Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders.

Before the scheduled opening date in September 2006 for Cascades, a fitness club in Inver Grove Heights, Minn., Wayne Newton, a principal of Cascades, sought help in obtaining bonding and insurance for the club from his brother, appellant Nicholas Newton, the surety bond manager at Associated Insurance Agents Inc. (AIA). Nick Newton's primarily sold surety bonds and was a licensed agent for property and casualty insurance, but that business made up about10 percent of his work.

A fitness club, as a high-risk business, generally would be required to obtain insurance from a surplus lines insurer, but respondent West Bend Mutual Insurance Co, a licensed insurance company in Minnesota, was able to offer fitness club insurance through one of its divisions, respondent National Specialty Insurance (NSI). In April 2006, AIA entered an agreement with West Bend to act as an agent selling West Bend's policies, including those for fitness clubs. The NSI agents' manual provided that, except for certain specified programs, which did not include fitness-club insurance, agents did not have authority to rate and bind coverage unless they had received a prior quote and approval from NSI. West Bend's fitness club coverage also required completion of a health club questionnaire, which was intended to provide additional information beyond a standard ACORD insurance application.