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The Thursday November 1, 2012 edition of the Los Angeles Daily Journal featured Robert McKennon and Reid Winthrop’s front-page article entitled: “Insurance Agents Key to Insurer Liability.” In it, Mr. McKennon and Mr. Winthrop discuss how agents can be the key to rendering insurers liable for policy coverage. The article discusses the difference between “brokers” and “agents,” including “dual agents,” and discusses when and how to make the case that a “broker” is really an “agent” for purposes of imputing liability to an insurance company. The article also discusses how to respond to an insurer’s argument that the policy terms control and the insured has a duty to read the policy. The article is posted below with the permission of the Daily Journal.
California Governor Jerry Brown recently signed a new law that will provide increased protection to seniors and other consumers who are interested in purchasing an annuity. AB 689, which was sponsored by the California Department of Insurance and authored by Assembly Budget Committee Chair Bob Blumenfield (D-San Fernando Valley), requires that insurers verify that an annuity purchase is suitable and appropriate for the consumer based on an evaluation of his or her age, income, financial objectives and ten other factors. The bill was unanimously passed by both the state Senate and the state Assembly.
Lawmakers felt that additional protection was necessary because many consumers have only a vague understanding of the conditions and risks associated with the purchase of an annuity. Assembly Member Blumenfield said that another reason for the new law is that annuities are often sold to seniors, who sometimes do not understand “that their money will be unavailable to them for years.” In addition, annuities are typically very expensive in the short term, a fact which is not always properly conveyed to consumers. Finally, as noted by Blumenfield, the sale of annuities is often a “breeding ground for fraud.”
Before the passage of the new law (located in the California Insurance Code, beginning at section 10509.910), agents and insurers were required to fulfill only limited requirements when selling or replacing life insurance policies and annuities. Now, insurance companies and agents must comply with very specific requirements when recommending that a consumer purchase, exchange or replace an annuity. Specifically, after evaluating 13 different suitability factors (detailed in section 10509.914(i)), an insurance company and agent can only sell an annuity if there are “reasonable grounds for believing that the [annuity] is suitable for the consumer.” See Insurance Code section 10509.915(a). The bill also requires that an insurance agent receive Insurance Commissioner-approved training before he or she can sell annuities.
McKennon Law Group PC has several cases dealing with unsuitable annuities. More often than not, annuities are not properly sold and we often find that insurance agents and insurers often do not make truthful representations about them. Although this law should help stem the tide of unsuitable annuity sales, problem annuity sales will continue to plague the insurance industry for a long time to come.
Do insurance brokers owe fiduciary duties to their clients? Under California law, until recently, this was an open question. Most attorneys, especially those representing policyholders, included a breach of fiduciary duty cause of action when suing an insurance broker/agent in actions that involve broker/agent malpractice. And, some include these claims when suing a broker/agent and an insurance company for insurance bad faith. California law has now been clarified with the California Court of Appeals for the Second Appellate District’s decision in Workmen’s Auto Insurance Company v. Guy Carpenter & Company, Inc., __ Cal. App. 4th __, Cal. App. LEXIS 533 (May 4, 2011), that held insurance brokers do not owe fiduciary duties to their clients.
Guy Carpenter & Co. (“Carpenter”) is a reinsurance intermediary providing insurance companies with reinsurance coverage. Carpenter placed reinsurance for Workmen’s Auto Insurance Co. (“the company”) with PMA Capital Insurance Company of Philadelphia, Pennsylvania (“PMA”). The company sued Carpenter, alleging causes of action for negligence, breach of fiduciary duty and breach of contract. Regarding the breach of fiduciary duty claim, the company asserted that Carpenter breached its duty by failing to secure timely payments from PMA, failing to secure the best available terms of reinsurance, and acting with the intent to injure the company by incurring inflated commissions.
The trial court dismissed the breach of fiduciary duty claim but the other claims were tried before a jury. The jury found in Carpenter’s favor on both the negligence and breach of contract claim. The company appealed this decision dismissing the breach of fiduciary duty claim.
