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When Is An Insurance Agent Not An Agent?

When She's the Middleman!

You may be surprised to learn that an insurance broker, despite the broker's more commonly known name of "insurance agent," isn't really always considered an agent of the insurance company.  Sure, there are some insurance companies that actually have insurance agents, like Farmers and Allstate, but not other companies that lack an actual agent force who sells only for that particular company. 

Why is this distinction important?

Just as American Way Cellular.  It purchased an insurance policy for its warehouse from Travelers through an insurance broker (note the name, "broker") and then as you would expect, had a fire loss.  That's right.  The warehouse burned down.  When it submitted a claim for coverage, Travelers denied the claim because the application, filled out by the broker, said that the warehouse had a sprinkler system.

As I am sure you have already guessed, the Court of Appeal in American Way Cellular v. Travelers didn't just issue this guidance for our benefit, it was deciding the lawsuit that erupted between American Way Cellular and Travelers.  American Way didn't have a sprinkler system (thus the reason that there was more damage), so Travelers cited the application condition and denied American Way's claim. 

Ouch.

American Way sued claiming that it was Traveler's insurance agent who wrongly wrote down on the application that it had a sprinkler system, so it was really the broker's fault, and therefore, since the broker was an agent of Travelers, Travelers had to pay the fire claim.

By definition, a broker can sell insurance for more than one company.  According to the Second District Court of Appeal here in Los Angeles, that ability means that the broker is not an agent of any of the insurance companies the broker represents, but instead a "middleman."

A "middleman?"

Yep.  The guy in between.  The one who takes a cut, but cannot act on behalf of the insurance company.  But wait a minute here.  The definition says, "represents."  Doesn't an agent also represent?  Yes, but. 

Here, that "but" means that in order for the situation to rise to the level of an agency relationship between the broker and the insurance company, the Court of Appeal ruled, "the principal, and not the agent, must make statements or commit acts causing the person relying on the apparent agency to believe the agency exists."

So, when an insurance broker or agent tells you that he/she is the agent of the insurance company, don't believe them.  Make sure you get something from the insurance company where the insurance company tells you who its agent is. 

That's a pretty stiff requirement to do a lot of extra work when you're buying an insurance policy, especially if you don't review in advance the application that the insurance broker fills out before it is sent to the insurance company.  You might just not have any insurance coverage like American Way Cellular, Inc. didn't if your broker fills out the application wrong, perhaps mistakenly checking the box that says you have a sprinkler system when you don't.  Then, after a fire, you've got no coverage, and most likely an insurance broker who doesn't carry enough insurance to cover the cost of the broker's mistake.

Double ouch.

We can't tell from the opinion whether that's the case here, but logic initially tells us that's the case since American Way sued Travelers Insurance instead of the insurance broker.  If that's the case, and given the results of this appellate opinion, American Way was just out of luck all the way around.

Triple ouch.

This case is a hard one to take a lesson from, however, because we find out the real reason coverage was denied and that denial was upheld by the Court of Appeal.  This case may fall into that realm where one fact makes bad law.  Here's the fact they don't list up front in the opinion:  apparently, one of the owners of American Way told the broker that it had a sprinkler system in its warehouse when it didn't.  As an aside here, and this is just a guess, but there may be a reason why the owner said the warehouse had a sprinkler system:  insurance companies offer lower premiums for sprinkler systems.

That's the real reason why American Way didn't sue the broker.  The broker was just doing as he was told to do.  That's also the most likely reason that the Court of Appeal reached the decision it did.  Even if there was an agency relationship between Travelers and the broker, the negligence was on the owner's side, not the agent or the insurance company's side. 

But wouldn't it have just been easier to say it the way I just said it instead of creating a whole bunch of extra work to find out whether they guy or gal that sells you insurance is a broker or an agent?

Perhaps.

But then you wouldn't really know whether your coverage is good or not.  Better to review the application before the broker/agent sends it off to the insurance company, and better to know whether you can take what the agent says as if the insurance company said it.

That way, when the fire comes, you won't have to hire me to sort it all out for you.  By doing your homework ahead of time, the problem will never affect you.

And that's the best kind of legal advice:  the advice that avoids the problem altogether.

Posted by J. Craig Williams on Friday, May 31, 2013


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