INSURANCE AGENTS BEWARE!

It is common for insurance agents to complete applications for their clients. In fact, most clients prefer that the agent handle “the paperwork.” The client then reviews the application in order to verify the accuracy and signs the application normally under a “lengthy” series of acknowledgments that says that the information is accurate and the insurance company will rely upon the answers.

What happens when the customer signs the application completed by the agent and the application contains an error? What happens when the insurance agent completes the application and does not know that the answer is false? IN TENNESSEE, THE INSURANCE AGENT PAYS THE CUSTOMER $1.0 MILLION.

The facts of the case were not very unusual. The insurance agents become friends with husband and wife. Husband had a $300,000 life insurance policy. The agents convince him that he should increase the policy to $1.0 million. The agents obtain some information, complete the application, and send the application to Husband. Husband signs the application without even reading it. The insurance company then issues the policy. Husband allows the $300,000 policy to lapse.

Two months later, Husband dies in a single car accident. Insurance Company declines coverage because of a false statement on the application. The application states that Husband has not been charged or convicted of driving under the influence. In fact, Husband was convicted of DWI.

Wife sues the insurance company for breach of contract, negligence and violation of the Tennessee Consumer Protection Act. The insurance company – settles the case by paying $900,000.

BUT THE STORY DOES NOT END –

Wife also sues the insurance agents. Common sense says that since the insurance company paid $900,000, then the maximum amount the insurance agent could be liable for would be $100,000.

Nice try, but the Tennessee Supreme Court says that the settlement was a general settlement of all claims. It did not specify that it was limited to the breach of contract claim.

In fact, the Court says that the insurance agents are guilty of wrongful failure to procure life insurance. Essentially, the insurance agents are guilty of professional malpractice. “Insurance that is obtained but later voided because of acts or omissions by an agent is just as worthless as no insurance or inadequate insurance.” That wrong is separate and distinct from the wrong done by the insurance company.

The Moral of this story: Is a Judgment against the Insurance Agents for $1.0 million worth a few minutes spent reviewing the insurance application with the client?

Morrison v. Allen, No. M2007-01244-SC-R11-CV (Tenn. Feb. 16, 2011).