When an insurer sues for rescission, the insured is generally responsible for omissions and misrepresentations on insurance applications. That being said, when a third party brokers the deal between the insurer and the insured, he too is potentially liable. A recent District Court case out of Northern California case illustrates how a broker can be held liable to the insured for those same omissions and misrepresentations in rescission actions.
In James River Ins. Co. v. DCMI, Inc., 2012 WL 2873763 (N.D. Cal. July 12, 2012), James River Insurance Company brought suit against DCMI, a construction contractor, to rescind the insurance contract taken out. The insurer alleged that DCMI made material omissions and/or misrepresentations about prior claims or threatened litigation against them. DCMI, who used a broker, Powers & Company, to find James River Insurance Company, argued that they were not responsible for the omissions.
DCMI cross-filed to include Powers & Company as a defendant in the suit. Powers & Company filed out the insurance application on behalf of DCMI. DCMI alleged that in doing so the broker neglected to explain material terms and used a pre-filled form. The cross-filing complained of breach of contract, negligence, and breach of duty. Powers & Company moved to dismiss the suit against them for a failure to state a claim regarding all three counts. The trial court denied the motion in relevant part.
The court held that the breach of contract and negligence cause of actions were proper. In doing so, the court explained that under California law, an insurance broker has the general duties found in any agency relationship. This includes the duty to use reasonable care, diligence, and judgment in procuring the requested insurance coverage. Failing to properly fill out an application and explain material terms is a breach of said duty—a breach that can be an element within either cause of action.
In ruling on the first claim, the court held that the use of a pre-filed form and then failing to explain key terms to a client could amount to breach of contract in a broker-relationship. The court explained that a breach of contract claim requires the showing of four elements: (1) the existence of a contract; (2) the plaintiff’s performance under the contract; (3) that the defendant breached the contract; and (4) the breach resulted in damage to the plaintiff. DCMI’s allegation of an arrangement and then the incorrectly completion of the forms was enough to survive a motion to dismiss.
On the second claim, the court held that although an insured bears the responsibility of omissions in application as to an insurer, the broker can still be liable to the insured. A negligence claim requires the showing of three elements: (1) breach of duty; (2) causation; and (3) damages. The court acknowledged that when an insurer seeks to rescind the insured bears the responsibility of the application. However, the court explained that nothing prevents the insured from then recovering from the broker where the broker is liable. In this case, the use of a pre-filled application and then failing to explain key terms could amount to negligence.
This case is significant because it shows just how far insurance broker liability can go. Even where the law already holds the insured responsible for rescission actions, a broker may be joined to the suit for his own negligence or breach arising out of the contract.
This was originally posted on the Jampol Zimet LLP’s Insurance Defense blog. Read the original post here.