Louisiana Supreme Court Limits Insurance Agents’ Duty to Advise Client

Recently, the Supreme Court of Louisiana decided that an insurance agent’s duty to exercise “reasonable diligence” in advising his or her client does not include an “independent duty” to advise the client whether the client has procured the correct type or amount of coverage.  Isidore Newman School v. J. Everett Eaves, Inc., No. 2009-C-2161, 2010 WL 2723704, at *7 (La. July 6, 2010).

After sustaining tuition losses as a result of Hurricane Katrina, the Isidore Newman School (the “School”) filed a lawsuit against its insurance broker, J. Everett Eaves, Inc. (“Eaves”), alleging that the agent was negligent in failing to advise the School that the School’s Business Income and Extra Expense (“BI & EE”) insurance coverage was not sufficient to cover tuition losses.  In addition, the School claimed that the policy was complicated and difficult to understand because it was over 400 pages in length and that it relied on the agent’s expertise to advise the School. 

Louisiana case law provides insurance agents and brokers owe the client the same duty of reasonable diligence which is fulfilled when the agent procures the insurance requested.  The Court found no authority that would require an insurance agent to inquire into a client’s coverage needs or to advise a client regarding issues of being underinsured without being specifically asked by the client.  The law imposes on the client the responsibility to determine the type and amount of coverage needed and to advise the agent of those needs.  Upon receipt of the policy, it is the client’s duty to review the policy and assure the policy satisfies the client’s needs.

The Court found that Eaves was not negligent in procuring insurance for the School.  In its decision, the Court provided that:

It is the insured’s responsibility to request the type of insurance coverage, and the amount of coverage needed.  It is not the agent’s obligation to spontaneously or affirmatively identify the scope or the amount of insurance coverage the client needs. It is also well settled that it is [the] insured’s obligation to read the policy when received, since the insured is deemed to know the policy contents. 

The Court determined that the School was in a better position than the agent to calculate its potential losses, including the loss of tuition income.  There were no facts to suggest that the agent had any way of knowing the School’s potential loss of business income.  The School never requested coverage for BI & EE in an amount that would cover its tuition losses.  There was no evidence that the agent lead the School to believe that it procured any BI & EE coverage, other than $350,000 as requested by the School.

The Court also noted that the School’s argument that the policy was complicated was not convincing because it was clearly provided in the policy that tuition losses were covered.  A review of the policy would have alerted the business manager/chief financial officer of the School, who was responsible for requesting insurance, that the School was underinsured.  While apparently not crucial to the case, the facts indicated that the insured was sophisticated.  The Court cautioned that a different result might have been reached if the agent had misled the School to believe that it had coverage that it did not have, or that the desired coverage was unavailable.