The court first addressed an insurance broker’s potential liability for failure to exercise reasonable care as follows:
[A]n insurance [broker] will be liable to his client in tort where his intentional acts or failure to exercise reasonable care with regard to the obtaining or maintenance of insurance results in damage to the client. [Citation.]‖ (Saunders v. Cariss (1990) 224 Cal.App.3d 905, 909.) For example, a ―broker‘s failure to obtain the type of insurance requested by an insured may constitute actionable negligence.‖ (Nowlon v. Koram Ins. Center, Inc. (1991) 1 Cal.App.4th 1437, 1447; Desai v. Farmers Ins. Exchange (1996) 47 Cal.App.4th 1110, 1120.) But as a general proposition, a broker does not have a duty of care to advise a client on insurance matters unless ―(a) the agent misrepresents the nature, extent or scope of the coverage being offered or provided . . . , (b) there is a request or inquiry by the insured for a particular type or extent of coverage . . . , or (c) the agent assumes an additional duty by either express agreement or by ‗holding himself out‘ as having expertise in a given field of insurance being sought by the insured.‖ (Fitzpatrick v. Hayes (1997) 57 Cal.App.4th 916, 927; Jones v. Grewe (1987) 189 Cal.App.3d 950, 954 (Jones) [an insurance agent does not have a duty of care ―to advise the insured on specific insurance matters‖ absent an express agreement or holding out as an expert]; Free v. Republic Ins. Co. (1992) 8 Cal.App.4th 1726, 1730 [no general duty of care to advise regarding the sufficiency of insurance].)
The court explained that in a typical agency relationship, there is the principal, and the agent looking out for the interests of the principal. The relationship between the agent and the principal, outside of the insurance industry, has been a fiduciary relationship, wherein the agent owes the principal a fiduciary duty. The company argued that insurance case law should not be applied to the reinsurance intermediary-broker relationship due to the “far more complex and comprehensive relationships with their clients.” Therefore it argued, Carpenter did not just owe a duty to exercise reasonable and due care, but owed a higher level duty, those duties owed by a fiduciary.
The Court of Appeals looked at “whether Carpenter was the company’s agent and, if so, whether that agency imposed a fiduciary duty on Carpenter as a matter of law such that Carpenter can be held civilly liable for breaching those duties.” A reinsurance-intermediary broker, as defined in the Insurance Code Section 1781.2(g) is
any person, other than an officer or employee of the ceding insurer, firm association, or corporation that solicits, negotiates, or places reinsurance cessions or retrocessions on behalf of a ceding insurer without the authority or power to find reinsurance on behalf of that insurer.
Under the statute, the reinsurance intermediary-broker can be characterized as a dual agent. Such a broker acts on the behalf of the interests of two parties, not a single party. The Court held that Carpenter, as a reinsurance intermediary-broker was an agent of the company. However, the Court was hard-pressed to find a fiduciary duty anywhere in insurance law. The Court stated: “we are unaware of even a single California precedent permitting a client to sue an insurance broker for breach of fiduciary duty.” Therefore, the Court did not want to open this door as a matter of public policy. The Court held that “decades of cases have drawn a policy line between what brokers must do and need not do. Because that line has been drawn, we decline to revisit the issue.”
The court went on to review a number of California cases discussing the duties of an insurance broker, including Kotlar v. Hartford Fire Ins. Co (2000), 83 Cal. App. 4th 1116, 1123. In Kotlar, the court held that “a broker only needs to use reasonable care to represent his or her client”, and “a broker’s duties are defined by negligence law, not fiduciary law.” The court then further explained its holding that a broker owes no fiduciary duties under insurance law:
Given the foregoing, and given that a broker is an agent, there is an inherent conflict between insurance law and agency law. Agency law establishes that ―[t]he relations of principal and agent, like those of beneficiary and trustee, are fiduciary in character. . .. [¶] . An agent must disclose to his principal every fact known to him bearing upon the [subject matter of the agency], the concealment of which would lead to the injury of the principal [citation].‖ (Kinert v. Wright (1947) 81 Cal.App.2d 919, 925 (Kinert); Chodur v. Edmonds (1985) 174 Cal.App.3d 565, 571 (Chodur) [―[a]n agent is a fiduciary‖].) Further, an agent has an obligation of ―diligent and faithful service the same as that of a trustee. [Citations.]‖ (Ibid.) As explained by Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 29 (Wolf), a fiduciary is bound to act with utmost good faith for the benefit of the other party. If applied in the insurance context, Kinert, Chodur and Wolf would require brokers to disclose all material knowledge and advise client‘s on specific insurance matters even if the broker is not required to do so by the duty of care. Indeed, ―the duty of undivided loyalty the fiduciary owes to its beneficiary . . . [is] far more stringent‖ than the duty of care. (Wolf, supra, at p. 30.) ―‗Many forms of conduct permissible in a workaday world for those acting at arm‘s length, are forbidden to those bound by fiduciary ties. A [fiduciary] is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive is then the standard of behavior.‘ [Citation.]‖ (Ibid.) Thus, it is impossible for us to reconcile insurance law and agency law.
So, unless there are other courts of appeal that disagree or if the California Supreme Court addresses the issue, it appears the level of care an insurance broker owes to its client is measured, not by a fiduciary duty, but by a reasonable standard of care.
