2.5 Liability and Defenses

• Library: Insurance Law in Virginia (Virginia CLE) (2020 Ed.)

2.5 LIABILITY AND DEFENSES

2.501 Overview. Agents and brokers are increasingly the targets of litigation based on an alleged failure to (i) procure insurance; (ii) provide the proper type of insurance; or (iii) prevent a lapse in insurance coverage. Most of these actions sound in negligence or breach of contract. Occasionally, actions against agents and brokers are also based on fraud, constructive fraud, or equitable estoppel principles. Most actions against agents and brokers are founded on alleged oral representations by the agent or broker that differ from the written provisions of the insurance policy at issue. The plaintiffs sometimes seek damages and sometimes reformation of the insurance contract itself.

Defenses to actions sounding in contract often focus on the plaintiff's failure to request specific coverage or failure to adequately inform the agent or broker of the plaintiff's needs. Defenses to actions sounding in tort have traditionally included contributory negligence, such as the failure to read the insurance policy, and assumption of the risk. These traditional defenses are rapidly being supplanted by the defensive interposition of the economic loss rule. That rule, generally speaking, precludes tort recovery for purely economic losses—losses not involving personal injury or property damages.

Virginia cases have not always clearly set forth the scope of an insurance agent's duty to his or her client and have often blurred the distinction between tort and contract actions. In Filak v. George, ⁵⁵ the Virginia

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Supreme Court reasserted the importance of that distinction. In Filak, the court held that Virginia's economic loss rule barred a cause of action for constructive fraud arising out of an agent's failure to procure insurance. The court emphasized that, under Virginia law, tort causes of action can arise out of circumstances simultaneously involving a breach of contract only when the defendant breaches a duty separate from that imposed by the contract. In Filak, the only duties assumed and breached by the defendant agent "arose solely from the parties' alleged oral contract." ⁵⁶

In Cincinnati Insurance Co. v. Ruch, ⁵⁷ however, Judge Payne of the United States District Court for the Eastern District of Virginia declined to apply the principles articulated in Filak. The economic loss rule was raised by the defendants but rejected by the court based on the court's conclusion that Virginia law provides for an extra-contractual duty of care. However, this conclusion was criticized by Judge Ellis of the Eastern District of Virginia, who noted that "contrary to the holding of Ruch, the Supreme Court of Virginia has never recognized the existence of a separate tort duty that an insurer owes to its insured." ⁵⁸ Quoting Filak, Judge Ellis further noted that

[i]ndeed, to the contrary, the Supreme Court of Virginia has held that an insurance agent "did not have a common law duty to the [insured] arising out of the parties' dealings" and that "[t]he law of torts provides redress only for the violation of certain common law and statutory duties involving the safety of persons and property." ⁵⁹

In S. Wallace Edwards & Sons, Inc. v. Selective Way Insurance Co., ⁶⁰ the Virginia Supreme Court held that the insured's tort claim for fraudulent inducement to enter into a contract survived the economic loss and source of duties rules because the actions by the defendants occurred before the insurance contract existed. The unpublished opinion does not expand the common law duty that an insurance agent owes to the insured, but rather the court pointed out that the material misrepresentations alleged by the insured, if proven, did not arise out of an existing contract between the parties.

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2.502 Parties. An agent's acts bind a carrier as long as the acts were undertaken within the scope of the agent or broker's actual or apparent authority.

[W]here the assured makes a full and fair disclosure of all material facts to the agent, and the latter, either through ignorance, negligence, or fraud, fails to correctly impart this knowledge to the insurance company, and the assured is in no way at fault for the act of the agent in failing to correctly transmit the information, then the insurance company is estopped from claiming a forfeiture of the policy. ⁶¹

Thus, plaintiff insureds sometimes name either the agent or the insurer as a defendant. When insureds name only an insurer as a defendant and allege negligence or breach of contract by the agent, the insurer will sometimes make the agent a third-party defendant. If an insured names both the agent and the insurer as defendants and wrongful conduct by each defendant is alleged, the agent and insurer will sometimes cross-claim against each other.

