Broker had no duty to be truthful with insurer but can besued for fraud

An agent in Indiana arranged insurance for a family-ownedbusiness that restored and repaired recreational vehicles. Theagency for which the agent worked also wrote personal-linesinsurance for the insureds and had a relationship with them goingback to the early 1980s.

The insurance written for the family-owned business initiallydid not cover any vehicles. However, to help the insureds obtainrelatively low-cost automobile insurance for their teenage son, theagent suggested that the son lease his 1995 Chevy pickup truck tothe business. The agent provided the lease to the insureds, andthey executed it. The lease required the family-owned business toprovide the son with insurance when he drove the pickup. The agencyrequested the insurer to amend its policy to cover the son as adriver of the truck, indicating that he would use the pickup totransport vehicle parts and supplies for the family-owned business.Accordingly, the carrier added an insured-lessor endorsement to thepolicy, covering the son as a driver.

In March 1998, the son sold the 1995 Chevy pickup and bought a1998 Ford Mustang GT. The son executed another lease, with the sameterms as the former one. The agency notified the carrier, asking itto delete coverage for the Chevy pickup truck and add it for theMustang GT. The insurance company issued an amended policydeclaration acknowledging the change in vehicles. However, it alsodeleted the lessor-insured endorsement. The agency did not detectthe deletion and consequently did not advise the insureds that thepolicy on the family-owned business no longer covered theirson.

On June 8, 1998, the son again traded vehicles, selling theMustang and replacing it with a 1997 Dodge pickup truck. On thatday, the son and the family-owned business orally agreed to a leasecovering the new pickup, with the same terms as the previousleases. On the same day, the insureds informed the agency of thenew lease and requested that coverage be dropped on the Mustang andadded on the pickup truck. The agency submitted the request to theinsurer on June 15, but just a few days before, on June 12, theson, while driving the pickup, was involved in a collision thatleft three minors dead and two others seriously injured.

In November 1998, the insurance company sought a judgmentdeclaring that its policy issued to the family-owned business didnot cover the son at the time of the accident. The trial court,however, granted summary judgment to the insureds, finding thatcoverage existed. The insurer appealed, but the appeals courtaffirmed the decision. Specifically, it held that the deletion ofthe lessor-insured endorsement was a cancellation for which thecarrier failed to give the insureds adequate notice.

The insurer tendered its $2 million policy limits to the injuredparties, then sued the agency for damages, alleging it owed thecarrier a duty to exercise due care, skill and diligence; to dealhonestly in placing insurance with the carrier; and to inspect theamended policy declaration that deleted the lessor-insuredendorsement to ensure that it reflected the requested coverage. Thecarrier also alleged that "in devising this plan to providelow-cost coverage to (the son)," the agency fraudulentlymisrepresented facts.

The agency filed a motion for summary judgment, which the trialcourt granted. In doing so, the trial court ruled that the agencywas an insurance broker and, as such, was the agent of theinsureds, not the insurance company. The court found the agencybreached no duty, if any, it owed the insurer, whether created bycontract or common law, or in some fiduciary capacity. The insurerappealed.

The appeals court said that the relationship between the carrierand agency was defined by their agreement. That document authorizedthe agency to solicit applications, bind coverage and collectpremiums, but did not otherwise impose any duty on the agency withrespect to disclosure of information regarding an insured. Nor,said the appeals court, did it require the agency to act honestlyor with due diligence. The agreement expressly described the agencyas an "independent contractor" and not as the insurer'semployee.

The carrier argued that its relationship with the agent was notdefined solely by the agreement and maintained that the parties'course of dealing was relevant to determining whether the agencyowed it any duty. The appeals court disagreed, noting that it wasdetermining the scope of the relationship "not from the vantagepoint of a proposed insured's expectations, but rather by examiningwhat responsibilities and obligations (the agency) agreed with (thecarrier) to undertake." It also noted that the agreement was thecarrier's; in offering it to the agency, the carrier could haveproposed imposing duties on the agency, including a duty toindemnify the insurer. The agency, the court said, then would havebeen free to accept or reject such terms. But the carrier didn't dothis, the court continued. Instead, it chose to contract with theagency as a broker, rather than employ it as its agent.

"Now that (the insurer) has been found liable for payment ofinsurance benefits, it cannot attempt to reconfigure therelationship; i.e., it cannot claim that agency was its agent andowed it duties, the breach of which would require agency toreimburse (the insurer) for insurance proceeds paid to an insured,"the court said. "Simply stated, (the insurer) cannot have it bothways, namely employ agency as a broker, but impose duties on thepremise that agency was an agent." The court did comment on "thetroubling nature of the allegations surrounding the manner in whichagency sought and obtained coverage for (the insureds' son) and hisvehicles; however, we find, as did the trial court, that as amatter of law agency did not owe any duty to (the insurer), andthus agency is entitled to summary judgment on (the insurer's)negligence claims."

The carrier also argued that the agency fraudulentlymisrepresented facts when it sought coverage for the son's threevehicles. The appeals court noted that Indiana law recognizes twoforms of fraud, actual and constructive.

The insurer didn't identify under which theory of fraud itsought recovery. To the extent it claimed that, when requestingcoverage, the agency failed to disclose (i.e., omitted) facts thatwould have affected its decision to insure the vehicles and theson, the court said the action constituted a claim for constructivefraud-which required a duty. Since it had been established that theagency owed no duty to the insurer, the trial court's decisiongranting summary judgment to the agency was correct, the appealscourt ruled.

But the appeals court continued that "to the extent that thecarrier alleged the agency affirmatively misrepresented past orexisting fact, for instance that the purpose of the subjectvehicles...was to transport vehicle parts for (the family ownedbusiness), (the insurer's) claim is one for actual fraud. This typeof fraud is not dependent on a duty and is not foreclosed by theabsence of a duty flowing from agency to (the insurer). Becauseagency has not established that as a matter of law it did notcommit actual fraud, summary judgment was inappropriate on thisaspect of (the insurer's) fraudulent misrepresentation claim.Therefore, we reverse summary judgment as to (the insurer's)fraudulent misrepresentation claim as it pertains to actual fraudand remand to the trial court for further proceedings consistentwith this opinion."

Westfield Insurance Co. vs. Yaste, Zent & Rye Agency, No.43A03-0306-CV-239 (Ind.App. 04/07/2004) 2004. IN.0000204(www.versuslaw.com).

Readers may fax Don Renau at (502) 897-1533. His e-mail addressis [email protected].