A. Why won't
they just "do
the right
thing?"
People make
mistakes. It's
part of being
human.
Even so, over
and over we see
cases where an
insurance
carrier or its
designated agent
makes an error
and then
stubbornly
denies
responsibility.
The
carriers/agents
just won't "do
the right thing"
in industry
parlance.
The result is
always the same.
Innocent
insureds are
left to fend for
themselves. The
carrier and
agents defend
based on the
notion that they
owe "no duty" to
have prevented
or to right the
particular
wrong. A
struggle ensues.
Bad faith law
may be
insufficient to
address the
situation,
especially if
the mistake has
to do with a
faulty insurance
application or a
failure to
provide adequate
limits or
coverages.
Breach of the
implied covenant
of good faith
and fair dealing
generally
requires a
breach of the
insurance
contract and the
policy
declarations or
coverages are
often exactly
what the
agents/carrier
mistakenly put
into place.
Catch 22,
anyone?
The solution is
to think outside
of the box just
a little bit and
examine what is
really going on
in the
insured/agent/insurer
relationship,
because the
nature and
extent of the
relationship
will ultimately
define where the
duty truly lies.
Fortunately,
this area is one
of the few in
insurance law
that has grown
more sympathetic
to insureds
during the past
decade.
B. Defining
Different Levels
of Duty.
The typical
agent/carrier
mistake problem
requires
analyzing duty
at multiple
levels. The
duties can
involve a
fiduciary duty
under certain
circumstances, a
duty to perform
reasonably or a
duty created by
an oral or
written
contract.
The duties
themselves will
define the
remedies
available to the
insured in the
event of a
breach so the
level of duty
involved becomes
critical in
prosecuting a
claim.
Breach of
fiduciary duty
is the most
interesting,
both because it
has recently
been affirmed as
available under
certain
circumstances
(Tran v. Farmers
Group, Inc.
(2002) 104
Cal.App.4th
1202, 128
Cal.Rptr.2d 728)
and because it
presents a
potential for
obtaining
punitive
damages.
Negligent breach
of a duty to
perform
resulting in
damages is also
important, but
will generally
only become
available where
the agent or
insurer have
acted in such a
fashion where
they can be seen
to have adopted
a special duty
towards the
insured. See
e.g., Paper
Savers, Inc. v.
Nacsa (1996) 51
Cal.App.4th
1090, 59
Cal.Rptr.2d 547;
Desai v. Farmers
Ins. Exchange
(1996) 47
Cal.App.4th
1110, 55
Cal.Rptr.2d 276;
Free v. Republic
Ins. Co. (1992)
8 Cal.App.4th
1726, 11
Cal.Rptr.2d 296.
Under this
theory, both
agent and
insurer may be
liable for the
agent's
negligence in
misrepresenting
policy terms or
the extent of
coverage
provided. In
addition, the
measure of
available
damages may, in
the right case,
include
attorneys fees
and costs.
Saunders v.
Cariss (1990)
224 Cal.App.3d
905, 274
Cal.Rptr. 186.
Finally, where
there is an oral
or written
agreement to
provide a
certain level of
insurance
protection,
there is the
potential for a
breach of
contract to
provide
insurance. The
damages
available would
be the same as
for any
contractual
breach.
C. The
Fiduciary Duty
as applied to a
Carrier.
1. A significant
duty in the
proper case.
The common
notion is that a
carrier's duty
to act
reasonably
towards its
insured arises
from the
quasi-fiduciary
nature of the
insurer/insured
relationship.
Branch v. Home
Fed. Bank (1992)
6 Cal.App.4th
793, 8
Cal.Rptr.2d 182.
That
relationship,
the cases say,
creates duties
that are similar
to, but not the
same, as a
trustor/trustee
relationship and
is the
foundational
basis for claims
for breach of
the implied
covenant of fair
dealing, more
commonly known
as insurance bad
faith.
There is,
however, a
situation where
the insurer and
insured are
involved in a
true fiduciary
relationship and
that is where
the insurer is a
reciprocal
insurer and the
insured has
signed a power
of attorney,
also known as a
"subscription
agreement."
Reciprocal
insurers, also
known as
interinsurance
exchanges, are
insurance
entities that
are as strange
to the novice as
they are
fascinating to
any student of
the industry.
Governed by
Insurance Code
section 1280 et
seq.:
An
interinsurance
exchange
is
an
unincorporated
business
organization
made
up
of
subscribers
and
managed
by
an
attorney-in-fact.
