Graham entered into a retail-producer agreement with a retail insurance agent. The retail producer submitted a homeowner's insurance policy application for the home of Mr. and Mrs. Balentine. GeoVera accepted their application and issued a policy.

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Soon after, the Balentines filed a claim with GeoVera for a residential fire. During GeoVera's investigation of the claim, it was discovered that the Balentines would not have qualified for coverage under GeoVera's underwriting guidelines:

1. The insured's home was located on 6 acres of land, while the application stated it was on 5 or fewer acres. Insured lots may not exceed 5 acres under GeoVera's underwriting guidelines.
2. The Balentines had filed for bankruptcy, and the application stated they had not filed for bankruptcy in the previous 5 years.
3. The application was not signed by the Balentines. All applications must be signed under the GeoVera underwriting guidelines.

After determining that the application's deficiencies could not be attributed to the Balentines, GeoVera paid the Balentines in excess of $780,000 on their claim.

GeoVera then filed claims against Graham asserting, among other things, breach of contract and negligence. Both GeoVera and Graham moved for summary judgment. The U.S. District Court dismissed GeoVera's negligence claims against Graham due to the utter lack of involvement in the underwriting process by Graham and also dismissed GeoVera's contract claim against Graham. The Eighth Circuit Court of Appeals affirmed the finding of no negligence in favor of Graham but reversed the breach-of-contract claim and found in a strongly worded opinion that GeoVera could proceed with its breach-of-contract claim against Graham.

In this case, GeoVera and Graham agreed that Graham had “no part in submitting the Balentine's application.” GeoVera asserted, nonetheless, that the agreement placed a duty on Graham to “make certain that only applications that complied with GeoVera's underwriting guidelines were submitted to GeoVera,” including applications submitted by the retailers appointed by Graham.

The issue decided by the Eighth Circuit Court of Appeals was whether the agreement between GeoVera and Graham placed a duty on Graham to apply GeoVera's underwriting guidelines to applications for insurance submitted by retailers. The Eighth Circuit agreed with GeoVera that the agreement “placed a duty on Graham to apply GeoVera's underwriting guidelines to all applications for insurance submitted under the terms of the agreement, including those submitted under the terms of the agreement including those submitted by retailers appointed by Graham.” The Eighth Circuit remanded the case to the district court for further consideration of the breach-of-contract claim asserted by GeoVera against Graham. On remand, GeoVera moved again for summary judgment against Graham. After careful consideration, the district court granted GeoVera's motion for summary judgment.

The district court followed the finding of the Eighth Circuit Court of Appeals that concluded, “while retailers may help or assist Graham [Rogers] in applying the underwriting guidelines, Graham [Rogers] retained the ultimate duty to apply GeoVera's underwriting guidelines so that the risk to be insured fell within the acceptable underwriting guidelines.”

It was undisputed that Graham took no action to determine that the Balentines' residence fell within GeoVera's underwriting criteria. Based on the undisputed record, the court found as a matter of law “that Graham breached its duty to apply GeoVera's underwriting guidelines to the Balentines' surplus-lines application.” The district court then awarded GeoVera $785,708.34 in damages, the amount it paid the Balentines for damages covered under the homeowner's policy.

Lessons Learned

Surplus-lines property carriers like GeoVera sometimes do not have extensive internal underwriting staffs. Increasingly, such carriers resort to computerized applications to be completed by retail producing agents. The surplus-lines carrier gains access to the services provided by the retail producing agent and the retail producing agent's customer base by entering into a contract with a wholesale broker, such as Graham Rogers Inc.

There is no direct contract between the underwriting carrier and the retail producing agent. Accordingly, the wholesale broker may obligate itself, like Graham did, to submit applications for risk which fall within the underwriting criteria, even though the wholesale broker has no actual hand in the application process. This is a classic example of agreeing to perform a task without making sure that means or procedures exist to perform the task in the first place.

Graham had no involvement whatsoever with the underwriting process, yet it obligated itself in contract to make sure the risk submitted by the retail producer covered only those risks which complied with GeoVera's underwriting guidelines.

The case exemplifies the vast difference between obligations in tort and contract. No one was arguing that the wholesale broker did anything “wrong” or that they were negligent, but the fact remains that they obligated themselves in contract to the carrier to submit only those risks which complied with underwriting guidelines.

It is time for all brokers to review their contracts with carriers.

Lawrence T. Bowman, director of Kane Russell Coleman & Logan PC, practices in the areas of litigation, large loss subrogation, insurance, construction and intellectual property. He can be reached at [email protected].

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