The September 11, 2014 edition of the Los Angeles Daily Journal featured Robert McKennon’s article entitled: “Case highlights importance of agent-broker distinction.” In it, Mr. McKennon discusses a new case, Douglas v. Fidelity National Insurance Co., 2014 DJDAR 12127 (Aug. 29, 2014), which highlights the critical importance in insurance coverage cases, especially disability insurance and life insurance cases, of the legal distinction between agents and brokers. Mr. McKennon explains why this distinction can alter the outcome of a case or insurance claim. The article is posted below with the permission of the Daily Journal.
Case highlights importance of agent-broker distinction
Insurance agent or insurance broker? In everyday parlance these two terms are often used interchangeably to mean a salesperson who obtains and sells insurance policies to consumers. However, the distinction between an agent and a broker can have serious implications regarding whether the insured or the insurer bears responsibility for any misrepresentations made by an individual or company acting as go-between in the process of applying for an insurance policy. This point was clearly illustrated by the California Court of Appeal inDouglas v. Fidelity National Insurance Co., 2014 DJDAR 12127 (Aug. 29, 2014).
InDouglas, the court reversed a verdict in favor of the insured, finding that the trial court improperly failed to provide the jury with instructions allowing it to find that the insurance “agent” was actually a “broker,” and that misrepresentations made in the insurance application process should be imputed to the insured, not the insurer.
The case involved plaintiffs who went to an insurance services company, InsZone, and met with their employee who assisted the plaintiffs in obtaining a homeowner’s insurance policy issued by Fidelity National Insurance Company. InsZone submitted applications to Fidelity through an online process. A few months after the policy was issued, the plaintiffs’ house was damaged in a fire and the plaintiffs filed a claim with Fidelity. After investigating the claim, Fidelity alleged that, contrary to representations made in their applications, the plaintiffs did not actually live in the house; rather, they used it as a residential care facility. Fidelity rescinded the policy based on several alleged material representations in the insurance applications concerning how the house was being used, claiming that it would not have issued the policy had it known about the misrepresentations.
The plaintiffs sued both Fidelity and InsZone, claiming that Fidelity wrongfully denied their benefits. They argued that they did not make any misrepresentations, and any false information was provided by InsZone acting as Fidelity’s agent. The jury ultimately sided with the plaintiffs.
On appeal, Fidelity argued that the trial court erred in refusing to provide jury instructions and verdict forms that would allow the jury to decide whether InsZone was the plaintiffs’ broker, thus rendering plaintiffs responsible for the misrepresentations. The Court of Appeal agreed, finding that there was undisputed evidence that an employee of InsZone had provided false information in the plaintiffs’ insurance policy applications. As such, the court explained, the issue of whether InsZone was the plaintiffs’ broker was significant because, if the jury found that InsZone was the plaintiffs’ broker, it “would have allowed the jury to hold plaintiffs responsible for any misrepresentations in the insurance applications, whether attributable to them directly or indirectly through [Inszone’s] conduct.”
The court specifically distinguished an “insurance broker” from an “insurance agent,” in that a broker acts as a middleman between the insured and the insurer and is not employed by any insurance company, whereas an agent represents and is employed by the insurer. The court explained that although both brokers and agents must be licensed by the California Department of Insurance, “a person may not act as an insurance agent without a notice of the agent’s appointment by the insurer to transact business on its behalf filed with the DOI.” In other words, the person must be appointed by the insurer as an agent.
Because it was unclear whether InsZone was appointed by Fidelity, and because the producer agreement specifically stated that InsZone was “‘never’ to be deemed Fidelity’s agent, except as ‘required by law,’” the court found that there was substantial evidence supporting a jury finding that InsZone was acting as a broker and not an agent. Interestingly, the court explained that the language in the independent producer agreement and the compensation schedule between InsZone and Fidelity did not automatically confer “agent” status. The agreement stated: “Producer has no authority to bind Company or Insurance Company on any insurance policy except as otherwise stated in the underwriting guidelines for the territories and lines of business set forth on Compensation Schedule.” The schedule provided that InsZone was authorized “to bind policies for the lines of business listed below and the Company shall pay Producer a commission based on the following table.” Thus, the court concluded, the jury should have been given the opportunity to determine whether InsZone was acting as the plaintiffs’ broker.
The court found that the trial court erred in refusing to allow the jury to consider the import of any unintentional material misrepresentations in the insurance applications because an insurer can rescind a policy based on unintentional material representations. Additionally, the court found that the trial court erroneously refused to include jury instructions that would have allowed the jury to consider whether InsZone provided false information in the insurance applications since the jury could find that InsZone was the plaintiffs’ broker whose misrepresentations can be imputed to the plaintiffs for purposes of determining whether a basis for rescission exists. Finally, the court held that the jury instructions improperly limited the jury to consideration of misrepresentations made in only one of the insurance applications submitted.
Douglasprovides several highly significant takeaways for an insured faced with a rescission issue. First, insurers may rescind an insurance policy based on a material misrepresentation provided in an insurance application, even if the false information was provided by his broker, and even if the insured was not at fault. Second, an insurer may rescind a policy even if the misrepresentation was unintentional. In this regard, it is important for the insured to determine if a notice of agent appointment is on file with the insurance commissioner as required by law. If one exists, the insurance producer will be deemed an agent of the insurer as a matter of law.
Had a notice of appointment existed inDouglas, the outcome would have been different. That’s because the agent’s actions would have been imputed to the insurer, who would have been estopped from seeking rescission of the policy. However, asDouglasinstructs, an insurer’s failure to file a notice of appointment with the Department of Insurance does not necessarily preclude a finding that an insurance producer was the insurer’s agent. See alsoChicago Title Ins. Co. v. AMZ Ins. Services Inc., 188 Cal. App. 4th 401, 425-26 (2010). An insured would then be well advised to scrutinize applications and agreements to search for any language supporting an argument that the producer is an agent who has the ability to bind the insurer.
Douglasagain illustrates that it is often crucial to the outcome of a rescission case to correctly distinguish between an insurance producer’s status as either an agent or a broker, as that distinction may well mean the difference between a claim being fully covered and the insured legally having no effective policy.