The
exchange
is
the
insurer
and
the
subscribers
are
the
insureds.
The
subscribers
execute
powers
of
attorney
appointing
the
attorney-in-fact
to
act
on
their
behalf.
The
attorney-in-fact
executes
the
exchanges
insurance
contracts.
* *
*
"Courts
which
have
considered
the
relationship
between
a
reciprocal
insurer's
board,
its
attorney-in-fact
and
its
subscribers
have
concluded
the
relationship
is
analogous
to
the
relationship
between
the
directors,
management
and
participants
in
other
kinds
of
organizations.
For
example,
at
least
one
court
has
held
that
>[t]he
position
of
the
attorney-in-fact
of a
reciprocal
insurance
exchange,
who
manages
the
business
of
the
exchange
under
powers
of
attorneys
of
the
subscribers
. .
. is
fiduciary
in
character
to
the
same
extent
as
that
of
the
management
of
an
incorporated
mutual
insurance
company
. ."' |
Tran, supra,
104 Cal.App.4th
at 1210-1211
[Emphasis in
original]
(quoting
Industrial Indem.
Co. v. Golden
State Co. (1953)
117 Cal.App.2d
519, 256 P.2d
677).
California based
Farmers
Insurance is our
best known
reciprocal
insurer and is a
fine example of
how the Tran
duty may be
applied.
As a reciprocal,
Farmers consists
of many separate
entities, which
makes it
difficult for
the uninitiated
to even name
them in a
lawsuit.
The correct way
to name Farmers
is to name the
appropriate
exchange, the
claims handling
entity and the
management
company. The
reason for this
is, a reciprocal
breaks up of its
functions into
different
companies, and
so a company
that played a
part in injuring
the insured must
be named.
For example,
Farmers'
exchanges are
much like bank
accounts where
the subscriber
funds are pooled
to pay claims
and management
company fees.
Farmers' primary
exchanges are:
Farmers
Insurance
Exchange, Fire
Insurance
Exchange or
Truck Insurance
Exchange. The
declarations
page of the
policy will
identify the
proper exchange.
Fire Insurance
Exchange and
Truck Insurance
Exchange have no
employees, they
are exchanges in
their purest
form. Farmers
Insurance
Exchange handles
claims for the
entire Farmers
organization and
so is usually a
proper party
when claims
handling is part
of the case, in
addition to the
exchange
identified on
the declarations
page.
Farmers Group,
Inc. is the
management
company,
otherwise known
as the
attorney-in-fact.
Farmers
generally frowns
when the "Group"
is named in a
lawsuit and will
usually fight
fiercely to get
the management
company out of
harms way.
However, the
Group is a
proper party in
a bad faith case
(Delos v.
Farmers Ins.
Group Inc.
(1979) 93
Cal.App.3d 642,
155 Cal.Rptr.
843) and is the
central player
where a breach
of fiduciary
duty claim is
made.
The reason has
to do with how a
reciprocal
functions.
Exchanges, which
are essentially
single pools of
money, can't act
on their own.
Exchanges rely
on a management
company to
provide all the
services that
make an
insurance
company
function. In
turn, the
management
company acts on
behalf of both
the exchange and
the subscribers
(we call the
later
"insureds"). The
subscribers, in
turn, authorize
the management
company
authority to act
on their behalf
by appointing
the management
company as their
attorney-in-fact
(the
"subscription
agreement"). For
its trouble, the
management
company charges
a percentage of
each policy
dollar as a fee
for its
services.
The bottom line
is, when Farmers
Group, Inc.
enters into an
attorney-in-fact
relationship
with an insured
B which happens
whenever a
policy is issued
B Farmers takes
on a special
duty that is
fiduciary in
nature.
|
We
believe
respondents,
having
chosen
to
conduct
their
insurance
business
through
interinsurance
exchanges
that
require
the
appointment
of
attorneys-in-fact
to
execute
contracts
on
behalf
of
subscriber/insureds,
are
bound
by
the
ordinary
rule
that
an
attorney-in-fact
is
an
agent
owing
a
fiduciary
duty
to
the
principal. |
Tran, supra,
104 Cal.App.4th
at 1213.
This duty has
significant
implications
when Farmers
Group, Inc. or
its agents make
an error and
refuse to "do
the right
thing."
