Down to Cases: Policy inception negligence lawsuits not so simple

Insurance agents and brokers often sign insurance applications without obtaining the signature of the person seeking the insurance first. The insurer relies upon the application when deciding whether or not to insure the risk. By definition, every question of fact in the application is “material” to the insurer’s decision.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, and the insured and insurer are put back into the position they were in before the policy was agreed. Because an agent filling out and signing an application on behalf of an insured is considered the agent of the insured, if the application contains false information, the insurer can sue the agent or broker for damages or as a defensive measure to a suit by an insured upset at having a policy rescinded.Agents and brokers should attempt, as a matter of self-preservation, to have each insured sign the application or authorize the agent or broker–in writing–to sign the application on the insured’s behalf, with a statement by the proposed insured that the application has been reviewed and the facts stated in the application are true and correct. Agents and brokers also should determine that the insured reads and writes English and if not, that they read the application and the factual statements to the proposed insured or have it translated into a language the proposed insured understands.The following two cases resulted from misrepresentations in applications for insurance that were not totally true. The insurer paid the insured and then sued the agent or broker for misrepresentation and breach of duty. Although both cases failed, both agents were required to take the question to trial and then pay for an appeal. When an agent is thorough during the application process, lawsuits like those below can be avoided.Fire in Texas: Misrepresentation in applicationIn Underwriters at Lloyds Subscribing to Policy Nos. MDJ03/L075 and MDJ03/Z0165 v. Edmond, Deaton & Stephens Insurance Agency Inc., No. 14-07-00352-CV (Tex.App. Dist.14 12/30/2008), the underwriters paid an insured under insurance policies based on damages arising from a fire. The underwriters sued the insurance agency that submitted the insured’s application, asserting claims for breach of fiduciary duty, negligence, negligent misrepresentation, and indemnity in that they would not have issued the policy in the same form had the truth been asserted in the application.The case went to trial and the jury concluded that the underwriters take nothing against the agency. The underwriters appealed unsuccessfully.Mike Stephens was an insurance agent for the agency. In April 2003, he prepared, signed and submitted a request to the underwriters for an insurance quote on behalf of Pioneer General Contractors and Pioneer Millworks (hereinafter collectively “Pioneer”), Amarillo, Texas, for insurance coverage. Only Stephens signed this application. The underwriters, based on the information in the application, quoted premiums for the requested insurance. The insurance agency, on behalf of the insured, accepted the offers in the quotes, and the underwriters issued binders indicating the effective dates of coverage.According to the underwriters, they rely on the information submitted in the application by an insurance agent and do not require such information to be confirmed in a separate inspection report. Approximately 2 weeks later, the insurance agency submitted applications dated May 23, 2003. These were on the same form as the earlier applications; however, they were signed by a representative of Pioneer and were not signed by Stephens. The applications stated falsely that both of Pioneer’s buildings were within the Amarillo city limits. In fact, both buildings were located outside the Amarillo city limits and were not located within the Amarillo Fire District and posed a greater risk than the underwriters were led to believe.When asked if he would say whether Stephens violated the standard of care, the expert testified, “I expressed that the agent–or the underwriter–violated or didn’t violate, but that he also made errors, but I don’t think the standard of care is the issue.” The expert also testified that he could talk about errors that the underwriters and the insurance agency made and what he “think[s] is right” and “what’s wrong.” The Court of Appeal concluded that since the expert was only stating an opinion, the jury had the right to ignore it.A fire damaged Pioneer’s property, and the underwriters paid Pioneer $1,488,955.26 for the damage under the policies. The underwriters alleged that the insurance agency prepared and submitted Pioneer’s applications for coverage and that these applications contained misrepresentations. Because the insureds signed applications and the underwriters failed to prove the misrepresentations were made by the agent or broker, their suit failed. If the case had been brought in California or New York, where rescission is available for an “innocent” misrepresentation of a material fact, the underwriters could have rescinded the policy, denied the claim, and the insured would have sued the agent or broker for providing information to the insurer that allowed the underwriters to rescind. The underwriters decided to pay the claim and try to collect from the agent and failed.Fire in California: Misrepresentation in applicationIn California, a trial court reached a similar result relating from a fire of Oct. 26, 2003, where the Vanderhyde family lost their San Diego county home in the Cedar Fire, one of the largest brush fires in California history. They did no better than the Texas underwriters, although they had the insurer-friendly law in California to rescind. When the Vanderhyde’s insurance claim wasn’t paid on time, the family sued their insurer, Pacific Specialty Insurance Co. (PSIC), which promptly accused the local insurance broker of manufacturing insurance policy applications and fabricating responses.PSIC accused “Gene,” an employee of Steven J. Erickson Insurance Agency, of committing intentional fraud. Trying to make a good defense out of an offense, PSIC sought more than $1 million, including punitive damages–a sum that would have put Gene and his employer into bankruptcy, because punitive damages can never be insured in California. The agent refused to settle and went to trial.An expert stated that the house’s front and living room were made of clear heart redwood–an “irreplaceable construction material”–stating that the material fell outside of the carrier’s underwriting guidelines because it involved cutting down old-growth redwood, the claimed only source of clear heart redwood. The expert concluded that the policy should never have been written as a result.Evidence at trial showed that the redwood could be found at local lumberyards and the carrier had an inspector go to the residence to inspect the brush location and distance from the fire department.In the end, the David v. Goliath gambit succeeded: The small brokers bested the big insurance company and the underwriters at Lloyd’s of London. Barry Zalma, Esq., CFE, is a California attorney specializing in expert witness testimony and consulting with plaintiffs and defendants on insurance coverage and claims handling. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. Contact the author at [email protected]