Broker Liability: Scope of Coverage

Absent any express representations of coverage by the agent or broker, when the insured accepts a policy without objection, the general rule is that a duty is placed upon the insured to read his or her policy and to know its contents. (National Auto & Cas. Ins. Co. v. Stewart (1990) 223 Cal. App. 3rd 452.) In those situations, therefore, the insured has been held chargeable with knowledge of its terms. (Fields v. Blue Shield of California (1985) 163 Cal. App. 3d 570.) The general rule was articulated in Aetna Casualty & Surety v. Richmond (1977) 76 Cal. App. 3d 645, 652:

It is a general rule that the receipt of a policy and its acceptance by the insured without objection binds the insured as well as the insurer and he cannot thereafter complain that he did read or know its terms. It is duty of the insured to read the policy.

However, when an agent or broker negligently misrepresents the scope of coverage, or negligently fails to obtain insurance as promised, the courts have ruled that the insured may reasonably rely on the representations of the broker or agent without reading the policy.

Greenfield v. Insurance Inc. (1971) 19 Cal App. 3d 803 provides a good illustration. In that case, Greenfield asked his insurance broker to obtain business interruption insurance covering a mechanical breakdown of a new auto shredder for use in the business. The broker told Greenfield that he obtained a policy with the requested coverage, and advised Greenfield that the only exclusions were for a breakdown due to flood and earthquake. In fact, the policy obtained by the broker included a broad exclusion for any type of “mechanical breakdown.”

Greenfield sued the broker on the theory of negligent misrepresentation with respect to the coverage, and the broker argued that there was a lack of reasonable reliance by Greenfield because he failed to read the policy.

The court, however, rejected the broker’s argument, and held that Greenfield justifiably relied on the broker’s representations that he had the coverage he wanted. The court observed that Greenfield relied on the broker for years in all aspects of his insurance business, and that it was reasonable that he would accept the broker’s representations as to coverage and not read the policy.

The general rule was articulated in Butcher v. Truck Insurance Exchange (2000) 77 Cal. App. 4d 1442, 1461: An insurance agent has an obligation to use reasonable care, diligence and judgment in procuring the insurance requested by an insured. …

The law is well established that an agent’s failure to deliver the agreed-upon coverage may constitute actionable negligence and the proximate of cause of injure.

In Butcher, the insureds, facing a suit for malicious prosecution, turned to their insurer for defense, having years before instructed the insurer’s agent to duplicate the coverage of a policy that contained that protection but was not being renewed. When the defense was denied on the ground that the policy did not contain such coverage, the insured sued the insurer and the agent for negligent misrepresentation. The court observed that a disparity in knowledge may impose an affirmative duty of disclosure on the agent or broker, and that a valid cause of action was thus stated by the insureds.

Another illustrative case is Desai v. Farmers Insurance Exchange (1996) 47 Cal. App. 1110. In that case, the insured purchased a policy based on the agent’s oral representation that a policy offered by Farmer’s Insurance Group would provide “100 percent coverage for the costs of repairs and/or replacement of the improvements to the property.” The insured sustained damages in excess of $500,000 from a fire and an earthquake, but Farmer’s paid only $158,734 as dictated by the terms of the policy. The court held that the agent’s failure to obtain the insurance requested was actionable negligence, and that “the reasonable expectations of the insured would be that he was completely covered for the replacement costs of the structures, regardless of the policy limits.” (47 Cal. App. 4d at 1114).

After the Policy Is Issued

The cases cited above all involve a misrepresentation by the agent or broker before the policy was issued. But an agent or broker could also liable for misrepresentations made after a policy was issued.

In Clement v. Smith (1993) 16 Cal. App. 4d 439, the insured sold a piece of property. A dispute arose with the purchaser, and the insured entered into a settlement agreement under which he agreed to subordinate his trust deed to construction financing to be obtained by the other party. The insurance agent assured him that his contractual liability policy would provide coverage for any problems arising out of the real estate transaction.

After a lawsuit was brought against the insured arising out of disagreements relating to the subordination agreement, the insurer denied coverage. The insured filed an action for negligent misrepresentation against his insurance agent, and the agent was found liable for misrepresenting the scope of coverage. There was evidence that the insured could have obtained the desired coverage by purchasing a director’s and officer’s liability policy. However, the court held that the insured, in failing to seek that additional coverage, could reasonable rely on the agent’s representations that he was already covered.

The above cases all involve representations of coverage by the broker or agent, upon which the insured could reasonable rely without personally reviewing the policy terms. However, where the insured is advised to read the policy, the broker or agent is generally absolved from liability.

In Hackethal v. National Casualty Co. (1987) 189 Cal. App. 3d 1102, a doctor ordered a “defendant’s reimbursement policy,” which was promoted with a brochure stating that the policy will pay the insured $200.00 “for each full day’s spent in work as a defendant.” The two-page policy’s coverage agreement, however, stated that the company would pay “for each day the insured is required to attend the trial of a civil suit for damages …”

The insured was charged with gross negligence and incompetence by the Board of Medical Quality Assurance, which required him to attend 39 days of hearings before an administrative law judge. When he put in a claim to the insurer for reimbursement for those 39 days, the insurer denied coverage because the administrative hearing was not a civil suit for damages.

The court noted that the brochure stated it was an outline and referred the reader to the policy for complete details, and the policy proclaimed in bold letters “please read your policy.”

The insured admitted that the agent never told him that the policy provided coverage for administrative hearings. Under those facts, the court found that the insured had a duty to read the policy.

In Handland v. NN Investors Life Insurance Co. (1994) 24 Cal. App. 4d 1578, the insureds brought an action involving their health insurance policy. An associate of the insurer represented that the policy would be “as good if not better” than the previous policy. In fact, it provided substantially less coverage, and, after one of the insureds was hospitalized, paid less than half the amount of her bills.

However, the insureds received a certificate of insurance indicating their coverage benefits, and in an attached letter, they were asked to read the certificate and call the insurer’s office if they had any questions.

The first page of the certificate advised them that if the policy did not meet their needs, they could return it within 10 days for a full refund.

Under those circumstances, the court held that a reasonable person would read the coverage provisions of the insurance policy to ascertain the scope of what is covered and that the insureds would be “bound by clear and conspicuous provisions in the policy, even if the evidence suggests that the insured did not read or understand them.

More problematic is where no express promise of coverage is made to the insured, but the insured claims it reasonably expected coverage.

In Logan v. John Hancock Mut. Life Ins. (1974) 41 Cal. App. 3d 988, the court held that in the case of standardized insurance contracts, any exceptions and limitations on coverage that the insured could reasonably expect, must be called to his attention, clearly and plainly before the exclusions or limitations will be interpreted to relieve the insurer of liability or performance. See, also, Underwriters Ins. Co. v. Purdie (1983) 145 Cal. App. 3d 57.

An Exclusive Agent

Finally, the personal liability of an agent or broker for misrepresentations was addressed in Lippert v. Bailey (1966) 241 Cal. App. 3d 376. The court held that an insurance agent acting solely on behalf of the insurance company is not personally liable for the negligent failure to obtain the coverage requested by the insured. The defendant, Bailey, was an agent for Fireman’s Fund Insurance Co. The court relied on the fact that the insured knew that Bailey was the agent for Fireman’s Fund, knew the policy would be issued by Fireman’s Fund and contracted with that end in view.

Under Lippert, the non-personal liability rule would not apply where the policy is sold by an insurance broker representing more than one insurance company. Likewise, the court specifically noted that if the evidence established that Bailey was a dual agent, i.e., was acting as the agent for both the insurance company and the insured, he could be personally liable.