Fiduciary
duties are the
same duties owed
by a trustee to
a trustor, which
means they are
significant and
far reaching. (Civ.Code
' 2322(c).) So,
an agent is
required to
disclose to the
principal all
information
relevant to the
subject matter
of the agency.
Orfanos v.
California Ins.
Co. (1938)
29 Cal.App.2d
75, 80, 84 P.2d
233. An agent is
liable to the
principal for
intentional or
negligent torts
against the
principal.
Cecka v. Beckman
& Co. (1972)
28 Cal.App.3d 5,
11, 104
Cal.Rptr. 374.
A trustee owes a
duty of loyalty
and has a duty
to administer
the trust solely
in the interest
of the
beneficiaries. (Prob.Code
' 16002;
Estate of Gump
(1991) 1
Cal.App.4th 582,
596, 2
Cal.Rptr.2d
269.) A trustee
has a duty to
apply the full
extent of the
trustee's
skills. (Prob.Code
' 16014(a).)
A trustee has a
duty to avoid
conflicts of
interest and may
not use or deal
with trust
property to the
trustee's own
profit nor take
part in any
transaction in
which the
trustee has an
interest adverse
to the
beneficiary. (Prob.Code
' 16004(a).) AA
transaction
between the
trustee and a
beneficiary
which occurs
during the
existence of the
trust or while
the trustee's
influence with
the beneficiary
remains and by
which the
trustee obtains
an advantage
from the
beneficiary is
presumed to be a
violation of the
trustee's
fiduciary
duties. (Prob.Code
' 16004(c).)
Persons who owe
a fiduciary duty
to the trustee
of a trust may
be liable to the
trust
beneficiaries
for breach of
fiduciary duty
whenever such
fiduciaries
actively collude
with the trustee
in breaching the
trustee's own
fiduciary
duties. The
right of the
beneficiary
against the
third party, in
such a case, is
a direct right.
City of
Atascadero v.
Merrill, Lynch,
Pierce, Fenner &
Smith (1998)
68 Cal.App.4th
445, 467,
483-484, 80
Cal.Rptr.2d 329.
"A fiduciary or
confidential
relationship may
arise whenever
confidence is
reposed by
persons in the
integrity and
good faith of
another. If the
latter
voluntarily
accepts or
assumes that
confidence, he
or she may not
act so as to
take advantage
of the other's
interest without
their knowledge
or consent."
City of
Atascadero,
supra, 68
Cal.App.4th at
483.
In a breach of
fiduciary duty
action, the
plaintiff bears
the initial
burden of proof
regarding the
parameters of
the fiduciary's
duty. Then, the
burden shifts to
the defendant to
demonstrate that
the particular
transaction was
entered in good
faith and the
inherent
fairness of the
transaction from
the beneficiary'
viewpoint.
Robinson,
Leatham &
Nelson, Inc. v.
Nelson (9th
Cir. 1997) 109
F.3d 1388, 1391.
Since it is the
attorney-in-fact
that issues
policies on
behalf of the
exchanges. The
upshot to all
this is, the
management
company may be
held responsible
for breaches of
its important
duties or a
fiduciary when
it or its agents
drop the ball in
policy
formation.
D. Finding a
Duty of Care.
An agent/carrier
error in
providing
coverage can
also give rise
to a duty of due
care if the
agent/carrier
acted in such a
way that they
can be said to
have adopted a
"special duty."
It is black
letter law that
where an
insurance agent
contracts in the
name of an
insurer and does
not exceed that
authority, the
insurer B in its
role as a
principal -- is
liable.
Kurtz, Richards,
Wilson & Co.,
Inc. v.
Insurance
Communicators
Mktg. Corp.
(1993) 12
Cal.App.4th
1249, 1257-1258;
16 Cal.Rptr.2d
259; Lippert
v. Bailey
(1966) 241
Cal.App.2d 376,
382; 50
Cal.Rptr.478;
Briano v.
Conseco Life
Ins. Co.
(C.D. Cal. 2000)
126 F.Supp.2d
1293, 1297-1298.
Where an agent
has adopted a
special duty and
is negligent in
its efforts on
behalf of the
insured, the
insurer in turn
is vicariously
liable for the
agent's
negligence. See,
e.g., Paper
Savers, Inc. v.
Nacsa (1996)
51 Cal.App.4th
1090, 1096-1098
(rev. den. Mar.
12, 1997); 59
Cal.Rptr.2d 547.
A long line of
decisional
authority,
including
Free v. Republic
Ins. Co.
