INSURANCE AGENTS & BAD FAITH LAW

VERY BRIEF SUMMARY

Under Texas law, retained insurance intermediaries are not normally held liable for insurance bad faith, if for no other reason because insurance agents and their customs do not usually have the “special relationship,” as it is known in Texas law. As is often the case, there may be exceptions. The Supreme Court of New Hampshire has come up with a new idea with might be helpful to (or have a potential impact on) Texas jurisprudence.  It has been held that sometimes some insurance intermediaries do have a duty of good faith to their customers, although, usually, it is “merely” a typical merchant-customer relationship. 101 Ocean Blvd., LLC v. Foy Insurance Group, Inc., et al,  2021/2021011 (N.H. March 19, 2021).

MORE DETAILED DISCUSSION

Setting aside the rarity of bad faith playing a role in breach-of-contract cases, the Texas insurance law of bad faith does not apply to insurance agents of various sorts, aka insurance intermediaries.

Even the law of negligence–insurance intermediary malpractice–is applied narrowly. Often it is thought of this way: insurance intermediaries are not liable to customers on theories of negligence except when a customer has asked for a particular type of policy or a policy with certain, specific provisions, and the intermediary has failed to provide it, though it was available.  This provision of the law would not be triggered if the agent reasonably attempted to find it but could not, so long as the relevant information was provided to the customer within a reasonable period of time.

Given the way the idea of insurance bad faith is thought of in Texas law, the non-inclusion of intermediaries is sensible. The policy underlying insurer bad faith–the existence of “the special relationship”–hinges on the power and superior knowledge of insurance companies when compared to their usual insureds.

Some have doubts that the terminology developed to refer and quasi-describe insurers’ obligation of good faith to insureds, the phrase “special relationship,” is really informative or is a rhetorical device.

The locution “special relationship” does not fit with most intermediaries most of the time.  Moreover, insurance intermediaries, many of them small businesses, should not be continually subjected to questionable lawsuits, as they might well be if the applicable law of negligence were conceptually looser to them than it now is.

The Supreme Court of New Hampshire, however, has come up with a new idea the subtlety of which might be of interest to Texas jurisprudence. That court has held that sometimes some insurance intermediaries do have a duty of good faith to their customers, although, usually, that relationship is a typical merchant-customer relationship. 101 Ocean Blvd., LLC v. Foy Insurance Group, Inc., et al,  2021/2021011 (N.H. March 19, 2021)

There were a number of different issues in this case. My sole interest pertains to the court’s holding that there is such a thing as insurance intermediary bad faith. It was a split opinion, on one of the issues decided but not this one. (The “splitting point” pertained to proof of damages, an important, independent issue in and of itself.)

In any case here is the central point about the case for this piece.

Albert J. Bellemore, Jr., a local real estate developer, etc, bought the relevant building in 2006. It had been built in the 1920s. Since the early 2000s, he had purchased insurance from the Foy agency on several properties. Several years, Bellemore had worked with someone from Foy about how much insurance was needed for the 101 Ocean Blvd hotel.

In 2014 Bellemore increased its coverage, included replacement cost coverage, and, at the behest of his agent,  moved from Lloyds of London to AIX Speciality Insurance, a surplus lines carrier connected to Hanover Insurance.

The AIX policy provided $10,000 law and ordinance coverage, a sort of clause designed to cover the costs in building restoration while complying with the applicable law and ordinances.

In 2015 the hotel was badly damaged by a fire. At first, Bellemore wanted to rebuild. The up-to-date building code as regards a building like this one was elaborate and stringent. The amount of the needed coverage in the AIX policy is way, way, way too small. The cost of rebuilding would be $1.1M, in and of itself, and conformity with laws and ordinances would cost another $905,070 to comply with the current building code. Bellemore decided to demolish the structure, AIX paid $910,141.

Bellemore/101 Ocean sued the Foy company for the amount the policy should have included. The basis of its lawsuit was insurance-agency bad faith. To prevail on this the insured-plaintiff had proved that there was a “special relationship” between the agency and the customer, the insured. As the Court recognized, there was precedent for this view, Sintros v. Harmon, 148 N.H.478, 481-82 (N.H. 2002). In that case, the court held that an insurance agent has “an affirmative duty to provide advice regarding the availability of sufficiency of insurance coverage, [but] only when an insured justifiably relies upon a ‘special relationship’ with the agent.”

The trial court instructed the jury as follows with respect to a “special relationship”:

“The general duty of care does not include an affirmative obligation to give advice regarding the availability or sufficiency of coverage. However, the existence of a ‘special relationship’ between the insurance agent and the client may impose upon an insurance agent an affirmative duty to provide advice regarding the availability or sufficiency of insurance coverage. An insured can demonstrate…a ‘special relationship’ by showing that there exists something more than the standard insurer-insured relationship between the parties.  This depends upon the particular relationship between the parties and is determined on a case-by-case basis. Examples include an express agreement between the insurance agent and the client, a long-established relationship or entrustment in which the agent clearly appreciates the duty of giving advice, the paying [of] additional compensation apart from premium payment, and the agent holding himself or herself out as a highly-skilled expert coupled with reliance by the insured. Also, a ‘special relationship’ between the parties may exist when the insured relies upon the agent’s offered expert [advice[ regarding the question of coverage, or when there is a course of dealing over time putting the agent on notice that his or her advice is being sought and relied upon. If a ‘special relationship’ exists between the parties, the Plaintiff must demonstrate not only the existence of the relationship, but also that he or she was justified in relying upon the relationship.”

The trial court also instructed the jury in detail about the nature and characteristics of applicable building codes as well as the nature of law and ordinance coverage.

In any case, the jury verdict and the judgment of the court favored the insured. The Plaintiff and the agency had a long, close relationship that involved the giving and the following of advice.  The insured was taken to have proved causation and damages, and so was awarded a substantial sum, and the supreme court affirmed.

(As already indicated, there was a dissenting opinion but it had nothing to do with the nature of insurance bad faith as applied to agents but had only to do with proof of causation, an interesting topic to be sure, especially given the case cited by the dissenting J. Emer’s Camper Corral, LLC v. Alderman, 943 N.W.2D 513 (Wis. 2020).

Michael Sean Quinn, PhD, JD, CPCU, Etc

Michael Sean Quinn, PhD, JD, CPCU, Etc. (530)

One of Texas's leading insurance scholars, Michael Sean Quinn is a past chair of the Insurance Section of the State Bar of Texas and has a broad legal practice.

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