Clients’ Unrealistic Expectations Get Insurance Agency in Hot Water

Insurance buyers often have unrealistic expectations about their coverage. It can be difficult for insurance agents to get them to understand how it actually works. If they do not, however, they could end up in a situation like this one.

A South Carolina couple’s home burned to the ground. The insurer providing their homeowners insurance coverage made several offers to settle their claim. However, the couple protested that “none of the offers were up to the full coverage limits in the policy.” They expected to receive the full policy limits for a total loss, and the insurer offered less than that. The couple sued the insurer, their insurance agency, and several other parties.

They claimed that the agency assured them that it would obtain insurance that would meet and satisfy their needs. Because of this assurance, they said that they relied on the agency’s advice and the agency knew (or should have known) that. According to them, when the agency obtained a policy, it told them that the policy it obtained would meet their needs. They believe that the agency breached its duty to them when the policy failed to do what was promised.

The homeowners wanted a state court to hear the case; the insurer, which is not based in South Carolina, wanted a federal court to hear it. To resolve this dispute, the federal judge had to decide whether the couple had a chance of prevailing in state court, and that was the subject of her opinion. The insurer and the agency argued that there was no possibility that the couple would win in state court. The judge disagreed.

She acknowledged that insurance agents do not have a general duty to obtain a policy that would pay out the limits in the event of a total loss. However, she said, “(T)here is, in some circumstances, a duty to procure a policy in which an insurer guarantees it will do so if the agent undertook to procure such a policy on behalf of the insured. That is exactly the scenario that the complaint alleges here, and that is sufficient for the court to conclude that there is at least a glimmer of hope of succeeding on the negligence claim.”

Regarding the accusations that the agency had negligently misrepresented the terms of the policy, committed what amounted to fraud, and had made a promise to the homeowners that it could not keep, the judge again ruled that the agency had failed to demonstrate that the homeowners could not succeed. Similarly, the judge rejected the agency’s contention that state law precludes a fiduciary relationship between an insurance agency and an insured.

Lastly, the homeowners claimed that the agency committed an “outrageous” act (intentional infliction of emotional distress). Here, the judge seemed a little more skeptical, but she noted that state courts had never addressed whether an insurance agent’s failure to obtain requested insurance could amount to an outrageous act. Because it was an open question, the judge ruled that there was a possibility that the insureds might win. She therefore ruled in their favor on this point as well.

On the basis of these findings, the judge ruled that the state court had jurisdiction over the dispute, not the federal court, and she sent it back to state court for trial. 

It appears that the homeowners in this case had incorrect expectations about what would happen if their home was destroyed. Some of this may have been beyond the agency’s control; the insurer may have set the limit of insurance on the dwelling based on a cost estimator. If the insurer’s estimate was too high, there was little the agency could do.

When discussing limits with clients, an agent should emphasize that the process of calculating a home’s replacement cost is inexact. The clients need to know that the limits they buy may exceed the cost of rebuilding, but that is a better situation than the opposite. It is more common for the limits to be insufficient to rebuild, and that would cause far more hardship for them.

Effective communication with clients, including the proper setting of expectations, can prevent many problems. It might have prevented this one.