Insurance agents and brokers often sign insurance applicationswithout obtaining the signature of the person seeking the insurancefirst. The insurer relies upon the application when decidingwhether or not to insure the risk. By definition, every question offact in the application is “material” to the insurer'sdecision.
In many states that apply the “Marine Rule” (LA Sound USA Inc. v.St. Paul Fire & Marine Ins. Co., 156 Cal. App. 4th 1259[2007]), a misrepresentation or concealment of a material fact,whether intentional or innocent, allows an insurer to rescind.Rescission results in a finding that there was never a policy, andthe insured and insurer are put back into the position they were inbefore the policy was agreed. Because an agent filling out andsigning an application on behalf of an insured is considered theagent of the insured, if the application contains falseinformation, the insurer can sue the agent or broker for damages oras a defensive measure to a suit by an insured upset at having apolicy rescinded.
Agents and brokers should attempt, as a matter ofself-preservation, to have each insured sign the application orauthorize the agent or broker–in writing–to sign the application onthe insured's behalf, with a statement by the proposed insured thatthe application has been reviewed and the facts stated in theapplication are true and correct. Agents and brokers also shoulddetermine that the insured reads and writes English and if not,that they read the application and the factual statements to theproposed insured or have it translated into a language the proposedinsured understands.
The following two cases resulted from misrepresentations inapplications for insurance that were not totally true. The insurerpaid the insured and then sued the agent or broker formisrepresentation and breach of duty. Although both cases failed,both agents were required to take the question to trial and thenpay for an appeal. When an agent is thorough during the applicationprocess, lawsuits like those below can be avoided.
Fire in Texas: Misrepresentation inapplication
In Underwriters at Lloyds Subscribing to Policy Nos. MDJ03/L075 andMDJ03/Z0165 v. Edmond, Deaton & Stephens Insurance Agency Inc.,No. 14-07-00352-CV (Tex.App. Dist.14 12/30/2008), the underwriterspaid an insured under insurance policies based on damages arisingfrom a fire. The underwriters sued the insurance agency thatsubmitted the insured's application, asserting claims for breach offiduciary duty, negligence, negligent misrepresentation, andindemnity in that they would not have issued the policy in the sameform had the truth been asserted in the application.
The case went to trial and the jury concluded that the underwriterstake nothing against the agency. The underwriters appealedunsuccessfully.Mike Stephens was an insurance agent for the agency.In April 2003, he prepared, signed and submitted a request to theunderwriters for an insurance quote on behalf of Pioneer GeneralContractors and Pioneer Millworks (hereinafter collectively“Pioneer”), Amarillo, Texas, for insurance coverage. Only Stephenssigned this application. The underwriters, based on the informationin the application, quoted premiums for the requested insurance.The insurance agency, on behalf of the insured, accepted the offersin the quotes, and the underwriters issued binders indicating theeffective dates of coverage.
According to the underwriters, they rely on the informationsubmitted in the application by an insurance agent and do notrequire such information to be confirmed in a separate inspectionreport. Approximately 2 weeks later, the insurance agency submittedapplications dated May 23, 2003. These were on the same form as theearlier applications; however, they were signed by a representativeof Pioneer and were not signed by Stephens. The applications statedfalsely that both of Pioneer's buildings were within the Amarillocity limits. In fact, both buildings were located outside theAmarillo city limits and were not located within the Amarillo FireDistrict and posed a greater risk than the underwriters were led tobelieve.
When asked if he would say whether Stephens violated the standardof care, the expert testified, “I expressed that the agent–or theunderwriter–violated or didn't violate, but that he also madeerrors, but I don't think the standard of care is the issue.” Theexpert also testified that he could talk about errors that theunderwriters and the insurance agency made and what he “think[s] isright” and “what's wrong.” The Court of Appeal concluded that sincethe expert was only stating an opinion, the jury had the right toignore it.
A fire damaged Pioneer's property, and the underwriters paidPioneer $1,488,955.26 for the damage under the policies. Theunderwriters alleged that the insurance agency prepared andsubmitted Pioneer's applications for coverage and that theseapplications contained misrepresentations. Because the insuredssigned applications and the underwriters failed to prove themisrepresentations were made by the agent or broker, their suitfailed. If the case had been brought in California or New York,where rescission is available for an “innocent” misrepresentationof a material fact, the underwriters could have rescinded thepolicy, denied the claim, and the insured would have sued the agentor broker for providing information to the insurer that allowed theunderwriters to rescind. The underwriters decided to pay the claimand try to collect from the agent and failed.
Fire in California: Misrepresentation inapplication
In California, a trial court reached a similar result relating froma fire of Oct. 26, 2003, where the Vanderhyde family lost their SanDiego county home in the Cedar Fire, one of the largest brush firesin California history. They did no better than the Texasunderwriters, although they had the insurer-friendly law inCalifornia to rescind. When the Vanderhyde's insurance claim wasn'tpaid on time, the family sued their insurer, Pacific SpecialtyInsurance Co. (PSIC), which promptly accused the local insurancebroker of manufacturing insurance policy applications andfabricating responses.
PSIC accused “Gene,” an employee of Steven J. Erickson InsuranceAgency, of committing intentional fraud. Trying to make a gooddefense out of an offense, PSIC sought more than $1 million,including punitive damages–a sum that would have put Gene and hisemployer into bankruptcy, because punitive damages can never beinsured in California. The agent refused to settle and went totrial.
An expert stated that the house's front and living room were madeof clear heart redwood–an “irreplaceable constructionmaterial”–stating that the material fell outside of the carrier'sunderwriting guidelines because it involved cutting down old-growthredwood, the claimed only source of clear heart redwood. The expertconcluded that the policy should never have been written as aresult.
Evidence at trial showed that the redwood could be found at locallumberyards and the carrier had an inspector go to the residence toinspect the brush location and distance from the firedepartment.
In the end, the David v. Goliath gambit succeeded: The smallbrokers bested the big insurance company and the underwriters atLloyd's of London. Barry Zalma, Esq., CFE, is a California attorneyspecializing in expert witness testimony and consulting withplaintiffs and defendants on insurance coverage and claimshandling. He founded Zalma Insurance Consultants in 2001 and servesas its senior consultant. Contact the author [email protected].