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Douglas v. Fidelity National Insurance Company

(Question of fact regarding whether insurance services company producer was acting as an agent on behalf of homeowner’s insurer or broker on behalf of the insured required reversal of jury verdict in favor of insureds for bad faith and punitive damage as improper jury instructions relating to status of the producer impacted insurer’s affirmative defense of rescission)

In Douglas v. Fidelity National Ins. Co., 229 Cal.App.4th 392 (August 29, 2014), the California First District Court of Appeal reversed a judgment entered after a jury verdict finding Fidelity to have acted in bad faith in connection with denying a fire loss claim involving the destruction of plaintiffs’ home in Hayward, California. The plaintiffs purchased a home on Locust Street in Hayward in 1993 or 1994. Plaintiffs, Jerry and Betty Douglas (“Plaintiffs” or “Jerry” or “Betty”), moved to Stockton in 2005. However, they kept the Hayward house and used it to run a group home for minors on probation. In approximately 2008 or 2009, the family experienced serious financial difficulties. As such, they ceased operating the group home and moved back to the Locust Street property in March 2010. Thereafter, they filed for bankruptcy and became late on their mortgage payments.

In December 2010, plaintiffs went to a Cost-U-Less Store in Stockton to purchase an insurance policy for the Locust Street home. When plaintiffs arrived at the Stockton store, an employee told them the paperwork he needed had not yet arrived. They left the store and did some shopping nearby. When they returned, the employee told them he had received the documents and only needed Jerry’s signature. 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 questions about the property. Jerry signed the documents and gave the employee a check. Cost-U-Less store sent the documents to producer, InsZone Insurance Services, which primarily works with customers over the phone and allegedly submitted an application for insurance to Fidelity for plaintiffs’ Locust Street home.

Thereafter, on March 14, 2011, a fire damaged the Locust Street property.  Subsequently, the plaintiffs submitted a claim for fire damage to Fidelity National Insurance Company (“Fidelity”). In response, an attorney representing Fidelity sent a letter to plaintiffs advising plaintiffs that Fidelity was rescinding its policy and returning a check for the insurance premium. The attorneys’ letter advised that 1) plaintiffs had made representations related to 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 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 advised that the plaintiffs owed Fidelity in excess of $24,000 for benefits already paid.

Thereafter, plaintiffs filed a complaint for breach of contract and bad faith against Fidelity. In response, Fidelity filed a cross-complaint for declaratory relief, restitution and reimbursement. Subsequently, plaintiffs’ lawsuit was tried, and the jury returned a verdict in excess of $500,000, plus interest and costs of suit. The jury also awarded plaintiffs $1.9 million in punitive damages. However, the trial court granted Fidelity’s motion for judgment notwithstanding the verdict on the award of punitive damages.  Fidelity and plaintiffs filed appeals regarding the judgment entered by the trial court.

In reversing the jury verdict for judgment in favor of plaintiffs, the Court of Appeal noted that the trial court had failed to approve proper jury instructions relative to the status of the insurance services company referred to as “InsZone Insurance Services” (“InsZone”). If InsZone was deemed the plaintiffs’ broker, information provided by InsZone may be relied upon by Fidelity in contending that plaintiffs misrepresented information on their application for insurance from Fidelity. On the other hand, if InsZone was determined to be an agent of Fidelity, its claim of rescission should fail.

In particular, the Court of Appeal noted that the testimony at trial supported the determination that plaintiffs had operated a residential care facility or business from their home with multiple boarders. Hence, Fidelity contended that rescission of the policy was merited. On the other hand, if InsZone did not act as plaintiffs’ broker, but rather as Fidelity’s agent, it was undisputed that plaintiff Betty Douglas signed application forms which did not include any of the questions and misrepresentations referred in Fidelity’s counsel’s denial letter. Hence, it was fair to infer that the answers were provided by Fidelity’s “agent,” InsZone, such that its claim for rescission failed.

In reversing the judgment entered in favor of plaintiffs, the Court of Appeal explained the importance of the status of InsZone as follows:

We turn to examine whether the jury should have been allowed to consider whether InsZone was acting as plaintiffs' broker during the policy transaction. The significance of this issue is critical to the merits of the present case. As a matter of law, “if [“LA Sound, not its broker, is responsible for the misrepresentations in the application.”].)

