Tennessee Supreme Court Deals Blow to "Duty to Read" and Broadens Agent Liability

Background of the Case

Howard and Kristen Scott Morrison had a $300,000 term life insurance policy purchased in 2000. After developing a social relationship with two insurance producers, Paul Allen and Jody Roberts, the Morrisons determined that they had insufficient insurance coverage. After the Morrisons discussed their concerns with Allen and Roberts in late January 2004, the two agents agreed to shop the market for the Morrisons and provide financial planning services as well. The agents collected personal information pertaining to underwriting factors from both Howard and Kristen during the January meeting.

On February 10, 2004, the agents recommended a $1 million term life policy for Howard and a $250,000 term life policy for Kristen from American General Life Insurance Company. The premium for both policies was less than the cost for the soon-to-be replaced $300,000 policy from another insurer. This policy was outside the 2-year period of contestability.

In a subsequent telephone conversation to complete the applications on behalf of the Morrisons, Mr. Allen spoke with Kristen. He did not speak directly with Howard.

Producers Allen and Roberts mailed a packet of materials, including the applications, to the Morrisons for signatures. The applications contained question 17E: "In the past 5 years, have any proposed insureds been charged with or been convicted of driving under the influence of alcohol or drugs or had any driving violations?" The agents had checked "No" as the answer. Among the paperwork Howard signed, the following statement appeared:

I have read the above statements or they have been read to me. They are true and complete to the best of my knowledge and belief. I understand that this application: (1) will consist of Part A, Part B, and if applicable, related forms; and (2) shall be the basis for any policy issues. I understand that any misrepresentation contained in this application and relied on by the Company may be used to reduce or deny a claim or void the policy if: (1) it is within its contestable period; and (2) such misrepresentation materially affects the acceptance of the risk. [Emphasis added.]

On page 4 of Part A, Howard's signature appeared in attesting to the following statement: "I certify that the information supplied by the proposed insured(s)/owner has been truthfully and accurately recorded on the Part A application."

On February 27, 2004, the Morrisons signed the applications in the places the agents had marked with "sticky notes." Neither Howard nor Kristen read the application documents; no cover letter accompanied the paperwork, and no oral instructions were given by phone. Kristen later testified, "It was obvious that Jody and Paul had done everything for us, and all we had to do was sign."

On May 7, 2004, a nurse traveled to the Morrison residence to gather their medical history, conduct a physical examination, and otherwise complete the application process. Morrison answered "Yes" to the following question: "In the past 5 years, have you had a moving violation or your driver's license restricted, suspended, or revoked?"

The case record is silent as to any follow-up phone contact by insurance company underwriters to verify whether the agents had accurately recorded information on the applications.

American General approved the policies, and there is no indication in the record that any post-issue field underwriting occurred upon delivery to either confirm the accuracy of the underwriting information or determine whether the Morrisons had experienced any changes in health status. Neither applicant read the policies. Moreover, there does not appear to have been any requests by the Morrisons about acquiring an incontestable replacement policy, nor did the agents advise the Morrisons that the incontestable clause started anew under the American General policies. Neither agent negotiated a separate fee in addition to the commissions for advising the Morrisons.

Two months after the policies' effective date, Howard Morrison died from injuries suffered in an automobile accident.

American General denied the death claim based on the answer to Question 17E in the application when investigation revealed that Mr. Morrison had a conviction for driving impaired, resulting in restrictions on his operator's license. Kristen Morrison contended that had the agents asked the question, he would have answered truthfully, and the "Yes" answer on the medical schedule confirmed that her late husband did not intend to conceal his traffic violation. Nevertheless, the insurer denied the claim because the alleged misrepresentation occurred and the policy was within the 2-year contestable period.

Kristen Morrison sued the agents and the insurance company under several theories of recovery. One theory was that the agents failed to procure an enforceable insurance policy based on the new policy's incontestable provision, rendering it unenforceable. As is true in most states, the incontestable clause was among the contract provisions required by law. The Tennessee Insurance Code states at 56–7–2307(3):

Policy is Entire Contract; Incontestability; Exceptions. A provision that the policy shall constitute the entire contract between the parties, and shall be incontestable after it has been in force during the lifetime of the insured for a specified period, not more than two (2) years from its date, except for nonpayment of premiums and except for the conditions of the policy relating to naval and military services in time of war.