(1992) 8
Cal.App.4th
1726; 11
Cal.Rptr.2d 296,
Desai v.
Farmers Ins.
Exchange
(1996) 47
Cal.App.4th 1110
(rev. den. Nov.
20, 1967); 55
Cal.Rptr.2d 276
and Paper
Savers, Inc. v.
Nacsa (1996)
51 Cal.App.4th
1090, impose
liability for
negligence on a
carrier in such
circumstances.
In Free v.
Republic
(1992) 8
Cal.App.4th
1726; 11
Cal.Rptr.2d 296,
an insured
alleged that
despite repeated
inquiries, an
insurance agent
failed to inform
that the
coverage limits
on a homeowners
policy were
inadequate to
replace the
proper in the
event of a fire
loss.
After the trial
court sustained
the insurer's
demurrers
without leave to
amend, the Court
of Appeal
reversed.
|
Clearly
defendants
were
not
required
under
the
general
duty
of
care
they
owed
plaintiff
to
advise
him
regarding
sufficiency
of
his
liability
limits
or
the
replacement
value
of
his
residence.
Nonetheless,
once
they
elected
to
respond
to
his
inquires,
a
special
duty
arose
requiring
them
to
use
reasonable
care. |
Id. at
1729.
Likewise, in
Desai v. Farmers
Ins. Exchange
(1996) 47
Cal.App.4th
1110; 55
Cal.Rptr.2d 276,
an order
sustaining an
insurer's
demurrers
without leave
was reversed
after an agent
wrongly assured
an insured that
there was
sufficient
coverage in
place to protect
against loss due
to covered
risks, including
fire. Id. at
1118-1121. In
reversing, the
Court of Appeal
cited Free in
support of the
proposition that
an insurer will
be vicariously
liable where,
despite an
agent's
assurances,
property policy
limits proved
insufficient to
protect the
insured "against
the very
specific
eventuality: the
destruction of
his [property]."
Id. at 1121.
Again, the Court
of Appeal in
Paper Savers,
Inc. v. Nacsa
(1996) 51
Cal.App.4th
1090, reversed a
grant of summary
judgment on
behalf of a
property insurer
where an insured
alleged an agent
misled him
regarding the
losses of
business
personal
property
provided by the
insurance policy
he purchased.
Id. at 1092.
The Court of
Appeal followed
both Free and
Desai in finding
a duty on behalf
of both the
agent and the
insurer.
|
[T]his
case
involves
a
special
duty
to
ensure
such
coverage
based
on
alleged
affirmative
assertions
made
to
induce
the
insured
to
purchase
the
policy
. .
. .
The
instant
case
has
nothing
to
do
with
the
interpretation
of
insurance
policy
terms.
No
one
is
disputing
the
policy
terms
or
their
meaning.
The
dispute
is
whether
[the
agent]
actively
misled
[the
insured]
as
to
the
effect
of
those
terms. |
Paper Savers,
supra, 51
Cal.App.4th at
1101-1102.
Defendants will
generally argue
that they owe no
duty, citing
Jones v. Grewe
(1987) 189
Cal.App.3d 950;
234 Cal.Rptr
717. However,
that argument is
misplaced where
a special duty
is involved,
particularly
where there is a
clear mistake.
As the Court of
Appeal has
repeatedly
observed, Jones
dealt with the
issue of whether
an agent might
be held
responsible for
failing to
recommend
adequate
liability
insurance
limits. The
appellate court
declined to
announce such a
duty, reasoning
"[n]either an
insurance agent
nor anyone else
has the ability
to accurately
forecast the
upper limit of
any damage award
in a negligence
action against
the insured by a
third party."
Free, supra,
at 1730.
Such a rationale
has no support
where there is
an error in such
finite coverages
as setting
property
insurance
limits, since
the value of
lost or
destroyed
property can be
calculated in
advance. "Under
such
circumstances,
defendants must
be deemed to
have assumed
additional
duties, which,
if breached,
could subject
them to
liability." Id.
|
[T]he
Free
court
held
once
an
insurer
or
its
agent
elects
to
respond
to
an
insured's
questions
about
coverage,
a
special
duty
arises
which
requires
them
to
use
reasonable
care
to
provide
accurate
information.
The
Free
court
found
the
Jones
decision
is
distinguishable.
It
noted
Jones
involved
a
liability
policy
for
which
the
upper
limit
of
desirable
coverage
cannot
truly
be
known
at
the
time
of
purchase.
