Allstate Ins. Co. v. Tarrant - Part 1

In March 2012, the Tennessee Supreme Court issued a landmark opinion concerning the liabilty of insurers and insurance agents in cases involving failure to procure and maintain appropriate insurance coverage.  The case is Allstate Ins. Co. v. Tarrant.  The case is a "must read" for insurance practitioners, and is full of good nuggets.  Today I'll address the basic facts of the case and the first issue of ratification.

The basic facts in the Tarrant case were that Mrs. Tarrant was involved in an automobile accident, resulting in injuries to the driver of a motorcycle.  The injured motorcycle driver then sued the Tarrants, alleging that they were liable for his injuries. After the personal injury suit was filed, a dispute arose between the Tarrants and their vehicle insurer, Allstate, as to the amount of insurance coverage that was available.  Allstate claimed that Mr. Tarrant had requested that his agent move the vehicle from a commercial policy with limits of $500,000 to a personal policy with limits of $100,000.  Mr. Tarrant denied that he directed his agent to make that change, and that the transfer was the result of the agent's mistake. 

The agent didn't deny that the agency may have made a mistake, but argued that it was the Tarrants' responsibility to notify the agency of the mistake upon his receipt of the proof of insurance cards.  Instead, Mr. Tarrant did not notify the agent and continued to pay premiums.  Based on these facts, the trial court held that Mr. Tarrant ratified the change of insurance by continuing to pay premiums on the policy after receiving notice of the change.  The Supreme Court upheld the Court of Appeals' reversal of this decision, holding that an insured cannot ratify the actions of the insurance agent because the agent, by statute, is regarded as the agent of the insurance company, not the insured.  The full reasoning of the opinion is too in depth to discuss here, but the entire decision was premised around the application of Tenn. Code Ann. 56-6-115(b), which states that an insurance producer who obtains an application for insurance must be considered to be the the agent of the insurer and not the insured.  Applying that statutory mandate to the elements of ratification (which requires an adoption, approval or confirmation of a contract previously executed by another in his stead and for his benefit), the Supremes held that Mr. Tarrant could not have ratified the agent's actions.

Another interesting thing about the case is that the Court's decision was not in the slightest bit affected by any question of whether the agent was a true agent of the company as opposed to a broker, which is usually regarded as an agent of the insured.  In fact, the court implicitly noted that the same rules would apply to both because the relevant statute applies to "insurance producers," which are statutorily defined as persons required to be licensed under the laws of the state to sell, solocite, or negotiate insurance.

There were several other important points in the case that I'll address in following posts.  But for those who haven't heard, just wait til you hear what our Legislature did in response to this opinion!


Morrison v. Allen, Part II

Yesterday I wrote about the February 2011 landmark decision of the Tennessee Supreme Court in Morrison v. Allen.  There was one relatively minor point concerning an alleged misrepresentation in an application that grabbed my attention.  In Morrison, the insurance company denied Ms. Morrison's claim for life insurance benefits based on alleged misrepresentations of her husband in his application for insurance.  Specifically, the application asked, "In the past five years, have any proposed insureds been charged with or convicted of driving under the influence of alcohol or drugs or had any driving violations?"  The insured answered, "No."

The alleged misrepresentation arose from the insured's conviction for driving while impaired ("DWI") a couple of years prior to the submission of the application.  On first glance, it might appear clear that failure to disclose the DWI would constitute a material misrepresentation based on the language of the question in the application.  But not so fast.  The Supreme Court affirmed that the insured's response was technically correct because he was convicted of DWI, which is a separate offense from driving under the influence.  

Although this particular issue was literally just a footnote in the very lengthy opinion, it might come in handy one of these days for the unfortunate soul who finds his claim denied as a result of an undisclosed DWI.


Tennessee Supreme Court Redefines the Law of Insurance Agent Liability

On February 16, 2011, the Tennessee Supreme Court rendered a landmark decision concerning insured's rights to pursue claims against their insurance agents for failure to procure appropriate insurance.  The case is Morrison v. Allen, and can be found here.  