The Issue before the Court

The court framed the basic issue as whether the widow Kristen Morrison could recover from the agents who failed to procure a life insurance policy that could not be contested by the insurer.

Decision and Reasoning

In deciding "Yes" to the issue, the court noted that the matter presented an issue of first impression in the context of an insured's failure to read the policy; it noted further that whether a duty to read is a sufficient defense for agents is a "fact intensive inquiry."

Much of the court's opinion rests on the notion that insurance agents serve "as insurance professionals" along with "other fiduciaries" and, therefore, should be held to higher standards than one would normally apply in ordinary sales transactions, adding:

The basis for our decision … is a breach of contract between the agent and the applicant for failure to procure a policy not subject to contest. [Emphasis added.]

The court decided that, in this transaction, the agents were "hired to buy a policy for their clients" and referred to the trial court's "finding that the defendants had collectively breached their employment contract by failing to procure an enforceable life insurance policy."

Accordingly, Mrs. Morrison established a cause of action "regardless of any failure to read the applications." The test as to whether a producing agent can be liable for failure to procure rests on the following elements:

1. the agent or broker undertook or agreed to procure insurance;
2. the agent or broker failed to use reasonable diligence attempting to place the insurance and failed to notify the client promptly of any failure; and
3. the agent's or broker's actions warranted the client's assumption that he or she was properly insured.

In this case, the Morrisons hired the agents to acquire a $1 million life insurance policy on Howard Morrison. The agents undertook that mission, and they failed. The Morrisons, in turn, relied on the expertise of the agents and assumed they were properly insured. Since the new policy was contestable, Mr. Morrison was uninsured if he died during the first 2 policy years. Furthermore, the agents assumed responsibility for completing the application; thus, under these circumstances, reasoned the court, when an agent assumes this duty to ask the questions, the applicant may trust the agent to record answers correctly and may justifiably rely on the agent's work.

In dismissing the duty to read defense, the justices expressed disagreement with the defendants that an agent can be negligent in filling out an insurance application and yet be shielded from any liability by the signature of the applicant. In the court's words, "As agents employed by the Morrisons for their expertise, the defendants may not claim any greater duty on their clients' part to anticipate and rectify their errors."

The majority also rejected the argument that Mrs. Morrison needed evidence that the Morrisons contracted for an immediate incontestable clause, explaining:

If an insured contracts with an agent to procure an insurance policy and reasonably relies upon the agent, based upon his or her expertise, to successfully complete the groundwork for procuring the policy, and the policy is successfully contested by the insurance company due to the acts or omissions of the agent, the insured has not, in fact, received the benefit of the bargain. Insurance that is obtained but later voided because of acts or omissions by an agent is just as worthless as no insurance or inadequate insurance…. There is no distinction between an agent's procurement of coverage that is contestable by the insurer and an agent's failure to procure at all.

Implications of the Decision

First, by labeling the agents as experts who must follow a higher standard, the court laid grounds for weakening the duty to read principle. The bottom line, as a result, is that, under current Tennessee common law, insurance producers must now face the fact that an applicant's signature on an application does not automatically absolve them of liability when they fail to satisfy policyholder needs.

Second, a separate fee for providing advice is sometimes cited as a basis for establishing a heightened sense of an agent's duty to the insured. In Morrison, however, the court apparently considered commissions from sales to be adequate consideration to satisfy terms of an employment contract.

Third, since state law requires the incontestable clause, a question as to whether it was possible for the agents to acquire an immediately incontestable policy remains unanswered. Apparently, the defense did not raise impossibility among its arguments.

Fourth, Morrison deals with an insurance policy covering a specific, single risk: a man's life. In contrast, property and casualty policies cover a myriad of risks. Substitute the following terms for "incontestable" to gain insight into what Morrison could mean for property and casualty producers: flood insurance; defense outside limits as opposed to defense within limits; replacement as opposed to actual cash value; coinsurance penalty; availability of higher limits for uninsured motorists; water exclusion; and full coverage. Add to these terms the hundreds of endorsements that add or subtract coverage for a broader glimpse of what the future may hold for Tennessee producers, who, under somewhat unclear circumstances, may be viewed as employees of an insurance applicant.

Finally, there is a growing emphasis on improving agent quality through various certification programs and continuing education in a continuous march toward expertise and professionalism. This is a two-edged sword, as Morrison establishes. Greater expertise and professional status also confer greater accountability.