the agent actually acquired for the client.

Where the client does not specify that the agent is to acquire insurance from a particular company, the agent may exercise discretion in selecting the company. In exercising this discretion the agent must exercise the skill and diligence that is ordinarily exercised by insurance agents generally in that particular field.