Persons or entities who solicit, sell, or negotiate insurance contracts are known generically as “producers.” Producers fall into two broad classifications: insurance agents and insurance brokers. (See Krumme v. Mercury Ins. Co. (2004) 123 Cal.App.4th 924, 932, fn. 4 (Krumme).) “‘An “insurance broker” is one who acts as a middleman between the insured and the insurer, soliciting insurance from the public under no employment from any special company, and, upon securing an order, placing it with a company selected by the insured or with a company selected by himself or herself; whereas an “insurance agent” is one who represents an insurer under an employment by it. A broker is, in essence, employed in each instance as a special agent for a single purpose, while the very definition of agent indicates an ongoing and continuous relationship. … 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.’ [Citations.]” (123 Cal.App.4th at p. 929.)

An agent's primary duty is to represent the insurer in transactions with insurance applicants and policyholders. (Marsh & McLennan of Cal., Inc. v. City of Los Angeles (1976) 62 Cal.App.3d 108, 117–118 (Marsh).) Each company the agent represents must file a notice of appointment with the DOI's commissioner. (§ 1704.) Because an agent represents the insurer, an agent's representations to an insured regarding coverage are treated as representations by the insurer. Generally, some hallmarks of an insurance agent (as opposed to a broker) are licensure, notice of appointment as an agent and the power to bind the insurer. (Marsh, supra, at pp. 118–119.) In contrast, a broker's primary duty is to represent the applicant/insured, and his or her actions are not generally binding on the insurer. “Put quite simply, insurance brokers, with no binding authority, are not agents of insurance companies, but are rather independent contractors … .” (Marsh, supra, at p. 118, italics added.) Of course, these labels alone are not determinative of the relationship, and the specific facts of each transaction must be reviewed. (Arocho v. California Fair Plan Ins. Co. (2005) 134 Cal.App.4th 461, 466 [36 Cal. Rptr. 3d 200].) The general laws of agency inform any such review. (Sanchez v. Lindsey Morden Claims Services, Inc. (1999) 72 Cal.App.4th 249, 255 [84 Cal. Rptr. 2d 799].)

Plaintiffs assert the evidence unequivocally shows that InsZone was not a broker. They cite to the independent producer agreement between InsZone and Fidelity. The agreement states, in part: “Producer shall never be deemed an agent for the Company or Insurance Company unless required by law. Producer has no authority to bind Company or Insurance Company on any insurance policy except as otherwise stated in the underwriting guidelines for the territories and lines of business set forth on Compensation Schedule.” (Italics added.) The compensation schedule provides that InsZone was authorized “to bind policies for the lines of business listed below and the Company shall pay Producer a commission based on the following table … .” The table includes homeowners policies in California. Relying on Marsh, plaintiffs assert that this power to bind “means the producer is agent.” Plaintiffs claim, “had the jury decided the agent/broker issue, it would have found InsZone was a producing agent for Fidelity, thus gutting the proposed affirmative defense.” In our view, the issue is not as clear cut as plaintiffs suggest.

We observe both insurance agents and insurance brokers must be licensed by the DOI (§ 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. (§ 1704, subd. (a); Loehr v. Great Republic Ins. Co. (1990) 226 Cal.App.3d 727, 732–733 [276 Cal. Rptr. 667].) It is unclear whether Lockefeer or InsZone was covered by such notice. Additionally, the producer agreement is ambiguous insofar as it states explicitly that InsZone was “never” to be deemed Fidelity's agent, except as “required by law.” It also appears that a jury could conclude Lockefeer did not bind the policy himself, since it was Fidelity's Web site that generated the policy number (see Krumme, supra, 123 Cal.App.4th 924, 929, quoting Marsh, supra, 62 Cal.App.3d 108, 118 [“‘a broker does not execute a policy without a prior authorization from the insurer. In contrast, the agent is authorized to execute the binder himself.’ [Citation.]” (italics added)].) Because there was substantial evidence to support a finding that Lockefeer was acting as a broker rather than an agent, we agree with Fidelity that the jury should have been allowed to make a determination of this issue.

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