2.503 Jurisdiction. In the absence of diversity of citizenship creating federal jurisdiction, the state courts typically have exclusive jurisdiction of claims against agents. Cases involving employee benefit plans governed by the Employee Retirement Income Security Act (ERISA), however, can be removed to federal court. In diversity cases, the federal court will apply Virginia law if the acts giving rise to the suit occurred in Virginia. ⁶²

2.504 Tort Liability to an Insured. Traditionally, an action against an agent for failing to properly procure coverage for an insured could be maintained as either a tort action for negligent failure to procure or a breach of a contract action. ⁶³ Failure to procure insurance is a well-established cause of action in Virginia. ⁶⁴

The Virginia Supreme Court had an opportunity to decide that an insurance agent is a fiduciary in Stacy v. J.C. Montgomery Insurance Corp., ⁶⁵

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but declined to do so. In Stacy, the plaintiff sued an insurance agent after an insurer denied coverage of fire loss in a vacant building. The building was excluded from the policy coverage because of its vacancy. The court held that the agent was a "special agent" rather than a "general agent." In affirming judgment for the agent, the court noted that the plaintiff had admitted

that he "made no explicit requests for the [agent] to perform any function other than to purchase insurance." That admission precludes the [plaintiff] from reliance upon the broad allegation in his motion for judgment to the effect that he had employed the agent to "procure and maintain" fire insurance coverage. ⁶⁶

The scope of an agent's duty was discussed in Harris v. K&K Insurance Agency, ⁶⁷ in which the Virginia Supreme Court responded to two certified questions from the United States Court of Appeals for the Fourth Circuit. The case, involving claims of negligence and breach of contract, had been removed from state to federal court. On appeal from a dismissal of the claims, the Fourth Circuit requested that the Virginia Supreme Court answer whether the "continuing undertaking doctrine" applies to claims against insurance agents, thereby tolling the statute of limitations for these claims. ⁶⁸

The court answered this question in the negative, noting that it had "recognized the continuing undertaking doctrine only with regard to a continuous or recurring course of professional services related to a particular undertaking. . . . We have applied the doctrine in cases stating claims of breach of contract or negligence involving the professional services of physicians, attorneys and accountants." ⁶⁹ The court noted that, in contrast,

the services performed by an insurance broker and an insurance agency on behalf of an insured ordinarily entail separate, independent acts involving an initial sale, a policy renewal, a policy change, or the processing of a claim. . . .

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[S]ince these actions do not, by their nature, require continuing work by the broker or the insurance agency, they cannot be characterized as continuing services relating to a particular undertaking. ⁷⁰

In Morris v. Royal Globe Insurance Co., ⁷¹ the court affirmed the trial court's granting of the insurer's motion to strike the plaintiff's evidence. There, the agent and the plaintiff presented completely contradictory versions of a conversation in which the plaintiff allegedly requested coverage for farm equipment. Although the court affirmed the motion to strike, it held "that the issue of negligence was submitted to the court on conflicting evidence." ⁷² Consistent with Morris, most failure-to-procure-coverage cases are submitted to the trier of fact for a determination of witness credibility. Many seem to turn on the simple question: What type of coverage did the plaintiff request?

Agents are presumed to have means of information not open or available to laymen. Thus, a cause of action against an agent can be predicated on an erroneous opinion given by the agent. ⁷³

In Wiles v. Boat/U.S., Inc., ⁷⁴ the court indicated that an agent's failure to act within the scope of its agency agreement in seemingly denying policy coverage for its insured might warrant a claim against it for acting beyond its role.

Agents are sometimes sued for fraud and constructive fraud.

The law is well settled that if one represents as true what is really false, in such a way as to induce a reasonable man to

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believe it, and the representation is meant to be acted on; and he to whom the representation is made, believing it to be true, acts on it, and in consequence thereof sustains damage, there is such fraud as will support an action for deceit at law, or a bill for rescission of the transaction in equity. Whether the representation is made innocently or knowingly, if acted on, the effect is the same. In the one case the fraud is constructive; in the other it is actual. ⁷⁵

In Lumbermen's Underwriting Alliance v. Dave's Cabinet, Inc., ⁷⁶ the court held that the agent's assurance that the coverage he provided would save the insured money was merely an unfilled promise as to a future event and, thus, not an actionable statement about a present or pre-existing...