Insurance Agent Held Liable For Faulty Procurement Even Though Insured Failed to Read Policy

Insurance Network of Texas v. Kloesel, #13-05-680 (Tex. App. April 3, 2008), See Kloesel Decision

A little over a month ago, I discussed a Houston Court of Appeals agent-liability decision that an agent wasn't liable for failure to procure requested insurance even though the agent told the policyholder (in direct response to a pointed question on the specific provision in question) that an exclusion would not bar coverage for damage to certain property.  The agent was wrong, and the insurer denied coverage.  See my discussion Houston Court of Appeals Exonerates Agent's Misstatement of Coverage. 

I thought this was an incorrect result.  The Houston court did not even discuss the agent's misrepresentation of the scope of the exclusion and instead focused of what was said in a certificate of insurance.  But surely policyholders must be entitled to rely on the greater expertise of insurance agents on the meaning and import of a particular policy provision, especially when the insured reads the policy, asks the agent about the suspect exclusion, and is told not to worry, the exclusion doesn't bar anticipated coverage.

The Kloesel decision goes the other way and should concern insurance agents.  The Kloesels wanted to procure insurance for the restaurant they owned.  They told their agent they wanted "full coverage" for "all things necessary for a restaurant . . . to stay in business and be protected."  They "wanted to be covered if someone got hurt in some way . . . if a customer got sick or if there was something wrong with the food."  The agent procured a policy that contained a communicable disease exclusion.  Then approximately 90 patrons contracted Hepatitis A transmitted from an employee handling food in the kitchen.  Lawsuits followed.

Insurer denied the claims which fell squarely within the communicable disease exclusion.  In the ensuing coverage litigation against the agent, the Kloesels admitted that they never read the policy and even saw summaries for two or three years before the incident that listed "Communicable Disease Exclusion".  The agent testified that he wasn't an expert in the restaurant industry and assumed that the insureds knew what communicable diseases were.  He thought they wanted food-poisoning coverage, which he got.  Otherwise, he said, he does not tell his customers what coverage they need.  "Only they know what is best for them."

The court upheld a jury verdict in favor of the Kloesels.  Key to the court's decision was the fact that the agent submitted a jury question asking if the Kloesels were contributorily negligent in failing to read and understand the policy terms, to which the jury answered "no."  The court concluded that the finder of fact was entitled to determine whether or not failure to read the policy contributed to the loss.

Of special note, the agent may have been doomed by his own insurance expert, who testified that the agent had no duty because insureds are deemed to read and understand their policies.  So far so good.  The expert then agreed on cross examination that the communicable disease exclusion "is not a desired coverage form" for a restaurant.  What if the Kloesels were your customers?  "It's possible" I would have looked for an alternative.  He also admitted that if he was going to procure coverage for a restaurant, he would want to get coverage for communicable disease.  With friends like that ...

It is also of interest that the court relied heavily on decisions from other states, like New Jersey and Maryland, that may not hold insureds to the same duty-to-read standards as Texas courts.  Thus, the Kloesel court relied on statements such as:

[W]hen [an agent] of repute is employed to effect an insurance against certain risks, the client is entitled to rely upon his instructions being properly carried out.  It is no answer for[the agent] to say: "I handed you the policy and you should have examined it and seen whether it gave you the protection you required." (Quoting Aden v. Fortsh, 776 A.2d 792, 805 (N.J. 2001);

Because "[a]n insured who hires and pays a professional [agent] does so to reduce, if not eliminate the risk that an inadequate policy would be procured," it stands to reason that "[i]nsurance 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. (Aden v. Fortsh at 806).

This is a far cry from the Omni Metals case, discussed last month.