Insurance brokers, who represent the insured to transact insurance with, but not on behalf of insurers, often will try to make the process easy for the insured by filling out the application before asking the insured to sign it. It is a practice fraught with danger that can cause the insured to have no coverage at all and may make the broker a defendant in a major lawsuit. That's just what occurred in a recent California case.
In December 2010, Jerry and Betty Douglas went to a business called Cost–U–Less Insurance where an InsZone Insurance Services employee assisted them in obtaining a Homeowners' insurance policy with Fidelity National Insurance. The insurance paperwork Jerry Douglas signed consisted of three pages; the first page was a blank form. The employee at Cost–U–Less did not ask him any questions about the property.
Three months later a fire damaged the Douglases' home. After an investigation, Fidelity rescinded their Homeowners' policy. The Douglases received a letter from an attorney that included a check from Fidelity in the amount of the insurance premium that the Douglases had paid. The attorney stated that in the course of investigating the fire loss, evidence showed material misrepresentations had been made in connection with the Douglases' insurance application.
The alleged misrepresentations pertained to: (1) whether any unit in the structure was occupied by more than one family, (2) whether the electrical panel used circuit breakers or fuses, (3) whether there were roommates or boarders in the home and/or if the home was used as a rooming or boarding house, and (4) whether a business was conducted on the property. The letter also advised that the Douglases owed Fidelity in excess of $24,000 for benefits already paid.
The Douglases sued, alleging that Fidelity failed to pay benefits due under the policy and was liable for insurance fraud. They also claimed that the InsZone employee who helped them obtain the policy was Fidelity's agent. Fidelity argued that the employee was the Douglases' broker, working for the homeowners, not the carrier.
Misrepresentation or fraud?
At trial, the jury returned a verdict for the Douglases, but the judge reduced the amount of the award. Both sides appealed. The California Court of Appeal noted that evidence presented at trial would support a finding that the Douglases were licensed to operate a residential care facility out of their home and that they received money in exchange for providing room and board to mentally ill clients.
The appeals court also noted that if an insurance application was prepared by a broker, the application's contents are the insured's responsibility. Unlike insurance brokers, the court said, an “insurance agent” is one who represents an insurer under an employment by the insurer. Brokers and insureds are ordinarily involved in what can be viewed as a series of discrete transactions, while agents and insureds tend to be under some duty to each other during the entire length of the relationship.
There was evidence, albeit conflicting, that InsZone and its employee acted as plaintiffs' insurance brokers, and not as agents of Fidelity, the appeals court found. The court's review of the record indicates a reasonable probability that a properly instructed jury could have rendered a different verdict. Fidelity was not necessarily required to prove that the misrepresentations it relied on in issuing the policy were contained within an application. It only needed to prove that there was a misrepresentation or concealment of a material fact in connection with an application for insurance.
The court also found that none of the questions or accompanying answers were printed on the page that Jerry Douglas signed. Thus, Douglas's testimony that he never saw the Fidelity underwriting questionnaire generated by InsZone was not implausible, and, under the instruction given, the jurors could have concluded there were no misrepresentations in the “application” because there were no representations at all on the blank pages that he signed.
Importantly, the court added, the jury was not asked to consider whether the application submitted by InsZone on the Douglases' behalf via Fidelity's website contained any material misrepresentations. Additionally, the instructions and jury form required Fidelity to prove that the misrepresentations were made deliberately in violation of California law that allows for rescission based on an innocent concealment or misrepresentation of material fact.
Fidelity's affirmative defense of material misrepresentation was not properly presented to the jury, the court concluded, necessitating a new trial.
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