Brokers Cannot Act for Insurer "Not Liable for Insured's" Noncompliance

By Marc Zimet, Esq. of Jampol Zimet LLP

 

Court of Appeals Clarifies the Broker-Insurer Agency Relationship & Holds Insurers Are Not Liable For Insured’s Failure to Comply With Terms of Policy

On May 31, 2013, the Court of Appeals ruled that insurance brokers may not act on behalf of an insurer, nor are they liable to an insured for its failure to comply with policy conditions. In American Way Cellular, Inc. v. Travelers Property Casualty Company of America (2013) — Cal. App.4th – the broker, A & J Financial Insurance Services, placed the insured, American Way Cellular, Inc., with Travelers. American Way was required to complete a questionnaire, in which is indicated that it had “SMOKE DETECTORS/FIRE EXTING./SPRINKLERS.” The policy provided that Travelers had the right to make inspections, but was not obligated to make such inspections. It further provided that the insured was required to maintain a sprinkler system, and failure to do so would result in denial of coverage. 

Approximately a year later, a fire occurred in the warehouse-style building. Travelers’ investigators discovered that there was no sprinkler system installed, but only a fire alarm and several extinguishers. Shortly thereafter Travelers issued a letter denying coverage for the fire.

In the litigation that followed, American Way alleged Travelers acted negligently because it had a duty to inspect the premises but failed to do so, that it knew no sprinkler system existed, and that it issued the policy nonetheless. American Way also contended that A & J, acting as a Travelers agent, incorrectly checked off that the premises had sprinklers. A & J contended the information came directly from American Way and that it only acted as a broker for the insured, never acting as an agent for Travelers. Travelers successfully brought a motion for summary judgment.

On appeal, American Way claimed Travelers knew or should have known it did not have sprinklers, as the fact was apparent by a precursory examination of the premises. The court held that Travelers was not negligent in relying upon American Way’s questionnaire and that an insurance broker does not have a duty to inspect the premises, investigate statements made in the application, or verify the accuracy of such statements. Rather, the duty rests upon the insured to divulge all information he or she knows.

The court further held that A & J was not an agent of Travelers, even though American way believed it to be. The court stated, “the principal, and not the agent, must make statements or commit acts causing the person relying on the apparent agency to believe the agency exists.” In this case, A & J’s admission that it was not an agent of Travelers, as well as the fact that there was no appointment filed with the Insurance Commissioner, established that no agency relationship existed. The fact that Travelers never made any statements or committed any acts that would cause American Way to believe A & J was its agent further compelled the result.

This case serves as an important reminder to brokers that understanding the principal-agency relationship is imperative to protecting oneself from liability. Whether a broker holds itself out as an agent, it will not be found to be so without actions confirming this from the insurer. Had A & J been found to be the cause of the incorrect questionnaire, and were it an agent of Travelers, the outcome of this case may have been different.

For additional information, contact Marc at mzimet@jampolzimet.com or (213) 689-8500

 

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