Restaurateurs Do Not Have to Check Exclusions in Policy: Insurance Agent Found Liable for Picking the Wrong Policy

On April 3, 2008, the Corpus Christi Court of Appeals held an independent insurance agency was liable for negligently selecting an insurance policy for a restaurant that did not include coverage for communicable diseases, and affirmed the jury's conclusion that the restaurateurs were not negligent in failing to take affirmative steps to familiarize themselves with their policy's communicable disease exclusion.

In InsuranceNetwork of Texas v. Kloesel, --- S.W.3d ---, 2008 WL 907479 (Tex.App.--Corpus Christi 4/3/08), Mr. and Mrs. Kloesel d/b/a Kloesels' Steakhouse, Inc. decided to change insurance, and consulted InsuranceNetwork regarding coverage. They requested a policy that would provide "100% coverage" and that "covered if a customer got sick or if there was anything wrong with the food." InsuranceNetwork procured a policy, however, that did not provide coverage for communicable diseases. When two patrons successfully sued the restaurant after they contracted Hepatitis A, the insurer denied coverage.

The restaurant sued InsuranceNetwork for breach of contract, negligence, and violations of the Texas Insurance Code and DTPA. At trial, the jury found that InsuranceNetwork was liable for causing the restaurant damages, and that the restaurateurs were not negligent in failing to take affirmative steps to familiarize themselves with their policy's communicable disease exclusion.

In affirming the trial court's judgment, among other things, the court of appeals found the insurance agency did not have a duty to explain to the restaurateurs that the policy it procured contained a communicable disease exclusion, where the owners never consulted with the agency to determine the adequacy of their liability coverage and the agency never gave them any advice in that regard. It also explained that, when courts assess whether an insured is negligent in failing to read his policy in such lawsuits, they do not do so for the purpose of determining whether the insured should be excused from failing to "exercise his eyes." Rather, courts do so to determine whether the insured should be excused from failing to know and understand the contents of his policy.

The court found that, in a negligent procurement of policy action against an insurance agent, an insured is excused from understanding the contents of his policy when: (1) it was reasonable for the insured to not have understood the import of the terms read, and (2) the insured's failure to acquire an understanding of the terms was directly related to the insured's reasonable reliance on the agent's knowledge and the assumption that the agent had correctly drawn the policy in conformance with said knowledge.  The court found that an insurance agent's client should be able to rely on the agent's knowledge in two respects: (1) when the agent's knowledge includes his client's instructions regarding the qualities desired in a policy, the client may assume the agent will procure a policy in conformance with such knowledge, and (2) the client may assume the agent will procure a policy that a reasonably prudent agent would procure.

Thus, the court of appeals held the evidence at trial was sufficient to establish that InsuranceNetwork's negligent procurement of a CGL policy containing a communicable disease exclusion proximately caused the restaurant's damages, and that the restaurateurs were not contributorily negligent due to their failure to fully read and understand their policy - - especially where the plaintiffs' expert testified that communicable diseases were the most significant insurable risk that restaurants faced, the restaurateurs testified they asked the agency to provide coverage in the event customers became sick and relied on the agency's expertise, and the exclusion was not defined in the policy binder and was placed among other exclusions that were entirely irrelevant to the restaurant's operation.

If you would like a copy of this opinion, or more information on the topic, please contact the Business Litigators at Clouse Dunn Khoshbin LLP at info@cdklawyers.com.