A recent court case illustrateswhy wholesale brokers should carefully review the contractuallanguage before signing with a surplus-lines carrier an agreementthat obligates the producer to ensure that risks being submittedcomply with the insurer’s underwriting criteria.

In GeoVera Specialty Insurance Co. vs. Graham RogersInc., the Eighth Circuit ruled that althoughinsurance-brokerage firm Graham Rogers Inc. did not actnegligently, it was still liable to underwriter GeoVera SpecialtyInsurance Co. based on the language in the agreement between thetwo parties—which placed the duty on Graham to apply GeoVera’sunderwriting guidelines to all applications of insurance submittedby retailers.

GeoVera andGraham entered into asurplus-lines broker agreement that allowed GeoVera to tap intoGraham’s network of insurance agents. GeoVera also maintained anelectronic residential-homeowner-quoting andhomeowner-insurance-processing system by which retailers, appointedby Graham, could submit applications to GeoVera directly.

Graham entered into a retail-producer agreement with a retailinsurance agent. The retail producer submitted a homeowners’insurance policy application for the home of Mr. and Mrs.Balentine. GeoVera accepted their application and issued apolicy.

Soon after, the Balentines filed a claim with GeoVera for aresidential fire. During GeoVera’s investigation of the claim, itwas discovered that the Balentines would not have qualified forcoverage under GeoVera’s underwriting guidelines because:

• The insured’s home was located on six acres of land, while theapplication stated it was on five or fewer acres. Insured lots maynot exceed five acres under GeoVera’s underwriting guidelines.

• The Balentines had filed for bankruptcy, and the applicationstated they had not filed for bankruptcy in the previous fiveyears.

• The application was not signed by the Balentines. Allapplications must be signed under the GeoVera underwritingguidelines.

After determining that the application’s deficiencies could notbe attributed to the Balentines, GeoVera paid the insureds inexcess of $780,000 on their claim. GeoVera then filed claimsagainst Graham asserting, among other things, breach of contractand negligence. Both parties moved for summary judgment.

The U.S. District Court for the Eastern District of Arkansasdismissed GeoVera’s negligence claims against Graham due to theutter lack of involvement in the underwriting process by Graham;and also dismissed GeoVera’s contract claim against Graham.

The Eighth Circuit Court of Appeals affirmed the finding of nonegligence in favor of Graham but reversed the breach-of-contractclaim and found in a strongly worded opinion that GeoVera couldproceed with its breach-of-contract claim against Graham.

While GeoVera and Graham agreed that Graham had “no part insubmitting the Balentines’ application,” the issue decided by theEighth Circuit Court of Appeals was whether the agreement betweenGeoVera and Graham placed a duty on Graham to apply GeoVera’sunderwriting guidelines to applications for insurance submitted byretailers.

The Eighth Circuit agreed with GeoVera that the agreement“placed a duty on Graham to apply GeoVera’s underwriting guidelinesto all applications for insurance submitted under the terms of theagreement, including those submitted by retailers appointed byGraham.” The Eighth Circuit remanded the case to the district courtfor further consideration of the breach-of-contract claim assertedby GeoVera against Graham. On remand, GeoVera moved again forsummary judgment against Graham. After careful consideration, thedistrict court granted GeoVera’s motion for summary judgment.

The district court followed the finding of the Eighth CircuitCourt of Appeals that concluded: “While retailers may help orassist Graham in applying the underwriting guidelines, Grahamretained the ultimate duty to apply GeoVera’s underwritingguidelines so that the risk to be insured fell within theacceptable underwriting guidelines.”

It was undisputed that Graham took no action to determine thatthe Balentines’ residence fell within GeoVera’s underwritingcriteria. Based on the undisputed record, the court found as amatter of law “that Graham breached its duty to apply GeoVera’sunderwriting guidelines to the Balentines’ surplus-linesapplication.” The district court then awarded GeoVera $785,708.34in damages—the amount it paid the Balentines for damages coveredunder the homeowners’ policy.

Graham had no involvement whatsoever with the underwritingprocess, yet it obligated itself in contract to make sure the risksubmitted by the retail producer covered only those risks thatcomplied with GeoVera’s underwriting guidelines.

The case exemplifies the vast difference between obligations intort and contract. No one was arguing that the wholesale broker didanything “wrong” or that they were negligent, but the fact remainsthat they obligated themselves in contract to the carrier to submitonly those risks which complied with underwriting guidelines.