According to Marshall & Swift/Boeckh, over 60% of U.S. homes are undervalued by an average of 25%. In some cases, according to MS/B, as much as 73% of an agency's book of homeowners business may be undervalued by an average of 35%. The problem isn't just limited to homes...according to MS/B, 75% of commercial buildings could be undervalued by an average of 40%. If an insured suffers an underinsured loss, whose fault is it? According to one recent court decision, in some cases, it could be the agent's.
In Martinonis v. Utica National Insurance Group, the Massachusetts Court of Appeals held the agent might be held liable for failure to adequately insure a home based on the long-term relationship between the agency and client wherein regular reliance on the agent's advice and assurances regarding policy limits created a special relationship.
The agent obtained a homeowners policy for the plaintiffs whose home was subsequently destroyed by a fire. The policy liability limit of $469,000 was paid in full by the insurer. The plaintiffs contended that the actual damages were $1,164,012.43 and that the agent was negligent in failing to advise them to obtain higher limits. The trial court awarded summary judgment in the agent’s favor.
The Court of Appeals reversed, stating: “[T]here is no general duty of an insurance agent to ensure that insurance policies procured by him provide coverage that is adequate for the needs of the insured…[however] in an action against the agent for negligence, the insured may show that special circumstances prevailed that gave rise to a duty on the part of the agent to ensure that adequate insurance was obtained.”
The insureds presented facts demonstrating a long relationship with the agent (almost 10 years), including procurement and advice on insurance policies placed with him on a variety of other properties, that led them to rely on his expertise. The agent had previously advised the insured that their contents limit was inadequate and, following his advice, they increased that amount. However, they contended that, after expressing concerns about their dwelling limit, the agent assured them that the limits were proper.
They thought the $469,000 dwelling limit was too low. The assessed value of the house was around $400,000 and the insureds expressed concern that the assessing authorities were slow to catch up with market value. They also knew that houses in their area were selling for over one million dollars.
According to the Court of Appeals:
There is no general duty of an insurance agent to ensure that the insurance policies procured by him provide coverage that is adequate for the needs of the insured. See Baldwin Crane & Equip. Corp. v. Riley & Rielly Ins. Agency, Inc., 44 Mass. App. Ct. 29, 32 (1997), quoting from 16A Appleman, Insurance Law & Practice § 8836, at 64-66 (rev. ed. 1981) ("Ordinarily...an insurance agent assumes only those duties normally found in an agency relationship...and he assumes no duty to advise the insured merely by such relationship"). See also Construction Planners, Inc. v. Dobax Ins. Agency, Inc., 31 Mass. App. Ct. 672, 675 (1991) (broker generally has no duty to obtain insurance or renew expiring policy). The agent does not, in general, have a fiduciary duty to the insured in this regard. See Baldwin Crane & Equip. Corp. v. Riley & Rielly Ins. Agency, Inc., 44 Mass. App. Ct. at 31-32. Nevertheless, in an action against the agent for negligence, the insured may show that special circumstances prevailed that gave rise to a duty on the part of the agent to ensure that adequate insurance was obtained. Ibid. "[S]pecial circumstances of assertion, representation and reliance" may create a duty of due care. See, e.g., McCue v. Prudential Ins. Co., 371 Mass. 659, 661 (1976); Construction Planners, Inc. v. Dobax Ins. Agency, Inc., 31 Mass. App. Ct. at 675, and cases cited therein.
In the court's opinion, the plaintiffs presented adequate evidence of such special circumstances, in opposition to the agent's motion for summary judgment, to create a genuine issue of material fact on that issue. Their testimony about the long relationship with the agent, the reliance placed on his review of the adequacy of their insurance, his specific assurance on past occasions in response to inquiries that the policies had adequate limits of liability, and the specific assurance in this case that the limits were proper, were sufficient to defeat a motion for summary judgment.
The agent's defense rested largely on the fact that no separate compensation in addition to normal commissions on premiums was requested by or paid to the plaintiffs to reflect the services he rendered in supplying counsel and advice. However, according to the court, the absence of separate compensation does not mean that special circumstances giving rise to a duty of care did not exist. The facts were enough to create a material issue of fact in the eyes of the court as to whether special circumstances exist on the issue of duty sufficient to survive summary judgment.
