Dental Practice Underinsured by 500k Lands Agency in Court

Even though the law may state that an Agency may not be liable  for underinsurance on a policy, it can still land an agency in court and in the hand of jurors.  This is why it’s best to make sure the policyholder has the appropriate limits rather than an incident that will land an agency in court. Here is a situation that landed an Agency in court due a 500k shortfall on business property coverage.

An Indiana dental practice bought insurance from a particular agency for the first time in the 1970’s. That agency later changed its name, and in the mid-1990’s it merged with another agency. Throughout all these changes, the dental practice stayed with the agency for more than 30 years.

A fire destroyed the practice’s office. The cost to replace its contents, including all the dental equipment and machinery, was $704,394.35. When the practice submitted an insurance claim,  its insurer paid it only $204,371 – the personal property limit on its policy.

The practice sued the insurance agency for allegedly breaching its duty to advise about adequate limits. It also claimed that the agency had breached a contract with the practice by failing to procure an adequate limit. Lastly, it sued the insurer, claiming that it was responsible for the acts of its agent.

The trial court came down on the side of the agency and the insurer. Appeals ensued, and the case went to the Indiana Supreme Court. The result was a mixed bag for the agency and the insurer.

The court said that the question of whether the agency had a duty to advise its client about the proper amount of coverage hinged on whether the two had a special relationship. The length of that relationship (31 years in this case) mattered less than the nature of it. The court ruled they had a special relationship if the agent:

•                Exercised broad discretion to service the insured’s needs;

•                Counseled the insured concerning specialized insurance coverage;

•                Held itself out as a highly-skilled insurance expert, coupled with the insured’s reliance upon the expertise; and 

•                Received compensation, above the customary premium paid, for the expert advice provided.

The court also noted how rare such relationships are. In 30 years, all but two decisions had found that the parties had a typical agent-insured relationship.

In this case, the court found that the facts conflicted with each other. The practice purchased its original policy at the agency’s direction, and after the merger the new agency regularly sent coverage questionnaires to determine the practice’s insurance needs. Also, the policy covered specialized dental equipment. The agency boasted of being endorsed by the state dental association and of having expertise that would enable it to tailor coverage to the practice’s needs.

Conversely, the record did not clearly show that the agency continued to exercise great discretion in choosing appropriate coverage after the merger. Also, the practice selected its own coverage limits and entered them on the questionnaires. While the covered equipment was specialized, the insurance coverage was not – it was probably a standard Businessowners Policy.

The agency’s based its expertise on promotional materials created by others. Finally, the practice and the agency never met face-to-face before the fire.

Because the record pointed to different answers, the court ruled that a trial should resolve the question as to whether the agency had a duty to advise. This decision was issued in 2015, and the published record does not show that a trial has been held. Given the uncertainty, the agency’s E&O insurer may have opted to settle out of court.

The court did find, however, that the agency did not have a contractual obligation to procure adequate coverage for its client. Lastly, it ruled that the insurer may have been liable for the agency’s actions, and it returned this issue to the trial court as well.

An agency should be careful about advertising itself as an expert. The court clearly found that to be significant, especially since the agency promoted its endorsement from a dental association. When a client suffers a half million dollar uninsured loss, and that client is in an industry that is the agency’s self-proclaimed area of expertise, a court may hold the agency to a high standard.

In this case, not only did this 500k shortfall land this agency in court, it also shortchanged itself of additional revenues and commissions.  When an agency’s policies are collectively underinsured, the agency ends up having a much higher loss ratio, lower contingencies and lower commissions. This is not to mention that an agency would probably see a significant increase in agency E&O premiums after an incident like this. A well established agency can not only help prevent E&O incidents from happening by having an aggressive annual review program with each client, they can also significantly grow their book of business from within for doing the right thing.