Denney and her husband, both self-employed, had family health insurance coverage through an individual policy with Blue Cross and Blue Shield of Kansas City (Blue Cross). The coverage was expensive, and Denney began looking for a more affordable policy.

Related: Read Zalma's previous column “Trust but Verify.”

McClary was affiliated with Design Benefits as well as another Kansas independent brokerage firm named Hosfield. He was affiliated with USA Benefits Group, which changed its name to America's Health Care Plan, a brokerage firm located in Illinois that is licensed in Kansas and markets insurance products of Golden Rule. These brokerage firms apparently had contracts with various insurance companies to market their insurance products in Kansas.

McClary's contract with Golden Rule was entitled an “Independent Broker's Contract,” and it clearly stated that McClary was not an agent of Golden Rule.

During September 2007, McClary met Demney in her office to discuss Denney's insurance coverage options. He gave Denney his business card, which indicated he was affiliated with USA Benefits but made no reference to Golden Rule. The potential insureds testified that they believed McClary represented Golden Rule. McClary testified that he did not take the time to explain his agency agreement to Denney. McClary referred to himself as an agent rather than a broker. McClary confirmed that he received a commission from Golden Rule for obtaining Denney's medical policy. Denney did not know the difference between an agent and a broker, and she “placed her faith” in McClary and the information he was providing to her.

Denney had a history of surgeries and procedures relating to digestive issues. Denney informed McClary of her medical condition and her previous surgeries because she did not want to risk losing health insurance for her family.

McClary first submitted Denney's application, disclosing her digestive conditions, to Assurant Health, a company that sells insurance products that are underwritten by the Time Insurance Co. Denney's application did not receive favorable consideration, so McClary contacted Denney by phone and received her authorization to submit an application on her behalf to another insurance company, Golden Rule, based on the information that she had previously provided to him. Golden Rule is a competitor of Assurant Health and Time Insurance Co., and these two companies are not affiliated in any way with Golden Rule. The application McClary submitted to Golden Rule did not disclose Denney's pre-existing medical condition. Denney did not review or sign the Golden Rule application before its submission. Denney did not review the application prior to its submission because McClary received her consent to submit the application over the phone. The application also contains a section entitled “BROKER STATEMENT” that directs the broker to “[r]review the completed application before signing below.” Directly above McClary's electronic signature, it states that “[e]ach question on the application was completed by the applicant(s).” This did not happen.

On Oct. 13, 2007, Golden Rule issued a policy covering Denney and her family members. Denney then cancelled her policy with Blue Cross.

In January 2008, Denney's physician, Dr. Mark Strehlow, sent a letter to Golden Rule requesting advance approval of coverage under the policy for surgery for Denney. Strehlow's letter stated that Denney had an extensive medical history related to various digestive conditions. Strehlow said that Denney was scheduled to undergo “abdominal reconstructive surgery.”

Related: Read another column by Barry Zalma “Who's an Employee?”

Golden Rule denied coverage for Denney's proposed surgery because the conditions documented in Denney's medical records were not disclosed in her application for insurance. Golden Rule stated that if Denney's medical history had been accurately disclosed, Golden Rule's offer of insurance would have contained a rider that excluded all coverage for digestive system diseases or disorders.

On May 5, 2008, Denney filed a complaint with the department based on Golden Rule's refusal to provide coverage for treatment of her pre-existing medical condition. Denney asserted that McClary misrepresented how far back Golden Rule would examine her medical history.

On May 28, 2009, the assistant commissioner of insurance (the department) orally announced his decision, finding that Golden Rule had violated the statute. The assistant commissioner concluded that Golden Rule should pay for the reconstructive surgery as well as for Denney's future medical services. The department entered its order on Sept. 3, 2009. The appeal followed.

Neither the district court nor the Court of Appeal could identify any specific act that was committed flagrantly and in conscious disregard of Golden Rule's statutory duties, nor could it identify a history of misconduct. Golden Rule argued that it could void the policy or deny the claim based on misrepresentations on the policy application submitted by McClary, who was acting as Denney's agent in this transaction.

The record contains undisputed evidence that Denney's medical history and conditions were not disclosed in the application submitted to Golden Rule. Under the clear language of the insurance application and policy, Golden Rule had the right to deny coverage. The hearing officer noted that Golden Rule had been victimized as well as Denney. He also found that absent fraud by the consumer, companies are required to accept the representations of their appointed agents to prevent unjustified harm to consumers.

Was McClary Golden Rule's agent?

The department concluded that McClary was the agent of Golden Rule. The department made the sweeping declaration that no contract between the company and the agent can abrogate the company's responsibility to the insured. The district court also ruled that because Golden Rule appointed McClary as a soliciting agent, McClary's actions are imputed to and the responsibility of Golden Rule.

McClary's contract with Golden Rule, entitled “Independent Broker's Contract,” authorized McClary to:

• Obtain and submit applications for insurance products to Golden Rule on behalf of persons for whom McClary is acting as a broker
• Collect initial premiums in exchange for official receipts furnished by Golden Rule. It expressly stated that McClary was an independent contractor relative to the company and nothing contained in the contract, or any written material or correspondence of the company, shall be construed to create an employer-employee or principal-agent relationship between McClary and the company.

The license issued by the state identifying McClary as an agent is merely a regulatory permit. The issuance of a license does not define the agent's powers to bind an insurance company, nor does it change the general law of agency. The license issued by the insurance department to a local insurance agent is merely the state's permit for him to ply his business, and a tacit admission by the insurance superintendant that so far as he is advised the licensee is an honest man, or at least a man of fair business reputation.

Related: Read the article “Just the Facts” by Barry Zalma.

It has long been the law of Kansas that agency must be established by some action of the principal, not merely based on acts or representations of the claimed agent. The law indulges in no bare presumptions that an agency exists. It must be proved. Generally, a broker or agent who is employed to procure insurance becomes the agent of the person for whom the insurance is procured.

Here, the written contract between Golden Rule and McClary expressly limited McClary's role with Golden Rule. It explicitly provided that McClary was authorized only to “obtain and submit applications” and that he was “acting as a broker.” The contract indicated that McClary was not its express agent, and the appellate court was unable to find any evidence in the record to the contrary.

McClary first attempted to obtain coverage for Denney from Assurant Health, a competitor of Golden Rule in the health insurance market. But Time Insurance Co., the carrier to whom Assurant Health referred Denney's application for underwriting, rejected Denney's application. Upon learning of the rejection, McClary consulted with Denney. McClary was an independent insurance broker who had access to several insurers that wrote health insurance policies in Kansas. His recommendation and ultimate selection of Golden Rule did not alter the fact that in doing so he was acting on behalf of Denney, not on behalf of Golden Rule.

Upon learning that Denney's health information was not accurately represented on the application submitted by her agent, Golden Rule initiated a prompt and reasonable investigation from January 2008 to April 2008. With this determination, we need not consider further the district court's conclusion that “Golden Rule's actions were either 'committed flagrantly and in conscious disregard' of the statutes in question, or 'committed with such frequency as to indicate a general business practice.'”

Therefore, Golden Rule did not engage in unfair claim settlement practices in violation of Kansas statutes. McClary failed to accurately report Denney's medical history in the policy application. Neither Denney nor Golden Rule was complicit in this failure to disclose. Nevertheless, in failing to accurately report Denney's medical history, we have determined that McClary was acting as Denney's agent at the time. Thus, Golden Rule was entitled to exclude coverage for Denney's anticipated surgery.