How do insurance agents know when they’ve done enough to adequately protect their clients against possible risks?

Because of a recent Iowa Supreme Court decision, agents will now need a “crystal ball” to cover all the bases, says Bob Skow, CEO of the Independent Insurance Agents of Iowa Inc.

In a decision that agents fear has reversed longstanding insurance law, the Iowa Supreme Court in Langwith vs. American National General Insurance Co. said that a jury must now decide whether an agent owed her client a duty beyond simply selling the requested insurance product.

The Dec. 30 ruling will lead to more professional liability lawsuits being filed against insurance agents, driving up insurance costs, Skow said.

“I would really call this the crystal ball ruling,” said Skow, who said agents will now have to bring up every possible type of coverage that might be needed to avoid a lawsuit.

The ruling will also exacerbate what has already been an increasing need for higher professional liability coverage for agents, he said.

“Twenty-five years ago, the average agent in Iowa probably carried $500,000 to $1 million of professional liability coverage,” said Skow, who has represented the independent agents’ group for the past 20 years.

“Today, the average agent is carrying considerably more than that because of the exposure. The problem is, there is only so much you can spread the risk; there are only so many agents. It only takes a few million dollars of (professional liability lawsuit) losses to hugely impact rates.”

The Iowa Association for Justice, however, contends that the ruling was a “well-reasoned, thoughtful analysis by the court,” said Alan Olson, a Des Moines attorney and the 2011 president of the association, which represents nearly 1,000 Iowa trial attorneys.

No umbrella

In Langwith vs. American National, the plaintiff, Dennis Langwith, claimed that his insurance agent, Janet Fitzgerald, should have provided him and his wife with better advice about how to cover their son, Ben, who had been dropped from their policy after his driver’s license was suspended.

Though the Langwiths signed a form excluding their son from their auto policy – and with it coverage under a larger umbrella liability policy – they assumed the umbrella coverage was reinstated after Fitzgerald sold them a new high-risk auto policy for their son.

In the lawsuit, Langwith, a West Des Moines orthodonist, claimed that Fitzgerald, who handled nearly all of the family’s insurance policies, should have advised him that his son was no longer covered under that umbrella policy, and that she should also have recommended that he could have avoided all personal liability for his son’s driving by transferring title of the vehicle to the son.

Skow said the Langwith ruling means that cases that might have been settled with a declaratory judgment by the court will now have to go to a jury trial. Any case in which an insured individual “doesn’t think that he or she got paid enough for an insurance loss” is potentially available for dispute, he said.

“Before, we could ask for the judge to make a declaratory ruling that the agent was not responsible to make the kinds of recommendations or decisions that somebody might be alleging,” he said.

“In other states where they’ve gone in this direction, we’ve seen huge verdicts by juries. This could break insurance agents, who might only have $1 million in professional liability insurance. By the way, it costs a lot to buy professional liability insurance.”

Though Iowa juries have a reputation for being conservative, jury trials will result in significant additional expenses incurred in preparation, Skow said.

‘Thoughtful analysis’

From a legal perspective, Olson said he doesn’t believe the Langwith ruling represents any kind of leap by the Iowa Supreme Court. To the contrary, the case illustrates that there are other ways that the agent-client relationship can be expanded, he said.

“So it’s a mainstream, well-reasoned, thoughtful analysis by the court,” Olson said. “The ruling reflects an understanding that a principal-agent relationship can range from very simple requests to a full risk assessment and everything in between.”

Because it is a “mainstream” decision, “I would not expect the Langwith decision in any shape or form to open the floodgates in leading to Iowa consumers pursuing cases in this regard than they have in the last 20 or 30 years,” Olson said.

Given that the district court in the Langwith case had issued a summary judgment, the case was not heard by a jury of Langwith’s peers, Olson said.

“The Langwith decision says the fact finder – a jury of their peers – is to consider the specific circumstances and determine the outcome of the dispute.”

Olson said it’s a misconception that jury awards drive up professional liability costs. “There have been numerous studies that have proved there is no connection,” he said. “Anybody who understands what affects insurance premiums knows that whether there are no lawsuits or many, the cost of premiums is cyclical and has been for many years.

“Second, there is nothing about the Langwith case that says all cases must go to a jury,” Olson said. “What the Supreme Court is saying is that in this particular situation, summary judgment is not appropriate.”

Earlier this month, the attorney representing Fitzgerald filed a petition for rehearing with the Iowa Supreme Court, which will likely be considered before a new trial date would be set.

‘Significant overstep’

From the agents’ perspective, the case is a “huge, significant overstep by the Iowa Supreme Court,” Skow said. “This case is, frankly, rewriting law,” he said. “We had a medical malpractice crisis in the 1980s. This potentially could lead to the same thing for insurance agents. There are only a handful of professional liability carriers, and many of those carriers have left states that have laws like this,” he said.

When Skow began representing the IIA more than 20 years ago, on average one in 20 members would be sued each year, he said. “Now we’re in the neighborhood of about one out of six or seven agents being named in litigation every year. In the bulk of those, it’s a dispute between the insurance company and the client, but they name the agent. Now, all of those get changed (to naming the agent), and we’re going to have to defend those.”

Olson said that under Iowa law, insurance agents have for many years had a duty to their clients, “and nothing in Langwith changes that,” he said. Rather, “it says that there are additional things that an insurance agent and a client can talk about that could lead to a greater duty.”

Agents have the choice not to venture into specific areas, Olson said. “The agent completely controls that – am I going to keep this to just providing the insurance, or am I going to act as a risk management specialist? The key point is that the insurance agent still determines the scope of their representation.”