The most critical time in the agent/policyholder relationship arises at the moment that a loss is reported to the agent. Years of effective marketing can be lost at that critical moment. This is not to mention the genuine desire on the part of most agents to assist their clients. However, out of genuine concern, agents can unwittingly expose themselves to tremendous liability. The purpose of this paper is to explore ways in which an agent can be truly helpful during the claims process while at the same time avoiding agent liability.
Creation of Liability
In many states, an agent with binding authority can actually “create” coverage prior to the sale of the policy when he/she makes representations concerning what the policy covers. These representations of coverage are binding on the insurance company even though the policy itself may not provide such coverage or may even exclude such coverage. However, cases are equally clear that after the policy has been sold, the agent cannot, by his/her representations, create coverage when none existed under the wording of the policy. At first glance, this would seem to insulate the agent and the company if the agent mistakenly made a representation that a policyholder was covered after he/she reported a loss when, in fact, no coverage existed. These cases, unfortunately, have given agents a false sense of security.
As with virtually every rule of law, there is an exception. In this circumstance, the exception is called “promissory estoppel.” The elements of promissory estoppel are:
- a promise or representation;
- reliance on the promise or representation by the person who receives it;
- the person who receives the promise or representation takes action based upon the promise or representation; and
- the action that is taken turns out to be detrimental.
Applying the concept of promissory estoppel to a post-loss representation would typically result from the following:
- after a loss is reported, the agent tells the policyholder that there is coverage when there is actually no coverage;
- the policyholder relies upon the agent as his insurance advisor;
- the policyholder takes action, such as making a short term loan, renewing a lease, entering into an employment contract with a manager, etc.; and
- After the claim is eventually denied, the policyholder is detrimentally affected because of the action that he/she took as a result of relying upon the representation that the loss was covered.
About the Author:
Michael W. Johnston is a founding partner of the Houston, Fort Worth, Lubbock and San Antonio Law Firm of Johnston Legal Group PC. He graduated with honors from Trinity University and Baylor Law School where he was an associate editor of the Baylor Law Review. For the past twenty-nine years, Mr. Johnston has been a civil litigator concentrating his practice in consumer, personal injury, commercial and insurance litigation. Mr. Johnston represents well known insurance companies in connection with first and third party insurance claims. He is Board Certified in Civil Trial Law by the Texas Board of Legal Specialization and the National Board of Trial Advocacy. He is also Board Certified in the field of Consumer Law by the Texas Board of Legal Specialization. Mr. Johnston is formerly a Texas Wesleyan School of Law Adjunct Professor of Insurance Law. For the past five years, Mr. Johnston has been designated as a “Super Lawyer.” Mr. Johnston is licensed to practice before all state courts in Texas and Oklahoma, the United States Supreme Court, United States Court of Appeals for the Fifth Circuit, the United States Court of Claims and the United States District Courts for the Northern, Southern, Eastern and Western Districts of Texas.