By Joel Bailey

Law360 (August 17, 2020, 6:06 PM EDT )

Joel Bailey

In the current COVID-19 environment of shelter-in-place and closed or struggling businesses, clients and attorneys will scour applicable insurance policies for coverage arguments to sustain their businesses and ultimately survive during this tumultuous time. Similarly, insurers will pursue creative arguments against coverage based on the policy's language and exclusions.

However, beyond the policy itself, certain businesses — such as health care businesses and governmental contractors — can explore a different liability angle: whether liability exists against the insurance agency or insurance agent who sold the applicable policy to the business without fulfilling its duties under Texas law. 

Under Texas law, insurance agents who sell insurance policies owe clear duties to their customers. As the Texas Supreme Court explained in May v. United Services Association of America:

An insurance agent who undertakes to procure insurance for another owes a duty to a client to use reasonable diligence in attempting to place the requested insurance and to inform the client promptly if unable to do so.[1]

According to the U.S. District Court for the Southern District of Texas in Aspen Specialty Insurance Co. v. Muniz Engineering Inc., liability is imposed against the insurance agency when the agent induces the plaintiff to rely on his performance to procure appropriate insurance, "and the plaintiff reasonably, but to his detriment, assumed that he was insured against the risk that caused his loss."[2] 

In practice, because many businesses lack the experience or expertise to purchase an appropriate policy, they retain and rely upon insurance agencies to "use reasonable diligence in attempting to place the requested insurance."

Indeed, at least one Texas court — the state's Thirteenth Court of Appeals, Corpus Christi — recognized in Insurance Network of Texas v. Kloesel that liability may be appropriate against an insurance agency given the insurance agency's experience and expertise.[3] And before May, some Texas courts broadly explained the duties and relationships between an insurance agent and the customer. In Trinity Universal Insurance Co. v. Burnette, the Court of Civil Appeals of Texas, Beaumont, explained:

A local agent ... owes his clients the greatest possible duty. He is the one the insured looks to and relies upon. Most people do not know what company they are insured with. The insured looks to the agent he deals with to get the coverage he seeks, with a sound company who can and will properly and promptly pay claims when they are due. It is his duty to keep his clients fully informed so that they can remain safely insured at all times.

During the course of requesting insurance, certain businesses may have requested that their insurance agent obtain a policy that provided adequate and sufficient coverage for mandatory shutdowns or pandemics like the ones many businesses experience today.

For example, health care businesses and governmental contractors are particularly suited to have anticipated and requested the potential need for coverage necessary to fill the gap during a pandemic for shelter-in-place order. As these types of businesses review policies, they may discover that their insurance agent did not deliver what was requested.

If the business requested coverage for situations like the one so many are experiencing in connection with COVID-19, and if the insurance agent or agency failed to obtain this coverage, the insurance agency may be exposed to liability theories of negligence, negligent misrepresentation or breach of the Texas Deceptive Trade Practices-Consumer Protection Act.

Indeed, as the Aspen court explained, insurance agencies must take steps to ensure that the insurance policy requested has "some semblance to what the client requested." In Aspen, the court denied the insurance agency's summary judgment because the policy procured was "just a small fraction" of the insured's business despite the business being offered a general commercial liability policy covering all of its operations.[4] 

In response, insurance agencies may argue that there is no duty under Texas law for an insurance agency to extend certain protections merely because the agent has knowledge of the potential need for such coverage.[5] Because whether a duty exists is a question of law for the court to decide,[6] the insurance agency could seek early dismissal of any negligence theories of liability through summary judgment on the duty question.

However, a plaintiff may be able to undercut this position by pointing to the holding in May where the Texas Supreme Court unequivocally held that certain duties certainly exist under the law and apply to insurance agencies. Thus, in rebuttal, the plaintiff would likely argue that the question is not one of duty because of the Texas Supreme Court's decision in May; rather, the applicable question is whether that duty was breached by the conduct of the insurance agent or insurance agency.

This rebuttal by the plaintiff arguably transforms the dispute from a legal determination for the court (whether a duty exists), to a question of fact that is generally considered and evaluated by a jury (whether a duty was breached).[7]

Insurance agencies may also argue that the insured has a duty to read its policy and have knowledge of its terms.[8] Utilizing this case law, insurance agencies may argue that if their customer chose not to review the policy to confirm coverage and terms, that the insurance agency cannot be responsible.

