Insurance brokers, who represent the insured to transactinsurance with, but not on behalf of insurers, often will try tomake the process easy for the insured by filling out theapplication before asking the insured to sign it. It is a practicefraught with danger that can cause the insured to have no coverageat all and may make the broker a defendant in a major lawsuit.That's just what occurred in a recent California case.

In December 2010, Jerry and Betty Douglas went to a businesscalled Cost–U–Less Insurance where an InsZone Insurance Servicesemployee assisted them in obtaining a Homeowners' insurance policywith Fidelity National Insurance. The insurance paperwork JerryDouglas signed consisted of three pages; the first page was a blankform. The employee at Cost–U–Less did not ask him any questionsabout the property.

Three months later a fire damaged the Douglases' home. After aninvestigation, Fidelity rescinded their Homeowners' policy. TheDouglases received a letter from an attorney that included a checkfrom Fidelity in the amount of the insurance premium that theDouglases had paid. The attorney stated that in the course ofinvestigating the fire loss, evidence showed materialmisrepresentations had been made in connection with the Douglases'insurance application.

The alleged misrepresentations pertained to: (1) whether anyunit in the structure was occupied by more than one family, (2)whether the electrical panel used circuit breakers or fuses, (3)whether there were roommates or boarders in the home and/or if thehome was used as a rooming or boarding house, and (4) whether abusiness was conducted on the property. The letter also advisedthat the Douglases owed Fidelity in excess of $24,000 for benefitsalready paid.

The Douglases sued, alleging that Fidelity failed to paybenefits due under the policy and was liable for insurance fraud.They also claimed that the InsZone employee who helped them obtainthe policy was Fidelity's agent. Fidelity argued that the employeewas the Douglases' broker, working for the homeowners, not thecarrier.

Misrepresentation or fraud?

At trial, the jury returned a verdict for the Douglases, but thejudge reduced the amount of the award. Both sides appealed. TheCalifornia Court of Appeal noted that evidence presented at trialwould support a finding that the Douglases were licensed to operatea residential care facility out of their home and that theyreceived money in exchange for providing room and board to mentallyill clients.

The appeals court also noted that if an insurance applicationwas prepared by a broker, the application's contents are theinsured's responsibility. Unlike insurance brokers, the court said,an “insurance agent” is one who represents an insurer under anemployment by the insurer. Brokers and insureds are ordinarilyinvolved in what can be viewed as a series of discretetransactions, while agents and insureds tend to be under some dutyto each other during the entire length of the relationship.

There was evidence, albeit conflicting, that InsZone and itsemployee acted as plaintiffs' insurance brokers, and not as agentsof Fidelity, the appeals court found. The court's review of therecord indicates a reasonable probability that a properlyinstructed jury could have rendered a different verdict. Fidelitywas not necessarily required to prove that the misrepresentationsit relied on in issuing the policy were contained within anapplication. It only needed to prove that there was amisrepresentation or concealment of a material fact inconnection with an application for insurance.

The court also found that none of the questions or accompanyinganswers were printed on the page that Jerry Douglas signed. Thus,Douglas's testimony that he never saw the Fidelity underwritingquestionnaire generated by InsZone was not implausible, and, underthe instruction given, the jurors could have concluded there wereno misrepresentations in the “application” because there were norepresentations at all on the blank pages that he signed.

Importantly, the court added, the jury was not asked to considerwhether the application submitted by InsZone on the Douglases'behalf via Fidelity's website contained any materialmisrepresentations. Additionally, the instructions and jury formrequired Fidelity to prove that the misrepresentations were madedeliberately in violation of California law that allows forrescission based on an innocent concealment or misrepresentation ofmaterial fact.

Fidelity's affirmative defense of material misrepresentation wasnot properly presented to the jury, the court concluded,necessitating a new trial.