When Is an Insurance Agent Liable in Michigan? Duties Owed to Policyholders and Insurers. Originally Published in the State Bar of Michigan Journal of Insurance and Indemnity Law.

Michigan law has imposed a range of duties on insurance

agents through the years, ranging from the most basic duty of

an “order taker” for the insured, to the highest duty of fiduciary

for the insurance company. Generally, these duties have

arisen from three separate legal sources – statutes, contracts

and common law. Coupled with the varying designations conferred

on insurance agents as well as the infinite number of

distinct factual scenarios leading to the purchase of insurance,

Michigan law is somewhat convoluted on the issue of an insurance

agent’s duties to a potential insured.

Nearly three decades ago, the Michigan Court of Appeals

published a decision that adopted the general rule that an independent

agent, who can write for several insurance carriers,

is considered the agent of the insured and not the insurer.

Mayer v Auto-Owners Insurance Company1 Yet, when considering

other legal sources, this common law rule oversimplified

a rather complex issue. To begin with, all licensed agents are

governed by the Michigan Insurance Code, which imposes a

fiduciary duty upon the agent to an insurance carrier when

receiving premiums.2 Thus, as soon as an independent agent

is appointed by a carrier, he or she instantly becomes the insurer’s

agent when handling premiums, which contradicts the

general rule that an independent agent is solely the agent of

the insured.

Moreover, an independent agent usually signs a producer

agreement with each carrier, thereby imposing additional duties

on the agent owed to the carrier as well as limited binding

authority. So, when considering all sources of Michigan

law, even an independent agent is the agent of its insurance

carriers, albeit for limited purposes. It follows, therefore, that

the common law rule in Mayer may be construed as partially

inconsistent with other sources of Michigan law. Sixteen years after Mayer, the Michigan Supreme court

published Harts v Farmers Insurance Exchange.3 Harts involved

a captive agent that sold an auto policy to an insured without

advising the insured to purchase uninsured motorist coverage.

Following an accident with an uninsured driver, the insured

sued the insurance agent for negligence. The Harts court found

that the agent had no duty to advise the insured on whether

to purchase uninsured motorist coverage, stating “an insurance

agent whose principal is the insurance company owes no duty

to advise a potential insured about any coverage.”

The Harts case also created the often-cited rule that an

insurance agent is simply an “order taker” unless a “special

relationship” is created between the parties. This special relationship

abrogates the general “no duty to advise” rule but

requires the insured to prove specific facts concerning the parties’

communications before the policy was issued.4

Although Harts involved a captive agent, and premised the

“no duty” rule upon the captive agent being the principal of

the insurance carrier, several unpublished Court of Appeals

cases after Harts expanded the “no duty without proving a

special relationship” test to apply to independent agents as

well. Significantly, these cases were silent on the distinction

between a captive agent and an independent agent, thereby

applying Harts to all insurance agents - essentially holding that

no insurance agent, captive or independent, owes a duty to

advise an insured on the adequacy of coverage absent proof of

the Harts “special relationship.”

This resulted in an apparent conflict with the older rule

cited in Mayer that an independent agent is considered the

agent of the insured and not the insurer - a rule that would

impose a duty to properly counsel and advise the insured

without proof of a special relationship. This particular conflict

frequently arises in errors and omissions cases at the trial

level on summary disposition. To my knowledge, neither the

Michigan Court of Appeals nor the Michigan Supreme Court

has addressed it specifically. However, recently, the Michigan

Court of Appeals made reference to the conflict in some unpublished

cases. The first case, National Association of Investors

Corp v Dobson-McOmber Agency, Inc., et al.5 involved a

non-profit corporation that purchased a directors and officers

policy from its longtime independent insurance agent. The

plaintiff had apparently requested that its agent provide a presentation

on the insurance coverage afforded under the policy.

At the presentation, the agent failed to discuss the policy exclusions.