James Dobbas (Dobbas) owned a ranch and livestock in Sierra County. Fred Vitas (Vitas), his insurance agent, obtained a $1 million primary liability policy and a $3 million excess liability policy for his ranch operations with Cal Farm Insurance Company (Cal Farm). Dobbas also owned a railroad emergency response company. American Guarantee and Liability Insurance Company (American) insured Dobbas as a sole owner of the company under a $7 million excess liability insurance policy. Vitas allegedly cancelled the Cal Farm $3 million excess policy or failed to renew it.
A bull owned by Dobbas escaped from his ranch and caused a serious two-car collision. Two people died and four were seriously injured. They sued Dobbas. Dobbas sued Vitas for insurance agent malpractice. Cal Farm paid its $1 million primary limits toward a settlement with the victims, and Dobbas assigned the victims his rights against Vitas as part of the settlement. The victims obtained a $5 million dollar judgment against Dobbas. In a separate coverage action, a federal district court held that American’s excess policy also covered the risk. American then paid $2.8 of its excess policy limits to settle the victims’ claims, and took an assignment of their assigned rights against Vitas.
American moved to intervene in the agent malpractice action against Vitas on a theory of equitable subrogation. The trial court denied American’s motion to intervene on the grounds that American could never prove that the agent caused or was responsible for the loss—a necessary element of an equitable subrogation claim. The California Third Appellate District affirmed, and expanded the basis for denying American’s motion to intervene.
“An insurer bringing an action based upon a claim of equitable subrogation must establish the following elements: ‘(1) The insured has suffered a loss for which the party to be charged is liable, either because the latter is a wrongdoer whose act or omission caused the loss or because he is legally responsible to the insured for the loss caused by the wrongdoer; (2) the insurer, in whole or in part, has compensated the insured for the same loss for which the party to be charged is liable; (3) the insured has an existing, assignable cause of action against the party to be charged, which action the insured could have asserted for his own benefit had he not been compensated for his loss by the insurer; (4) the insurer has suffered damages caused by the act or omission upon which the liability of the party to be charged depends; (5) justice requires that the loss should be entirely shifted from the insurer to the party to be charged, whose equitable position is inferior to that of the insurer; and (6) the insurer’s damages are in a stated sum, usually the amount it has paid to its insured, assuming the payment was not voluntary and was reasonable.’” (quoting Patent Scaffolding Co. v. William Simpson Constr. Co., 256 Cal.App.2d 506, 509 (1967))
The appellate court took aim at the fifth element. It equated the insurance agent’s duty to obtain excess insurance covering the risk with American’s duty to indemnify against the risk. The appellate court pointed out that since both Vitas and American contracted to protect Dobbas from the same risk, neither could claim a superior equitable right against the other under California law.
“’In subrogation litigation in California, the doctrine of superior equities is critical in determining whether a right of subrogation exists.’ [citation]. The issue is addressed by the fifth element of equitable subrogation, i.e., whether justice requires that the loss be entirely shifted from the insurer to the third party. The equities do not permit recovery where the insurer and the third party promised the same thing, to provide insurance. [citation].”
The appellate court explained that American’s right of recovery, if any, against Vitas was more akin to the right of equitable contribution—not equitable subrogation:
“Because the obligation of both American Guarantee and Vitas was to provide insurance to Dobbas to indemnify the same loss, American Guarantee’s rights against Vitas parallels those of two equally situated insurers when one fails to pay a claim. The appropriate resolution of such facts is by application of the rules of equitable contribution. Equitable contribution apportions costs among insurers that share the same level of liability on the same risk. [citation]. It arises when one insurer has paid more than its share of the loss that several insurers are obligated to indemnify. [citation]. Equitable subrogation, on the other hand, allows an insurer that paid a loss to be placed in the insured’s position to recover from another insurer who was primarily responsible for the loss. [citation]. Under the rules of equitable contribution, an insurer can recover only when it has paid more than its fair share with regard to other insurers who are obligated to pay the same claim. If it has not paid more than its fair share, it cannot recover, even though the other insurer has paid nothing. [citation]. “
Applying the rules of equitable contribution, the appellate court concluded that American paid no more than it would have paid had the Cal Farm excess policy been in place. Accordingly, the appellate court sent American away empty handed.
It isn’t immediately intuitive that an insurance agent’s duty to obtain insurance against a risk is co-extensive with an insurer’s duty to indemnify against the risk. But for purposes of equitable subrogation under California law, it is. It will be interesting to see whether the appellate court’s expansive holding leads to unintended consequences in future cases.
