Were insureds injured by agent’s negligence?

In 2002, Jerry and Becky French purchased a manufactured home for $76,950. They worked with their long-time insurance agent, Jane Hodson, to purchase State Farm homeowners insurance for their new home. As part of the purchase process, Hodson asked Jerry various questions and entered data into an “insurance to value” (IV) calculator to arrive at a replacement cost of $173,200.

The IV calculator is an electronic tool insurance agents use to determine a “reasonably accurate estimate of current replacement cost” coverage. Hodson also determined that the Frenches would need additional coverage during “construction” of the home (even though the home was a manufactured home), so she added a “dwelling under construction” endorsement to the policy. The Frenches also purchased an “increased dwelling limit” endorsement that increased their coverage by $34,640, as well as an additional $130,000 of personal property coverage.

State Farm offered different insurance policies “determined by the type of home you have.” Specifically, according to Hodson, State Farm offered “renter[’]s insurance,…mobile home insurance, [and]…homeowners.” And, according to State Farm, there are significant differences between a manufactured home and a stick-built home. A stick-built home is one that is built piece by piece at the construction site, as opposed to a home that is built entirely in the factory. Despite those apparent differences, Hodson did not ask Jerry French whether his new home was a manufactured or stick-built home, nor did she ask him about the purchase price of his new home.

The Frenches moved into their new home in August 2002. In February 2003, the house was destroyed by fire. State Farm claim representative Michael Schliessman told the Frenches that they “could use up to their policy limits—$176,837—to rebuild [their] home but [they] would be responsible for costs incurred over that amount.” He then sent Jerry French a follow-up letter that stated, in part: “The expenses for your building are payable under Coverage A. Any item that is permanently attached to the dwelling is included under this coverage. Your limit under this coverage is $176,837.” The letter described the process by which repair work was to be performed, including the following statement: “If your contractor’s estimate is higher than your claim representative’s estimate, we will work with your contractor to reconcile the differences.”

Because they thought an electrical defect in the manufactured home had caused the fire, the Frenches were hesitant to buy another manufactured home. Instead, although they intended to use the existing foundation, they wanted to build their new home on site using a local contractor, at an approximate cost of $184,445.

State Farm researched the cost of replacing the Frenches’ manufactured home. The cost of the same model had increased to $80,187.18, and this was the amount that State Farm offered to replace the home. The Frenches claimed that they had interpreted the Schliessman letter to mean that the full $176,837 was available. They accepted the $80,187.18 amount but reserved their right to seek further coverage.

In 2004, the Frenches sued State Farm and Hodson. Count I of the lawsuit alleged that State Farm breached its policy by limiting the coverage to $80,187.18. Count II alleged that, if the court found that the policy provided only $80,187.18 of coverage, then Hodson was negligent in her duties as their agent. On the issue of Hodson’s negligence, the court found in favor of Hodson. The Frenches appealed that decision, arguing that Hodson had overcharged them for illusory coverage and that she had breached her duty to ascertain the facts necessary to procure coverage.

On appeal, the Court of Appeals of Indiana noted that it had “serious misgivings” as to whether Hodson exercised “reasonable skill, care and diligence in the procurement of more than $200,000 in homeowners coverage for a $76,000 manufactured home.” Nevertheless, the key issue was whether the Frenches suffered an injury because of that negligence. According to the court, because of Hodson’s alleged negligence in procuring a policy with inflated limits, the Frenches received more benefits than they should have; not less. In addition, the court found that the Frenches did not rely on Hodson when they decided to build a “stick-built” home as opposed to purchasing another manufactured home. They made that decision even when they knew there was a coverage dispute.

The court concluded that to the extent there was any negligence on the part of Hodson, that alleged negligence did not cause the Frenches injury. Accordingly, the decision of the lower court in favor of Hodson was affirmed.

French vs. State Farm Fire & Casualty Company-No. 18A02-0612-CV-1161-Court of Appeals of Indiana-March 6, 2008-881 North Eastern Reporter 2d 1031.