Whether a producer was a “broker” (acting on behalf of the insured) or an “agent” (acting on behalf of the insurer) was a question of fact where the insurer sought to rescind due to misrepresentations on the application. ( Douglas v. Fidelity National Insurance Co. (2014) 2014 WL 4261346)
Facts
Jerry and Betty Douglas owned a residence and sought to insure it. Thus, Mr. Douglas contacted InsZone Insurance Services, Inc., an insurance “producer.” (A “producer” is a generic term for someone who, depending on the facts, is a “broker” or an “agent.”)
Fidelity National Insurance Company is an insurer that utilizes an internet-based underwriting and rating system. The system is designed so that a producer can submit an application consisting of 43 questions, and receive an instantaneous notification from Fidelity that the application has been accepted or rejected. If Fidelity accepts the application, the producer is supposed to print a copy and obtain the applicant’s signature.
Using this internet-based application process, InsZone transmitted to Fidelity an application that contained factually-inaccurate information about several issues. If the application had contained accurate information, Fidelity’s system immediately would have rejected the application. Instead, however, based on the inaccurate information, Fidelity’s system immediately accepted Mr. and Mrs. Douglas’ application.
After Fidelity issued the policy, a fire caused substantial damage to Mr. and Mrs. Douglas’ residence and various items of their personal property. While investigating the claim, Fidelity discovered that the application InsZone had submitted on behalf of Mr. and Mrs. Douglas contained several factually-inaccurate answers. Thus, Fidelity notified Mr. and Mrs. Douglas that Fidelity was rescinding the policy, and Fidelity sent Mr. and Mrs. Douglas a check to refund the premium payment they had made.
After Fidelity purported to rescind the policy, Mr. and Mrs. Douglas filed suit against both Fidelity and InsZone. Mr. Douglas asserted that, during the application process, he had signed a blank application at the behest of an InsZone employee. Mr. Douglas also asserted that InsZone’s employee had only asked Mr. Douglas three questions (not 43 questions).
The case proceeded to a jury trial, during which a central issue was whether InsZone was Fidelity’s “agent” or Mr. and Mrs. Douglas’ “broker.” The jury awarded a substantial verdict (including contractual damages, bad faith damages and punitive damages) against Fidelity. Although the judge later struck the award of punitive damages, the remainder of the award exceeded $800,000. Fidelity appealed, as did Mr. and Mrs. Douglas.
Holding
The Court of Appeal reversed, finding that the trial judge had erroneously instructed the jury on the issue of whether InsZone was a “broker” (who was acting on behalf of Mr. and Mrs. Douglas) or an “agent” (who was acting on behalf of Fidelity).
The appellate court noted that an insured is responsible for the contents of an application submitted by a broker. Thus, the jury should have been allowed to determine whether InsZone was acting as Mr. and Mrs. Douglas’ “broker” or Fidelity’s “agent.” If InsZone was Mr. and Mrs. Douglas’ “broker” at the time of the application, then Fidelity would not be legally responsible for any errors Mr. and Mrs. Douglas claimed InsZone had made (e.g., having Mr. Douglas sign blank forms, failing to ask all questions on the application, etc.).
The appellate court observed that whether a producer is a “broker” or an “agent” is often a question of fact. Generally, a producer is deemed to be an “agent” if (1) the insurer has filed with the California Department of Insurance a notice appointing the producer as an agent; or (2) the insurer and the producer have entered into a written agreement that authorizes the producer to bind coverage. Here, there was no evidence that Fidelity had filed with the California Department of Insurance a notice appointing InsZone as an agent. Further, the Court of Appeal noted that InsZone apparently did not have authority to bind coverage and that, instead, it was Fidelity itself (through its internet-based application system) that had approved the application.
Because the issue of whether InsZone was a “broker” or “agent” was a material question of fact, the jury should have been presented with properly-crafted jury instructions and allowed to decide this factual issue. Thus, the Court of Appeal reversed the judgment and ordered a new trial.
Comment
Under California law, it is well established that material misrepresentations or concealments in an application for insurance entitle an insurer to rescind, even if the misrepresentations are not intentionally made. In addition, it is well established that an insurer has no responsibility for a misrepresentation that is attributable to a broker, but that an insurer may have responsibility where the misrepresentation is attributable to an agent.
If the insurer has filed a notice of appointment with the Department of Insurance, the producer will be deemed an agent as a matter of law. In addition, if the insurer has granted the producer authorization to bind coverage, the producer will be deemed to be an agent as a matter of law. In most other cases, the issue of whether the producer is an “agent” or a “broker” will present a question of fact.