Iowa Court Of Appeals Reminds Us That Policyholders Are Responsible For Securing Desired Insurance Coverage

By harley erbe

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Insurance coverage is a basic part of a business's financial security. Often, for example workers' compensation insurance, the state mandates that a business have insurance coverage or prove that it's financially capable of being self-insured and paying workers' compensation claims out of pocket. But this also creates a burden for businesses in that they have to review their coverages and ensure that everything necessary is in place, contacting their agent or insurer as necessary to adjust or add coverages. The consequences of failing to do so were illustrated in the January 27, 2016 Iowa Court of Appeals decision in L40 Cattle Company v. Prins Insurance.

The case arose because L40 Cattle Company made insurance decisions about its workers' compensation coverage that it later regretted. L40 initially obtained an insurance policy without workers’ compensation coverage. It later added this coverage for a single individual, who was an owner of the company. The workers’ compensation application did not seek coverage for any employees of the company. Less than a year after obtaining the coverage, L40 submitted a cancellation request. Prins complied with the request and issued a written notice of cancellation. You can see where this is going.

Unbeknownst to Prins, a number of individuals worked for and were paid by L40. One of these individuals sustained an injury that resulted in the amputation of his upper left leg. L40 settled the employee's personal injury claim out of its own resources because it lacked workers' compensation coverage.  Cue the lawyers.    

L40 sued Prins. It alleged that Prins breached its contract with L40 by implementing a cancellation of coverage when doing so was in violation of a reasonable standard of care, failing to advise L40 or obtain a reinstatement of workers' compensation coverage when the renewal date arrived, and failing to properly advise L40 of the risks and necessity of coverage for its employees. L40 also alleged that Prins breached a fiduciary duty for essentially the same reasons. L40 later added a negligence claim and alleged Prins was liable for failing to extend a workers’ compensation policy on a related business to L40. The trial court dismissed the case before trial and L40 appealed.

Insurance procurers’ duties to clients have expanded and contracted over time. Such obligations are currently governed by Iowa Code 522B.11(7). That code section establishes fairly limited responsibilities in these situations. Insurance agents and procurers need only use reasonable care, diligence, and judgment in procuring the insurance requested by an insured. They're not required to serve as advisors or consultants for insurance clients or policyholders unless they holds themselves out as an insurance specialist, consultant, or counselor and receive compensation for consultation and advice apart from commissions paid by an insurer.

Applying those general principles, the Iowa Court of Appeals determined that Prins was not liable to L40: "L40 requested workers’ compensation insurance. Prins obtained it. Later, L40 asked to cancel the policy. Prins obliged. Section 522B.11(7)(a) requires nothing more, unless Prins held itself out 'as an insurance specialist, consultant, or counselor and receive[d] compensation for consultation and advice apart from commissions paid by' L40. It is undisputed that Prins did not receive any additional compensation for its services aside from the commissions. For this reason, the expanded duty exception is inapplicable." So that was that.

The L40 case is a reminder that, unlike lawyers, doctors, accountants, and other professions that are expected to provide advice that customers and clients are entitled to rely upon, insurance agents and insurance companies usually have much more limited duties. In most instances, as long as the insurance agent and the insurer properly execute the policyholder's instructions, there's no potential advice-based liability to the insured unless the agent's being paid for that advice separate from the policyholder's premiums. In other words, the policyholder's instructions need to be executed with speed and precision, but the agent and the insurer have no obligation to advise the insured as to what those instructions should be unless they're being paid for that advice. The compensation requirement for "expanded" duties is almost always fatal to such claims against insurance agents. It doesn't matter how the agency holds itself out, how long the insured has worked with the agency, or whether the agent is the policyholder's friend or family member, if the agent's not being paid to give advice regarding coverage there cannot be any type of negligence claim asserted against the agent for failing to advise the insured to obtain or adjust certain coverages. 

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