Michigan courts have long held that an insurance agent is simply an order taker. Pursuant to Harts v Farmers Insurance Exchange, an insurance agent’s job is to present an insurer’s product and take an insured’s order. Absent a special relationship, an insurance agent owes no duty to advise an insured of the adequacy of coverage.
Because an insurance agent is merely an order taker, the obligation to review an insurance application for accuracy falls on an insured. Until recently, an insured faced an uphill battle if she tried to hold an insurance agent liable for a denial of coverage based on a false statement in an application.
Montgomery v Fidelity & Guaranty Life Insurance Company typically doomed an action against an insurance agent for negligence in filling out an insurance application. In Montgomery, an insurer denied coverage and rescinded a policy based on a material misrepresentation in an application filled out by an insurance agent and signed by an insured. The Court of Appeals attributed the misrepresentation to the insured and upheld the rescission of the policy. The Court reasoned that regardless of whether the insurance agent filled out the application and knew of the falsity of the statement, the insured had an obligation to review the application and correct the error before signing and submitting the application to the insurer.
The Court of Appeals revisited the issue a couple months ago in Holman v Farm Bureau General Insurance Company of Michigan. In Holman, an insured sought coverage from an insurer after an accident. The insurer denied coverage and rescinded the policy based on a material misrepresentation in the insurance application. The insured sued the insurance agent for negligence in filling out the application and making the misrepresentation. The insurance agent blamed the insured.
The Court left undisturbed the longstanding principle that an insurance agent doesn’t owe a duty to advise an insured about the adequacy of coverage. The Court agreed that an insurance agent is, in essence, an order taker. But the Court held that an insurance agent owes a duty, albeit a limited duty, to take an order “accurately and not contribute false information to the application, whether purposefully or mistakenly.”
The Court didn’t overrule Montgomery. The Court did, however, distinguish Montgomery. The Court reasoned that Montgomery involved contract principles (rescission), whereas Holman involved tort principles (negligence).
Ultimately, the Court held that a signature on an insurance application containing a misrepresentation is no longer a complete bar to a negligence claim against an insurance agent. Whether an insurance agent may be liable for negligence, the Court continued, is an issue of comparative negligence for a jury to decide.
In the aftermath of Holman, you should consider revisiting your practices and adopting measures to avoid or at least minimize your exposure to liability for negligence. Below are some tips to consider in the context of the application process.
- • If you’re required to submit the application through an online portal, print off a blank application for the insured to review.
- • Go over the application line by line with the insured.
- • Instead of filling out the application for the insured, ask the insured to fill out the application with your assistance.
- • Ask the insured to initial each answer in the application.
- • Make sure that the insured signs the application.
- • Save a copy of the application in your file. Do not simply rely on the insurer to maintain a record of the application.
- • Document any question asked by the insured or advice given to the insured during or after the application process.
The Court of Appeals threw a wrench in the existing legal landscape of insurance-agent liability. Whether the Holman decision will stand remains to be seen, as an application for leave to appeal to the Supreme Court is currently pending. Regardless of the outcome, you should view the tips above as best practices. In the words of Wyatt Earp: “Fast is fine, but accuracy is everything.”