Whereas
the
type
of
insurance
involved
in
the
Free
case
involved
the
amount
required
to
rebuild
one's
home,
characterized
by
the
court
as a
"specific
eventuality"
and
one
that
is
determinable. |
Paper Savers,
supra, 51
Cal.App.4th at
1097-1098.
Carriers and
agents may also
attempt to rely
on
Fitzpatrick v.
Hayes (1997)
57 Cal.App.4th
916; 67
Cal.Rptr.2d 445,
but it actually
doesn't help
their cause
where a special
duty is
involved. First,
like the Jones
case,
Fitzpatrick
analyzes an
insurance
agent's duty in
the context of
liability
insurance,
specifically,
umbrella
coverage.
Second,
Fitzpatrick
affirms that a
duty arises
where (a) the
agent
misrepresents
the nature,
extent or scope
of coverage, (b)
there is a
request for a
particular
extent of
coverage, or (c)
the agent
assumes an
additional duty
by holding
himself or
herself out as
having expertise
in a given field
of insurance
being sought by
the insured.
Fitzpatrick,
supra, at
927.
Kurtz,
Richards, Wilson
& Co., Inc. v.
Insurance
Communicators
Mktg. Corp.
(1993) 12
Cal.App.4th
1249, 1257-1258,
agrees that
where, as here,
an insurance
agent serves in
a dual agency
capacity, a duty
to exercise
reasonable care
is owed the
insured.
Accord, Lippert
v. Bailey
(1966) 241
Cal.App.2d 376;
see also,
Clement v. Smith
(1993) 16
Cal.App.4th 39;
19 Cal.Rptr.2d
676 (liability
imposed where
insured
dissuaded from
purchasing
additional
coverage by
agent
misrepresentations);
Butcher v.
Truck Ins.
Exchange
(2000) 77
Cal.App.4th
1442, 1461; 92
Cal.Rptr.2d 521
(agent's failure
to deliver
agreed upon
coverage is
admissible).
E. Finding a
Contractual
Duty.
Finally, an
agent/carrier's
mistake in
coverage may
give rise to a
breach of
contract claim.
The graveman of
a breach of
contract cause
of action where
there is
agent/carrier
error is that
the
agent/carrier
undertook a
special duty,
such as to
ensure that the
Plaintiff's
property was
insured to
value, breached
that duty and
so, breached
their contract
of service to
protect the
Plaintiff's
property with
adequate
insurance. Such
a failure is
actionable. 3
Witkin Summary
of Cal. Law
(2005 10th)
Agency, ' 119,
p. 162.
Where an insured
is misled by the
negligence of an
insurance agent,
there is no duty
to read the
policy and the
insured may sue
for breach of
the contract to
procure
insurance (Butcher
v. Truck Ins.
Exchange
(2000) 77
Cal.App.4th
1442, 1465) or
breach of
contract to
insure (Eddy
v. Sharp
(1988) 199
Cal.App.3d 858,
867; 245
Cal.Rptr. 211).
Also, to the
extent the
insured can
allege that
through fraud,
mistake or
accident, the
subject
insurance policy
fails to express
the real
intention of the
parties, ie, to
adequately
protect the
Plaintiff's
property from
loss due to a
covered risk
such as fire,
the intention
controls and any
language in the
written policy
form
contradicting
that intent is
disregarded
under the normal
rules of
contract
construction.
Civ.Code ' 1640;
Heidlebaugh
v. Miller
(1954) 126
Cal.App.2d 35,
38; 271 P.2d
557.
F.
Conclusion.
Insureds
sometimes need
to rely on the
expertise of
agents and
carriers to
obtain the
correct
coverages and
limits that will
best protect
them. When
agents and
carriers act as
insurance
experts but drop
the ball, they
should do the
right thing.
When they won't,
it's up to the
consumer lawyer
to set things
right.
33 Advocate 5
(May 2006)
LEARNING
CENTER
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Bill Daniels
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variety of articles and videos to
keep you abreast of legal developments and case law that
affect our society.
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Bill Daniels | Law Offices has a reputation for winning
milestone cases. Our successful track record proves it, with Bill Daniels involved
with multiple significant verdicts and settlements in the
tens and even hundreds of millions of dollars. When facing a
tough opponent, you need an equally aggressive advocate on
your side willing to do battle for you!
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for a free consultation on the merits of your
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