In Douglas v. Fidelity National Ins. (No. A137645; filed 8/29/14), a California appeals court held that it was a jury question whether a retail insurance service with limited binding authority should be deemed a broker or an agent for the purpose of determining if application misrepresentations would void coverage.
In Douglas, the homeowners needed insurance for a house they had used as a group home. They sought coverage from Cost-U-Less, which provided personal lines insurance from, among others, Fidelity National Insurance Company. According to the couple’s wife, she went to a Cost-U-Less office where she answered application questions from a person on the telephone, who was later identified as an employee of another company, InsZone.
InsZone had a producer contract with Fidelity. In practice, InsZone would be contacted by Cost-U-Less via telephone, at which point an InsZone employee would verbally solicit information from the client, with the information being entered into a computer by the InsZone employee and then transmitted electronically to Fidelity.
The questions included whether the home was used for business purposes or for residence by more than one family. The wife denied being asked those questions. However, as transmitted to Fidelity, the answers were listed as “No.” In the Cost-U-Less office the couple was presented with a blank ACORD application, which the husband signed. At some point the signature page was attached to a printout of the InsZone transmittal, which the husband denied signing.
Following a fire claim Fidelity sought to rescind the policy for misrepresentation and concealment. In the subsequent bad faith lawsuit, the jury was instructed that effective rescission required a finding that the homeowners made misrepresentations in the application. The jury returned a verdict that there were no misrepresentations by the homeowners, and awarded damages for bad faith plus punitive damages.
On appeal, Fidelity argued that the jury should have been instructed to determine whether InsZone was acting as an agent of Fidelity or a broker for the homeowners, because the false statements could be attributed to the homeowners if InsZone were deemed a broker, despite their denials.
The homeowners responded that InsZone was unquestionably an agent for Fidelity, because the producer agreement granted InsZone binding authority. Specifically, the producer agreement authorized InsZone to bind homeowners policies. The couple argued that conclusively established InsZone as an agent of the insurer under Marsh & McLennan v. City of Los Angeles (1976) 62 Cal.App.3d 108, which held that binding authority is the hallmark of agency.
However, the appeals court sided with the insurer, saying that “the issue is not as clear cut as plaintiffs suggest.” The court began by noting that under Insurance Code section 1704, a person may not act as an insurance agent without an appointment filed with the Department of Insurance, but there was no evidence of an agency appointment. Further, the court found the producer agreement ambiguous because in addition to the grant of binding authority it also contained provisions disclaiming any agency relationship. Plus, the court noted a possible question whether the InsZone employees were truly binding coverage, because it was actually controlled by parameters programmed into the insurer’s computers, which signaled acceptance of the application by issuing a policy number.
Noting the undisputed evidence that misrepresentations existed, and the lack of any finding whether InsZone was a broker or agent, the court concluded that “[o]ur review of the record indicates a reasonable probability that a properly instructed jury could have rendered a different verdict.” The court reversed the judgment and remanded the case for a new trial, including the jury’s determination whether InsZone was acting as broker or agent in the transaction.
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