Down To Cases

An agent in Indiana arranged insurance for a family-owned business that restored and repaired recreational vehicles. The agency for which the agent worked also wrote personal-lines insurance for the insureds and had a relationship with them going back to the early 1980s.

The insurance written for the family-owned business initially did not cover any vehicles. However, to help the insureds obtain relatively low-cost automobile insurance for their teenage son, the agent suggested that the son lease his 1995 Chevy pickup truck to the business. The agent provided the lease to the insureds, and they executed it. The lease required the family-owned business to provide the son with insurance when he drove the pickup. The agency requested the insurer to amend its policy to cover the son as a driver of the truck, indicating that he would use the pickup to transport vehicle parts and supplies for the family-owned business. Accordingly, the carrier added an insured-lessor endorsement to the policy, covering the son as a driver.

In March 1998, the son sold the 1995 Chevy pickup and bought a 1998 Ford Mustang GT. The son executed another lease, with the same terms as the former one. The agency notified the carrier, asking it to delete coverage for the Chevy pickup truck and add it for the Mustang GT. The insurance company issued an amended policy declaration acknowledging the change in vehicles. However, it also deleted the lessor-insured endorsement. The agency did not detect the deletion and consequently did not advise the insureds that the policy on the family-owned business no longer covered their son.

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

In November 1998, the insurance company sought a judgment declaring that its policy issued to the family-owned business did not cover the son at the time of the accident. The trial court, however, granted summary judgment to the insureds, finding that coverage existed. The insurer appealed, but the appeals court affirmed the decision. Specifically, it held that the deletion of the lessor-insured endorsement was a cancellation for which the carrier failed to give the insureds adequate notice.

The insurer tendered its $2 million policy limits to the injured parties, then sued the agency for damages, alleging it owed the carrier a duty to exercise due care, skill and diligence; to deal honestly in placing insurance with the carrier; and to inspect the amended policy declaration that deleted the lessor-insured endorsement to ensure that it reflected the requested coverage. The carrier also alleged that "in devising this plan to provide low-cost coverage to (the son)," the agency fraudulently misrepresented facts.

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

The appeals court said that the relationship between the carrier and agency was defined by their agreement. That document authorized the agency to solicit applications, bind coverage and collect premiums, but did not otherwise impose any duty on the agency with respect to disclosure of information regarding an insured. Nor, said the appeals court, did it require the agency to act honestly or with due diligence. The agreement expressly described the agency as an "independent contractor" and not as the insurer's employee.

The carrier argued that its relationship with the agent was not defined solely by the agreement and maintained that the parties' course of dealing was relevant to determining whether the agency owed it any duty. The appeals court disagreed, noting that it was determining the scope of the relationship "not from the vantage point of a proposed insured's expectations, but rather by examining what responsibilities and obligations (the agency) agreed with (the carrier) to undertake." It also noted that the agreement was the carrier's; in offering it to the agency, the carrier could have proposed imposing duties on the agency, including a duty to indemnify the insurer. The agency, the court said, then would have been free to accept or reject such terms. But the carrier didn't do this, the court continued. Instead, it chose to contract with the agency as a broker, rather than employ it as its agent.

"Now that (the insurer) has been found liable for payment of insurance benefits, it cannot attempt to reconfigure the relationship; i.e., it cannot claim that agency was its agent and owed it duties, the breach of which would require agency to reimburse (the insurer) for insurance proceeds paid to an insured," the court said. "Simply stated, (the insurer) cannot have it both ways, namely employ agency as a broker, but impose duties on the premise that agency was an agent." The court did comment on "the troubling nature of the allegations surrounding the manner in which agency sought and obtained coverage for (the insureds' son) and his vehicles; however, we find, as did the trial court, that as a matter of law agency did not owe any duty to (the insurer), and thus agency is entitled to summary judgment on (the insurer's) negligence claims."

The carrier also argued that the agency fraudulently misrepresented facts when it sought coverage for the son's three vehicles. The appeals court noted that Indiana law recognizes two forms of fraud, actual and constructive.

The insurer didn't identify under which theory of fraud it sought recovery. To the extent it claimed that, when requesting coverage, the agency failed to disclose (i.e., omitted) facts that would have affected its decision to insure the vehicles and the son, the court said the action constituted a claim for constructive fraud-which required a duty. Since it had been established that the agency owed no duty to the insurer, the trial court's decision granting summary judgment to the agency was correct, the appeals court ruled.

But the appeals court continued that "to the extent that the carrier alleged the agency affirmatively misrepresented past or existing fact, for instance that the purpose of the subject vehicles...was to transport vehicle parts for (the family owned business), (the insurer's) claim is one for actual fraud. This type of fraud is not dependent on a duty and is not foreclosed by the absence of a duty flowing from agency to (the insurer). Because agency has not established that as a matter of law it did not commit actual fraud, summary judgment was inappropriate on this aspect 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 fraud and remand to the trial court for further proceedings consistent with 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 address is drenau@thepoint.net.