To demonstrate the divergence in E&O cases, here is a January 2006 decision from Florida:
AMH APPRAISAL CONSULTANTS, INC. and ANN MARIE MCCARTHY, Appellants, v. ARGOV GAVISH PARTNERSHIP, Appellee.
COURT OF APPEAL OF FLORIDA, FOURTH DISTRICT
January 11, 2006, Decided
"Appellee Argov, the owner of a building which was destroyed in a fire, sued appellants for negligently appraising the building too low for purposes of insurance and prevailed. One of the arguments raised by the appraiser is that the trial court erred in not allowing the jury to consider negligence of the insurance agent; however, we conclude that, in the absence of expert testimony, the agent could not be held responsible.
"Relying on the appraisal provided by the appraiser to the agent, the owner insured a commercial building for $ 1.6 million. The building was totally destroyed in a fire a month later. When the owner discovered that the cost of rebuilding would substantially exceed the coverage, it brought this suit against the appraiser, asserting a negligent appraisal. The appraiser, among other defenses, alleged the insurance agent's negligence contributed to the insufficient amount of insurance coverage. The trial court did not submit the agent's negligence to the jury because there was no expert testimony to the effect that the agent was negligent. A jury found the appraiser liable, and she appeals.
"In order to include a nonparty, such as this agent, on the verdict form under section 768.81(3), Florida Statutes (2002), and Fabre v. Marin, 623 So. 2d 1182 (Fla. 1993), the defendant has the burden of presenting sufficient evidence of the nonparty defendant's negligence. Nash v. Wells Fargo Guard Servs., 678 So. 2d 1262, 1264 (Fla. 1996); Lagueux v. Union Carbide Corp., 861 So. 2d 87, 88 (Fla. 4th DCA 2003) (holding that evidence was not specific or sufficient to include Fabre defendant on verdict form).
"There are no Florida cases determining when expert testimony is necessary to establish the standard of care of an insurance agent. Cases from other jurisdictions are collected at Necessity of Expert Testimony to Show Standard of Care in Negligence Action Against Insurance Agent or Broker, 52 A.L.R. 4th 1232 (2004). These cases indicate that expert testimony is required in some, but not all, cases. It has been held that a claim based on a failure to procure requested coverage did not require expert testimony. Fillinger v. Northwestern Agency, 283 Mont. 71, 938 P.2d 1347 (Mont. 1997). Nor was an expert necessary to establish negligence by an agent for failing to make premium payments on the client's behalf or warn that the client was not insured. Johnson & Higgins v. Blomfield, 907 P.2d 1371 (Alaska 1995). On the other hand it has been held that an expert would be necessary in order to find an insurance agent negligent for failing to interpret an insurance policy. Humiston Grain Co. v. Rowley Interstate Transp. Co., 512 N.W.2d 573 (Iowa 1994).
"Experts are 'possessed of special knowledge or skill.' Fla. R. Civ. P. 1.390 (defining expert witnesses). The opinions of experts are admissible when the subject matter is beyond the understanding of the average layperson. Ward v. State, 519 So. 2d 1082 (Fla. 1st DCA 1988). Real estate appraisers are experts. See Fla. Dep't of Transp. v. Armadillo Partners, Inc., 849 So. 2d 279 (Fla. 2003). Insurance agents are also experts. Seascape of Hickory Point Condo. Ass'n v. Associated Ins. Servs., Inc., 443 So. 2d 488 (Fla. 2d DCA 1984).
"It is the position of the appraiser in this case that the insurance agent should have scrutinized the appraisal and recognized that it was too low. Given that appraising requires expertise, and that the insurance agent did not have that expertise, a jury could not have determined that the agent was negligent in the absence of an opinion of an expert. This was simply too esoteric to be understood by the average layperson.
"We have considered the other issues raised by appellant and find them to be without merit. Affirmed."
Additional reading on undervaluation: