We’ve been talking a lot here lately about potential agent liability to policyholders in Katrina cases. United of Omaha Life Insurance Co. v. Honea (8th Cir. August 17, 2006) is about a different kind of agent liability — to the insurer. (Click here to see a pdf of the case. Hat tip: Steve Brostoff). In the case, the Eighth Circuit affirmed the district court’s grant of summary judgment to the agent in a lawsuit filed by the insurer. However, certain things about this case make it not necessarily representative of agent liability to insurance companies across the country.
The agent, Honea, helped Rauch, the principal of a construction company, obtain a life insurance policy that he then assigned to another company for which he was building a nursing home, as collateral in lieu of a performance bond. United of Omaha had previously rejected Rauch’s life insurance application once because it named the other company as the beneficiary: the insurer did not want to issue life insurance that appeared destined for a term of less than five years. The agent, Honea, then changed the application to say Rauch’s estate was the beneficiary. Under the terms of the policy, there was nothing wrong with assigning it once it was issued. The insurer also mailed premium notices for two years to the assignee company and only noticed its underwriting guidelines had been violated when Rauch died.
The Eighth Circuit rejected the insurer’s claims, saying Arkansas law provides that an agent represents the insured, not the insurer, so Honea was under no obligation to point out that the second application was really the same as the first. Arkansas law was also unfriendly on the insurer’s claim that the agent negligently misrepresented facts to the insurer, because Arkansas does not recognize the tort of negligent misrepresentation. Another big problem was that the insurer apparently failed to submit evidence of why it rejected the first application or that Honea was aware of these reasons or of the underwriting guidelines.
I don’t necessarily accept this case as representative of the law in this area, because other states have laws and court precedent that make the agent representative of both the insured and the insurer, but at different stages in a transaction. However, this is a good case to keep tucked away when the issue of agent liability to an insurer comes up again.