Careful with Applications : Broker’s Misrepresentation Without Knowledge of Insured is Sufficient for Rescission

Insurance brokers, who represent the insured to transact insurance with, but not on behalf of, an insurer 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 make the broker a defendant in a major lawsuit.

In  Douglas v. Fidelity National Insurance Co ., 229 Cal.App.4th 392, 177 Cal.Rptr.3d 271, 14 Cal. Daily Op. Serv. 10,315, 2014 Daily Journal D.A.R. 12,127 (2014) the insureds sued a fire insurer for bad faith. The Superior Court, Alameda County, entered judgment on special jury verdict awarding damages to the insureds, but struck the jury’s $1.9 million punitive damages award following the granting, in part, of insurer’s motion for judgment notwithstanding the verdict (JNOV). The insurer appealed.

Factual Background

In December 2010, plaintiffs went to a business called Co st–U–Less Insurance (Cost–U–Less) where, over the telephone, an InsZone Insurance Services (InsZone) employee assisted them in obtaining a homeowner’s insurance policy with Fidelity. Three months later a fire damaged plaintiffs’ home.

After an investigation, Fidelity rescind- ed the homeowner’s policy on the grounds that plaintiffs’ insurance application con- tained material misrepresentations about various facts concerning plaintiffs and their home. Fidelity stated it would not have issued the policy had it known the truth about the misrepresentations.

Proceedings at Trial

In December 2010, plaintiffs went to a Cost–U–Less store in Stockton to pur- chase an insurance policy for the Locust Street home. The insurance paperwork Jerry signed consisted of three pages. The first page was a blank form. The employee at Cost–U–Less did not ask him any ques- tions about the property. Jerry signed the documents and gave the employee a check.

After the fire and investigation by Fidelity, Jerry received a letter dated May 31, 2011 from an attorney named Jeffrey Charlston. The letter included a check from Fidelity in the amount of the insur- ance premium Jerry had paid. Charlston stated that in the course of investigating the fire loss, evidence had developed show- ing material misrepresentations had been made in connection with plaintiffs’ insur- ance application. The alleged misrepresen- tations pertained to: (1) whether any unit in the structure was occupied by more than one family, (2) whether the electrical panel utilized circuit breakers or fuses, (3) whether there were roommates or board- ers 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. Charlston also stated it did not appear Jerry had ever personally lived in the home, asserting the property was being used either as a halfway house for parolees or as a rehab facility. Jerry testified that these claims were untrue. Finally, Charlston advised that plaintiffs owed Fidelity in excess of $24,000 for benefits already paid.

The Purchase of Insurance And Succeeding Fire

Richard Gasparini, Jr., had visited On the Right Path several times. During one such visit, he was setting up his laptop computer when people came through the front door yelling that they had a search warrant. He was handcuffed and taken out to the street. In connection with that visit he created a report dated December 30, 2009. He also visited plaintiffs’ home on February 10, 2011. Later, Betty came to his office and told him about the fire. She said several times that she wanted to relocate the facility to another house.

Bruce LeBlanc evaluates policies to ensure they meet Fidelity’s underwriting guidelines. He confirmed that insurance brokers use Fidelity’s website to complete online applications. The application pro- gram is called Fidelity Rating and Internet Service Technology (FIRST). It automati- cally quotes and underwrites policies in real-time. Some of the questions on the application are underwriting questions and others are rating questions. The rating questions pertain to the quote for the pre- mium on a specific policy. The underwrit- ing questions are intended to qualify the risk for acceptance. The broker obtains the relevant information from the applicant and inputs it into the FIRST system. Once the application is submitted, the broker can print the signature page off the Internet and have the applicant sign it. The system will not approve applications that have unacceptable underwriting responses.

Discussion

It is well established in California that material misrepresentations or conceal- ment of material facts in an application for insurance entitle an insurer to rescind an insurance policy, even if the misrepresen- tations are not intentionally made. To pre- vail, the insurer must prove that the insured made a material “false representa- tion” in an insurance application.

The evidence presented at trial would support a finding that plaintiffs were licensed to operate a residential care facil- ity out of their home and that they received money in exchange for providing room and board to mentally ill clients. For exam- ple, the unusual incident/injury report that Betty submitted to the licensing agency after the fire states that two male clients were residing in the home at the time of the fire. Plaintiffs’ counsel essentially stip- ulated, outside the presence of the jury, that Betty was running a business out of her home.

InsZone’s Status as Broker  or Agent

As a matter of law, if an insurance application was prepared by an insurance broker (the agent of the insured), the appli- cation’s contents are the insured’s respon- sibility. Unlike insurance brokers an “insurance agent” is one who represents an insurer under an employment by the insurer.  Brokers and insureds are ordinar- ily 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.

Insurance agents and insurance bro- kers must be licensed by the Department of Insurance (DOI) (California Insurance Code § 1631). But a person may not act as an insurance agent without a notice of the agent’s appointment by the insurer to transact business on its behalf filed with the DOI.

There was evidence, albeit conflicting, that InsZone and Lockefeer acted as plain- tiffs’ insurance brokers, and not as agents of Fidelity. The court’s review of the record indicates a reasonable probability that a properly instructed jury could have ren- dered a different verdict. The instructional errors were exacerbated by plaintiffs’ coun- sel’s closing arguments. He repeatedly asserted the “application” was the blank form Jerry had signed, emphasizing that this form did not include the disputed underwriting questions. Of course, Fidelity was not necessarily required to prove that the misrepresentations it relied on in issu- ing the policy were contained within an application. It only needed to prove that there was a misrepresentation or conceal- ment of a material fact in connection with an application for insurance.

None of the questions or accompany- ing answers are printed on the page Jerry signed. Thus, Jerry’s testimony that he nev- er saw the Fidelity underwriting question- naire generated by InsZone is not implau- sible, and, under the instruction given, the jurors could have concluded there were no misrepresentations in Jerry’s “application” because there were no representations at all on the blank pages that he signed.

Importantly, the jury was not asked to consider whether the FIRST application submitted by InsZone on plaintiffs’ behalf via Fidelity’s website contained any mate- rial misrepresentations. Additionally, the instructions and jury form required Fidelity to prove that the misrepresenta- tions were made deliberately in violation of California law that allows for rescission based on an innocent concealment or mis- representation of material fact.

Fidelity’s affirmative defense was not properly presented to the jury and the court concluded Fidelity was prejudiced thereby, necessitating a new trial.

Zalma Opinion

Insurance agents and brokers should always advise their clients of how they will market the insurance requested. If they are acting as a broker, that is a person who transacts insurance with but not on behalf of an insurer, the broker should advise the insured that he only works for the insured. If an agent, he should advise the insured that he is acting for the insurance compa- ny. Regardless, when an application is pre- pared the prudent agent or broker will always provide a copy of all representations made to the insurer – whether on an appli- cation or on a computerized system like FIRST and explain to the insured that the insurer will rely on each statement of fact provided to the insurer by the application process whether on an ACORD form or by e-mail or some other method of trans- mitting information.