In Morrison, the basic facts were that Mr. and Mrs. Morrison obtained life insurance policies on each of their lives from their insurance agents, Roberts and Allen. The agents filled out the applications, and sent them to the Morrisons to sign with instructions on where to sign, which they did.  Although the applications contained the typical warnings regarding misrepresentations and contained an affirmation that the statements therein had been read, neither of the Morrisons read the applications before signing them.  Two months later, Mr. Morrison died.  The insurance company then denied Ms. Morrison's claim for benefits under the policy, alleging misrepresentations in the application (failure to disclose a DWI).  After filing suit, Ms. Morrison ultimately settled her claim with the insurance carrier for $900,000 ($100,000 less than policy limits), but proceeded to trial against the insurance agents, Roberts and Allen.  After a bench trial, the trial court awarded a judgment to Ms. Morrison against the defendant agents for breach of contract and negligence and further found the defendants violated the Tennessee Consumer Protection Act.  

The Supremes then totally revamped and redefined the law of agent liability in the State of Tennessee.  A few broad principles emerge:

First, the Court adopted the following elements for a cause of action for failure to procure:  (1) an undertaking or agreement by the agent or broker to procure insurance; (2) the agent's or broker's failure to use reasonable diligence in attempting to place the insurance and failure to notify the client promptly of any such failure; and (3) that the agent's or broker's actions warranted the client's assumption that he or she was properly insured.

Second, the Supreme Court held "that if an agent undertakes to obtain an insurance policy for an insured, and the policy obtained is contestable due to the acts or omissions of the agent, then the applicant has the same right to recover for failure to procure as he or she would have had if no policy had issued at all."

Third, a finding of liability does not require evidence that an insured specifically request an "immediate incontestability clause"  or a promise by the agent that the policy would be incontestable.  On the contrary, all that is required is that the insured show that he contracted with the agent to procure an insurance policy and then reasonably rely on the agent "to successfully complete the groundwork for procuring the policy."  Accordingly, a cause of action arises "where coverage is denied by the insurer on a policy that is contestable as a result of the acts or omissions of the agent.

Fourth, and here's where it gets interesting, the Court held that an applicant's failure to read an application does not insulate agents from liability.  "When an applicant applies for an insurance policy and the agent undertakes to fill out the application on his or her behalf, the applicant should be able to trust that the agent will ask the important questions and accurately record the answers to them so that the policy cannot later be successfully contested based on inaccuracies."  Put simply, an insured's failure to proofread an application is inconsequential in a failure to procure case, and the signature of the applicant does not shield the agent from liability.

And that just covers 15 pages of the 27 page opinion.  More to follow in the coming days on this case that is a huge win for policyholders in the State of Tennessee.



But I Thought I Had Flood Insurance . . . Is My Agent Responsible?

Over the past couple of days, that's a phrase I've heard several times, and its an issue that raises an interesting question --  Are insurance agents potentially liable for the flood damage suffered by Tennessee residents across the state?  I think the answer is yes.  

This is really a more complicated question than one might think, but one thing is for sure in Tennessee and that is an insurance agent has a duty to his client, the insured, to make sure that he or she is appropriately insured.  In fact, the very reason people use insurance agents is to gain the benefit of having someone on their side who is inside the industry, knows the language, and to advise them as to what additional coverages that might be necessary.  

One common recurring theme is the scenario in which the agent never mentions flood insurance at all.  There was no reference at all to the fact that flood damage is excluded from general residential and commercial policies, no mention of the fact that flood damage is available at an additional cost, and no advice at all concerning the uninsured flood risk.   I believe this scenario can create liability for the agent for the otherwise uninsured flood loss.  

My read on Tennessee agent liability law is that it is much more favorable than many of our sister states.  There are several cases that provide some sound principles for trial courts to follow in the circumstances that face us.  For example, the Tennessee Court of Appeals has expressly held that an insurance agent cannot unilaterally make a decision as to whether or not a consumer needs certain coverage, but rather the agent has a duty, as a matter of law, to educate the client and give him or her the option of obtaining the additional coverage.  This is a sound principle that resonates with common sense.  People rely on their agents to help them understand complicated insurance policies that 95% of the population doesn't even read, much less understand.  If there is a gap in their coverage, they rely on their agent to advise them of that fact.  If an agent fulfills that obligation, then the consumer can make an informed decision about whether to take on the additional premiums.  

I would encourage anyone who was shocked to learn that they don't have insurance coverage for flood damage to contact a qualified attorney.  My firm, Gilbert Russell McWherter PLC, is offering free consultations to those who believe they may have a claim.  Even if you don't, we're happy to field calls from all affected citizens and to offer practical advice on getting past these incredibly difficult times.