Agents' Errors & Omissions Review is excerpted from The Professional Edge newsletter which is published by SAFECO Insurance Companies in conjunction with the marketing administrators for SAFECO's agents E&O program.
When it rains, it pours
At issue: The lawsuit was filed by Plaintiffs Henri Lynn Burton ("Burton") and Kadi Casey ("Kadi"). Burton and Kadi were involved in a single-vehicle accident on April 16, 1990. They were traveling in an automobile driven by James Casey ("James") when he lost control of the vehicle and hit an embankment. James was Burton's husband and Kadi's father at the time of the accident. James and Burton had liability insurance and uninsured motorists coverage through State Farm.
Burton and Kadi filed a liability claim with State Farm, alleging that James' negligence had caused the collision and their injuries. State Farm, on May 22, 1990, denied the liability claim on the basis of the family-member exclusion contained in the insurance policy. Four years later, on April 14, 1994, Burton and Kadi brought the lawsuit against State Farm and Bill Kurtz, the insurance agent who sold the policy to James and Burton. State Farm moved for summary judgment.
The court, granting a partial summary judgment, dealt with no fewer than seven causes of action which were filed against the carrier and its agent as follows:
1. The causes of action against State Farm for breach of the common law duty of good faith and fair dealing, violations of the Texas Deceptive Trade Practices and violations of the Insurance Code, accrue on the date the insurance claims are denied. The plaintiffs' claims and their causes of action accrued on May 22, 1990, and June 27, 1990, respectively. The statute of limitations for these causes of action is two years. Since Burton did not file her claim until April 14, 1994, four years after the causes of action accrued, the claims were barred by the statute of limitations. Kadi's claims were not barred by the statute of limitations because she was under 18 years of age.
2. The Duty of Good Faith and Fair Dealing. There is a duty, under Texas law, on the part of an insurer to deal fairly and in good faith with an insured in the processing of claims. A cause of action for breach of the duty of good faith and fair dealing exists when the insurer has no reasonable basis for denying or delaying payment. Texas courts have ruled, "Insurance carriers maintain the right to deny questionable claims without being subject to liability for an erroneous denial of a claim. A bona fide controversy is a sufficient reason for failure of an insurer to make a prompt payment of a loss claim."
State Farm denied the liability claim, in total, based on the family-member and family-owned-vehicle exclusion contained in the policy. There was controversy as to the validity of the family-member exclusion as applied to liability policies, and it was not held invalid by the Texas Supreme Court until two years after the State Farm denial of the claim. At the time of the denial, the liability claim was questionable, as there was a bona fide controversy regarding the enforceability of the exclusion. Thus, the plaintiffs could not establish that there was no reason for State Farm to deny the claim.
3. The Plaintiffs also argued that State Farm violated article 21.55 of the Insurance Code by failing to pay their claim promptly. Article 21.55 did not go into effect until September 1, 1991. A claim filed before that date is governed by the law that existed at the time the claim was filed. Since the claim was filed before that date, the plaintiffs' claim is without legal basis. The court said that article 21.55 does not require insurance carriers to pay claims promptly but, rather, requires them to notify claimants promptly in writing as to the acceptance or rejection of their claim.
4. Burton and Kadi claimed that Kurtz, the agent who sold them the policy, either intentionally or negligently misrepresented the scope of the policy's coverage at the time he sold them the policy.
Kurtz was dismissed from the action; however, State Farm could still be held liable for misrepresentations because Kurtz was acting as an agent of State Farm at the time. In Texas, a claim of misrepresentation is governed by a four-year statute of limitations. Therefore, the plaintiffs' claim of misrepresentation fell within the statute of limitations for this cause of action.
The court ruled, however, that the plaintiffs' negligent and intentional misrepresentation claims were not valid for the following reasons:
a. Under Texas law, an insured has a duty to read the policy and is bound by its terms. Even if an insured does not read the policy, he or she is still bound by the terms. Furthermore, if the insured thinks there is coverage on the policy, when in fact there is not, it is not grounds for misrepresentation.
b. Burton and Kadi did not claim that State Farm or Kurtz told them that they would be covered for the injuries if a family member was negligent in driving a covered vehicle. Instead, they claimed that Kurtz told them that the policy met the requirements of the Texas Safety Responsibility Act. When the policy was issued, it did meet the requirements of the act. It was not until two years after State Farm denied the claim that the family exclusion endorsement was held to be invalid. Thus, there was no misrepresentation of policy terms.
5. The plaintiffs, in their complaint, alleged breach of contract. The policy stated that State Farm will pay damages for which any covered person becomes legally responsible. The plaintiffs asserted a third-party claim seeking compensation for injuries sustained as a result of James' negligence. Instead of suing James, they sued State Farm.
Texas law states that a third-party claimant has no contractual rights under an insurance policy unless the liability of a covered person has been established by judgment or by written agreement with the insurance carrier. Burton and Kadi did not have proof of a written agreement or judgment establishing liability on the part of James. Furthermore, any claims by Burton against James for his negligence were barred by the two-year state of limitations.
6. State Farm asserted that the plaintiffs' uninsured motorist claims failed because the vehicle was not an uninsured vehicle as defined by the insurance policy. The policy excludes, from the uninsured motorist definition, any vehicle owned or furnished to the insured or family member. The court ruled that the purpose of uninsured motorists coverage is to protect the insured and his or her family from the negligence of others, not from the insured's own negligence. Furthermore, the court said that there was no physical contact between the Casey vehicle and another vehicle.
Henri Lynn Burton (Casey) et al., Plaintiffs v. State Farm Mutual Automobile Insurance Company, et al., Defendants, Viv. A. No. H-94-1666, U.S. District Court, S.D. Texas, 1994.
SAFECO's commentary: Plaintiffs and their attorneys, when filing lawsuits against insurance agents and carriers, often turn over as many rocks as possible looking for an avenue to the "deep pocket."
The court concluded that the plaintiffs failed to produce sufficient facts to establish a claim for the causes of action. In addition, they were barred by the statute of limitations. State Farm's motion for summary judgment was granted.
In this case, the carrier and agent did what was required of them by providing an insurance policy to the Casey family--yet were subjected to a lawsuit that incurred legal expenses and time. If there is a moral to this case, it is that being diligent and professional in meeting the needs of clients is the best defense in the event of an E&O claim.
Relying on carrier's poor service
At issue: The agent sent a workers compensation application to a carrier on May 30, 1995, requesting an effective date of July 1, 1995. The carrier asked for loss runs for the previous year by July 17 if coverage was to be bound. The agent, who received the loss information from the previous carrier on July 20, sent the data the same day to the carrier with a request to issue the policy. Meanwhile, the insured made the premium payment to the agency.
The agent assumed that coverage was in effect and did not follow up on the July 20 request to bind coverage. No confirmation from the carrier was received. Since the carrier usually took three to four months to issue policies, the agent regarded this as a customary delay and deemed it not unusual or unforeseen.
One of the insured's employees was stabbed to death while at work. The claim was submitted to the carrier. Since no policy was ever issued or bound, coverage was denied. The carrier had closed the file on July 17 unbound because the loss runs were not received by that date.
SAFECO's commentary: A carrier's poor service or delays should not dictate an agency's follow-up procedures. Long delays in issuing policies may indicate other problems in the carrier's office. If agents make assumptions, be aware that the carrier may fall short in other areas as well. The poorer the service...the more diligent should be the follow-up. The agent should have determined the status of coverage by July 1 and should have confirmed coverage on July 20, when the loss information was sent to the carrier. *
©COPYRIGHT: The Rough Notes Magazine, 1997