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Broking bad: a misstatement on an application filed on a client's behalf leads to a denial of coverage.

It is common for insurance brokers to complete applications on their clients' behalf, but what happens when coverage is subsequently denied based on misstatements in the application? Can the insurer be held liable?

Recently, in American Way Cellular v. Travelers Property Casualty Company, the California Court of Appeal held that an insurer is not liable for the negligent acts of another unless that party was an actual or ostensible agent of the insurer.

In American Way, Travelers issued a commercial property policy to American Way based on an application prepared and submitted by A&J, a licensed insurance broker. Under "Fire Protection," the application indicated that the property had "Smoke Detectors/Fire Exting./Sprinklers." The policy contained an endorsement stating, "As a condition of this insurance, you are required to maintain ... an Automatic Sprinkler System." The endorsement contained an exclusion for any fire loss or damage if, prior to the fire, the insured failed to maintain an automatic sprinkler system.

A fire occurred at the premises and American Way submitted a claim. During the investigation, it was determined that there was no automatic sprinkler system installed in the building. Travelers relied on the endorsement's exclusion to deny the claim.

American Way sued Travelers for breach of contract and bad faith. The trial court entered judgment for Travelers based on the endorsement requiring a functioning sprinkler system as a condition of coverage and evidence that no sprinkler system existed at the premises.

The court also found that Travelers was not liable for A&J's negligence because A&J functioned as an insurance broker, not as an agent of Travelers.

American Way appealed, arguing that A&J was an actual or ostensible agent of Travelers. The Court of Appeal disagreed, explaining that "an insurer, as a principal, may be vicariously liable for the torts of its agent if the insurer directed or authorized the agent to perform the tortious acts, or if it ratifies the acts it did not originally authorize." However, unlike an agent, "a broker does not act for the insurer, and the insurer is not liable for the broker's acts or omissions."

The court then looked at the legal distinction between an agent and a broker. Statutorily, an agent is defined as one who is authorized, by and on behalf of an insurer, to transact all classes of insurance, while a broker is a person who, for compensation and on behalf of another person, transacts insurance, but not on behalf of an insurer.

The court explained, "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; whereas an insurance agent is one who represents an insurer tinder an employment by it."

The court also explained why A&J was not an ostensible agent of Travelers: "Ostensible agency cannot be established by the representations or conduct of the purported agent; the statements or acts of the principal must be such as to cause the belief the agency exists."

Best's Review columnist Lissa A. Martinez is an attorney with DarrasLaw in Ontario, Calif. She is a plaintiff's lawyer representing disabled insureds and can be reached at
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Title Annotation:Insight
Author:Martinez, Lissa A.
Publication:Best's Review
Date:Nov 1, 2013
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