After the policy was issued, a former board member

sued the non-profit and the non-profit tendered the suit to the

insurance carrier for coverage. Upon receipt of the lawsuit, the

carrier denied coverage based upon the “insured v insured” exclusion

in the D&O policy, which prompted the non-profit to

sue its agent for negligence. The trial court applied the Harts

special relationship test and granted the agent’s motion for directed

verdict at trial.

The Court of Appeals reversed the trial court’s directed verdict

and discussed several significant legal principles, including

a short discussion of whether the Harts special relationship test

applies to independent agents at all, stating: “it appears that the

Harts case may not even apply to this case.” Although the court

did not explicitly refuse to follow Harts, it implicitly challenged

the prior cases that applied Harts to independent agents.

Within six months after issuing Dobson-McOmber, the

Court of Appeals issued two additional unpublished decisions

that applied Harts to independent agents. The first decision

was Mauro v Lucido’s Insurance Agency, Inc.6 In Mauro, without

discussing the distinction between a captive and independent

agent, the Court applied the Harts rule to the facts of the case,

stating: “Insurance agents generally have no duty to advise an

insured.” However, Harts lists four situations when a “special

relationship” between the agent and the insured may create a

duty to advise the insured on the part of an insurance agent.”7

The third and most detailed decision is Nokielski v Colton.8

Colton involved an auto accident in which the driver of a vehicle,

Colton, was sued for negligence. Prior to the car accident,

Ms. Colton maintained an auto policy and an umbrella

policy through the same insurance carrier. Subsequently, Ms.

Colton switched her auto policy to a different carrier and left

her umbrella policy in place with the original carrier. Unfortunately,

the new auto policy only had limits of $100,000

per person/$200,000 per accident, which did not satisfy the

umbrella policy condition that the primary layer of insurance

provide at least $500,000 in coverage. This resulted in a gap in

coverage for the accident of $400,000.

The Coltons sued their insurance agent (who was an independent

agent) for failing to advise them to purchase at least

$500,000 in primary coverage. The trial court applied Harts

and ruled that no special relationship existed to create an exception affirmative duty to advise or counsel an insured about the adequacy

or availability of coverage. Colton at 3. At the appellate

level, the Coltons argued that Harts was inapplicable because

it only applies to cases involving captive insurance agents and

not independent agents.

The Court of Appeals discussed the captive versus independent

agent distinction in its opinion and found that the Harts

rule applies to both:

Although the defendant in Harts was a captive insurance

agency, in our opinion, there is no reason

that would preclude the Harts test from applying

to both types of agents…The Harts Court did not

specifically indicate that it only intended to address

captive agents and not independent agents…we

conclude (its reasoning) extends to both captive and

independent insurance agents.9

The Colton case delved into an issue that has oftentimes

been the subject of argument at the trial court level. However,

since Colton was issued within months of Dobson-

McOmber (which questioned the applicability of Harts to

independent agents), its persuasiveness is somewhat tempered.

Additionally, the unpublished nature of these cases

brings to mind something stated by a local trial judge during

motion call recently: “An unpublished case is nothing

more than a letter from the court to the litigants.” Significantly,

a publication request in Colton was denied by the

appellate panel on February 16, 2011.

Endnotes

1 Mayer v Auto-Owners Insurance Company, 127 Mich App 23

(1983).

2 MCL 500.1207.

3 Harts v Farmers Insurance Exchange, 461 Mich 1 (1999)

4 Harts at 10.

5 National Association of Investors Corp v Dobson-McOmber Agency,

Inc., et al., Unpublished per curiam opinion of the Court of Appeals,

Issued June 29, 2010 (Docket No. 286295)

6 Mauro v Lucido’s Insurance Agency, Inc, Unpublished per curiam

opinion of the Court of Appeals, Issued December 21, 2010

(Docket No. 294397).

7 Mauro at 3.

8 Nokielski v Colton, Unpublished per curiam opinion of the

Court of Appeals