Brother act: siblings slip up in attempt to obtain coverage for MN fitness club.
A fitness club, as a high-risk business, generally would be required to obtain insurance from a surplus lines insurer, but respondent West Bend Mutual Insurance Co, a licensed insurance company in Minnesota, was able to offer fitness club insurance through one of its divisions, respondent National Specialty Insurance (NSI). In April 2006, AIA entered an agreement with West Bend to act as an agent selling West Bend's policies, including those for fitness clubs. The NSI agents' manual provided that, except for certain specified programs, which did not include fitness-club insurance, agents did not have authority to rate and bind coverage unless they had received a prior quote and approval from NSI. West Bend's fitness club coverage also required completion of a health club questionnaire, which was intended to provide additional information beyond a standard ACORD insurance application.
Before the meeting, the brothers had discussed insurance requirements for the fitness club. At the meeting, the brothers at least partially filled out West Bend's health club questionnaire. That questionnaire stated in boldface, immediately above the signature line: "IF A QUOTE FOR WORKER'S COMPENSATION COVERAGE IS BEING REQUESTED PLEASE COMPLETE AN ACORD WORKER'S COMPENSATION APPLICATION." The signature block also states that the person signing the questionnaire "understand[s] completion of this questionnaire does not compel the company to provide coverage." Both brothers signed the document on Aug. 30. Because the ACORD workers' compensation application required Wayne Newton to obtain additional information, such as federal tax and unemployment identification numbers, it was not completed at the meeting.
After Nick Newton received that information and completed the required ACORD applications, an AIA employee submitted them online to NSI on Sept. 7, requesting a quote and an effective policy date of Sept. 21. An NSI underwriter told AIA that the completed health club questionnaire, which had not yet been submitted, was also required. The underwriter received the completed questionnaire and scheduled West Bend coverage to become effective Sept. 21. Unfortunately, respondent Jade Benson, the employee hired by Cascades, was severely injured in a work-related accident on Sept. 18.
West Bend refused to honor the workers' compensation claim, and appellant Westport Insurance Corp., AIA's E&O carrier, assumed responsibility for that claim. Cascades assigned its right to indemnification against West Bend to Nick Newton, AIA, and Westport. Cascades and Westport settled the employee's claim against Cascades. Nick Newton, Cascades, AIA and Westport then sued West Bend in Dakota County district court, seeking reformation of Cascades' workers' compensation policy to reflect an effective date of Sept. 1, 2006; indemnification for workers' compensation benefits paid; and breach-of-contract damages arising from West Bend's denial of coverage.
DISTRICT COURT RULE
The district court concluded that no genuine issue of material fact existed on the issue of Nick's apparent authority to bind West Bend to workers' compensation coverage for Cascades' employee prior to the accident. The district court reasoned that, under Minnesota case law, no material factual issue existed on whether West Bend held out Nick Newton as having such authority; that Wayne Newton had actual notice that his brother may not have had authority to bind coverage; and that Minnesota statutory law did not grant general apparent authority to insurance agents based on their license to sell insurance.
Cascades acknowledged that, based on AIA's agency agreement with West Bend, Nick Newton had no actual or implied authority to issue the workers' compensation policy before its approval by West Bend. Cascades argues that the district court erred by concluding that no material factual issue exists regarding Nick Newton's apparent authority to orally bind West Bend to workers' compensation coverage before the date West Bend approved coverage.
Cascades challenged the district court's summary judgment and dismissal of their claims seeking reformation of a workers' compensation policy with West Bend to reflect a policy date before an employee's accident, arguing that appellant insurance agent had apparent authority to orally bind coverage on the earlier date. The Minnesota Court of Appeal was asked to resolve the dispute in Cascades Development of Minnesota LLC v. West Bend Mutual Insurance Co., A12-2184 (Minn.App. 06/17/2013).
Apparent authority requires that:
(1) The principal has either held the agent out as having authority or knowingly permitted the agent to act on its behalf
(2) The third party has actual knowledge that the agent was held out by the principal as having such authority or was permitted by the principal to act on its behalf
(3) Proof of the agent's apparent authority is found in the conduct of the principal, not the agent.
Nick Newton did not occupy a corporate position that would contribute to leading a third party to reasonably believe that he had authority to conduct all transactions on behalf of that company. If a principal has provided an agent with general authority to engage in a class of transactions, but has placed undisclosed limits on that authority, a third party may reasonably believe that the agent is authorized to conduct those transactions.
Minnesota case law does not compel the conclusion that every insurance agent appointed by an insurer to solicit coverage has apparent authority to bind the insurer as a matter of law. Rather, the existence of apparent authority presents a question of fact. To create a genuine issue of material fact on the issue of Nick Newton's authority to orally bind West Bend before approval of the insurance application, Cascades was required to present facts tending to show that, because of West Bend's manifestations, Nick Newton had that authority, such that a reasonable person in Wayne Newton's position would have been justified in relying on it.
It is undisputed that West Bend's coverage for a fitness club was high-risk insurance, requiring specialized underwriting and the completion of a healthclub questionnaire. That questionnaire, which both brothers signed on Aug. 30, contained boldface language stating West Bend's requirement that a workers' compensation application must be submitted to obtain a quote for that coverage. It also stated that the applicant "understand[s] completion of this questionnaire does not compel the insurer to provide coverage."
Cascades maintained that the presence of West Bend's logo on the questionnaire creates a material fact as to whether the company was expressing a manifestation of intent to be bound by Nick Newton's action as its agent. In view of the signed disclaimer, the presence of the logo does not create a material factual issue on this question. Finally, although West Bend has acknowledged that it would have provided coverage had Cascades' application been timely submitted, we conclude that this factor alone does not create a genuine issue of fact on the issue of apparent authority.
It is undisputed that AIA did not submit the ACORD workers' compensation application to West Bend until Sept. 7. It also is undisputed that after that date, West Bend requested the completed health-club questionnaire before it would provide a quote for fitness-club insurance. Under principles of contract law, the application did not become binding until it was accepted by the insurer.
On June 17, 2013, the appeals court affirmed the decision of the district court: "Because the district court did not err by concluding that no genuine issue of material fact existed on the issue of the agent's apparent authority, we affirm."
An agent requires authority from an insurer to bind the insurer to any particular risk. In this case, perhaps because of the familial relationship between the putative agent and his brother, more trust than good sense was used. If there is a mistake, misrepresentation or concealment of material fact a policy can be reformed to express the intent of the parties to the policy of insurance. However, when there is a clear and explicit disclaimer of agency it should be clear to both the agent and the putative insured that there will be no insurance until it is agreed to by the insurer.
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Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage claims handling, bad faith and fraud. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. His ebooks are available at zalma.com/zalmabooks.htm. Contact him at zalma.com or email@example.com.
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|Title Annotation:||Down to Cases|
|Publication:||American Agent & Broker|
|Date:||Sep 1, 2013|
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