However, an insurance agency's use of this case law may be hindered if the insurance agent failed to use reasonable diligence to place the policy requested in the first place. Moreover, the insurance agency's customer may be able to similarly demonstrate that these holdings do not necessitate summary judgment. Instead, the plaintiff can assert that whether it bears any fault for not reviewing its policy closely enough goes to the proportionate responsibility question that a jury should decide under Chapter 33 of the Texas Civil Practice and Remedies Code.

Because insurance agencies likely have considerable more experience and knowledge of insurance contracts, it may prove difficult to convince a jury that their customer should bear more responsibility.

Assuming a plaintiff's liability claims move past summary judgment on the questions of law, the next issue for the plaintiff is proving its damages. At a high level, the structure of the damages model can be fairly straightforward: What was the value of the insurance policy requested versus the value of the insurance policy wrongfully obtained by the insurance agency?

Solely by way of example, if the customer requested a policy with a $10 million limit if a global pandemic shuts down its business, but the insurance agency only obtained a policy with a $8 million limit, the customer could have a $2 million damages theory. In practice, however, a plaintiff will likely need expert testimony in order to demonstrate the value of the policy it requested.

Similarly, the plaintiff will need evidence demonstrating that the insurance agent was told about the nature of coverage needed, or at least that the insurance agency — utilizing its experience in the industry — should have known the appropriate values had the agency used reasonable diligence.

Therefore, from the beginning of the case, a plaintiff should evaluate its damages model and damages theory to understand what evidence will be necessary, including the nature and type of expert needed to support the requested damages. Otherwise, the plaintiff faces a potential pitfall in pursuing relief.

Therefore, just as businesses evaluate whether coverage exists under applicable insurance policies and proceed to litigate that issue for years to come, certain businesses should also evaluate what requests were made to its insurance agents for the policy itself, and whether the insurance agency fulfilled its request.

Did the business specifically request complete coverage in the event of a mandatory shut-down or in a pandemic? Did the insurance agent make broad representations about the type of coverage provided that was inconsistent with the policy language itself?

If the insurance agent or agency did not fulfill the requests made or made misrepresentation regarding coverage, the business may consider asserting claims such as negligence, DTPA, fraud, or negligent misrepresentation against its insurance agency in litigation.

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Joel Bailey is a partner at Hedrick Kring PLLC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. 

[1] May v. United Servs. Ass'n of Am. , 844 S.W.2d 666, 669 (Tex. 1992).

[2] Id.; Aspen Specialty Ins. Co. v. Muniz Eng'g, Inc. , 514 F. Supp. 2d 972, 982 (S.D. Tex. 2007).

[3] Ins. Network of Tex. v. Kloesel , 266 S.W.3d 456, 478 (Tex. App.—Corpus Christi 2008, pet. denied) ("Because an insured who hires and pays a professional agent does so to reduce, if not eliminate, the risk that an inadequate policy will be procured, it stands to reason that insurance consumers who instruct their agents to provide coverage should be entitled to have those instructions followed without regard to the insured's failure to detect the agent's negligent conduct.").

[4] Aspen, 514 F. Supp. 2d at 986.

[5] See Pickens v. Texas Farm Bureau Ins. Co. , 836 S.W.2d 803, 805 (Tex. App.—Amarillo 1992, no writ).

[6] Greater Houston Transp. Co. v. Phillips , 801 S.W.2d 523, 525 (Tex. 1990).

[7] Ray v. Farmers State Bank of Hart , 576 S.W.2d 607, 609 (Tex. 1979) ("As a general rule, the determination of negligence is the province of the trier of fact."); In re Molina, 575 S.W.3d 76, 81 (Tex. App.—Dallas 2019, no pet. h.) ("Whether conduct amounts to negligence is generally a question for the factfinder."); Strobach v. WesTex Comm. Credit Union, No. 08-17-00182-CV, 2019 WL 3812366 at *10 (Tex. App.—El Paso Aug. 14, 2019, no pet. h.) ("[T]he question of whether a defendant acted with or fell below the standard of ordinary care is usually a question of fact for the jury.") (internal citations omitted); Katy Springs & Mfg., Inc. v. Favalora, 476 S.W.3d 579, 589 (Tex. App.—Houston [14th Dist.] 2015, pet. denied) ("Whether a defendant breached its duty is a question of fact.").

[8] Garrison Contractors Inc. v. Liberty Mut. Ins. Co. , 927 S.W.2d 296, 300 (Tex. App.—El Paso 1996).

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