The Nuts & Bolts of Insurance Agent Negligence In California

The first rule regarding insurance agent negligence in California is to hire experienced insurance agent professionals who are experts in the business, duties, and responsibilities of how insurance agents and brokers are supposed to conduct their business. This post is a promised follow-up to a recent post, The Nuts and Bolts of California Property Insurance.In addition to the materials Dan Veroff and Victor Jacobellis presented in their seminar, I want to share an example to prove my point about the need to hire an insurance agent expert to determine if a case is worthy.

The following is an excerpt from an expert in a case successfully handled by Derek Chaiken from our Los Angeles office. The expert insurance agent, as part of her report, noted the following:   

The reasonable standard in the insurance industry is the use of ACORD forms for applications for insurance coverages. ACORD forms contain industry-standard questions and answers that insurance companies use to underwrite the risks presented by the prospective insured. The Commercial Property ACORD Application Form 140 contains sections that are to be completed, including a section in which to provide information to the underwriter as to whether there is an automatic sprinkler in place, some other type of fire suppression system, the manufacturer of such systems and the percentage of the building protected.

Applications form the basis of the insurance contract and, as such, should reflect exactly what the policyholder is asking for in protection from the underwriter. That should be memorialized by a signature and date from the customer on said application. The underwriter reviews that application and determines, according to their own underwriting rules, whether to follow the application, reject it, or modify the terms of coverage they are willing to offer, notifying the agent, who in turn, notifies the customer. It is a reasonable duty that an agent responsible for providing information to a prospective insurance company regarding a potential policyholder’s risk should verify that the information they are submitting is accurate and correct.

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The reasonable insurance industry standard is for an agency to maintain written operational procedures that are followed by each staff member. The purpose of these standardized procedures is to memorialize the information received and transmitted between the parties involved during the transaction of insurance.

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Have written standards for the completion of applications and standardized transmittal information and requests to the customer.

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Have written standards in place for notifying a prospective customer or an existing customer, of serious restrictions of coverage in the policies being proposed or procured. It is industry standard to bring attention, in writing, to a severe restriction that has the potential for removing coverage from the policy for one of the very causes of loss that is critical for the protection of the owner’s assets, i.e., loss caused by fire.

These duties and standards are not going to be found recited by judges in insurance negligence cases. They come from experienced insurance agents who are trained, taught, and managed in the work and duties of what insurance agents are supposed to do for a living. Insurance agents do not read insurance agent malpractice cases to learn how they are supposed to do their work for the same reasons doctors do not read medical malpractice cases to learn how to treat patients.  

So, the second rule of insurance agent negligence cases is to be certain to find attorneys who know insurance and have experience representing policyholders with these types of cases. The insurance agent negligence cases are usually a complex mix of facts and standards most lawyers know nothing about unless they have practiced in this area of law and nuanced legal issues.

Returning to the Nuts & Bolt presentation, the first issue is the liability of the person selling the insurance. All types of agents selling insurance have similar duties. The question is, who else is responsible for the agent or broker’s errors?

In California, if the party is an insurance agent of the insurance company, the insurance company is also liable for negligence. If the party is deemed a broker, the policyholder may be deemed to be liable as well as the broker. Sometimes, the party selling the insurance is a dual agent-broker, and the liability depends on the exact facts. The insurance company will be liable if it is deemed to be a direct writer.

California Code Definitions regarding the classification of an agent vs. broker:

Insurance Code section 1621 – An insurance agent is a person who transacts insurance … on behalf of an admitted insurance company.

Insurance Code section 1704(a) – Any person . . . shall not act as an agent of an insurer unless the insurer has filed with the commissioner a notice of appointment, executed by the insurer, appointing the licensee as the insurer’s agent.

Insurance Code section 1623(a) – An insurance broker is a person who, for compensation and on behalf of another person, transacts insurance . . . with, but not on behalf of, an admitted insurer. …

The California Broker Presumption:

Section 1623(a) . . . It shall be presumed that the person is acting as an insurance broker if the person is licensed to act as an insurance broker, maintains the bond required by this chapter, and discloses, in a written agreement signed by the consumer, all of the following:

That the person is transacting insurance on behalf of the consumer.
A description of the basic services the person will perform as a broker.
The amount of all broker fees being charged by the person.
If applicable, the fact that the person may be entitled to receive compensation from the insurer, directly or indirectly, for the consumer’s purchase of insurance a consequence of the transaction.

Rebutting the Broker Presumption:

Section 1623(c) The presumption of broker status is rebutted as to any transaction in the admitted market in which any of the following is present . . .

Designated agent of insurer

Agent can bind coverage

Agent can pay claims

Agent can appoint other agents for the insurer

Section 1623(d) – In all other cases, the presumption of broker status is rebutted based on the totality of the circumstances indicating that the broker-agent is acting on behalf of the insurer.

(e) For purposes of this section, “totality of the circumstances” means evidence indicating whether a broker-agent was acting on behalf of the insurer or was acting on behalf of a third person. In determining the totality of circumstances, all relevant facts and circumstances shall be reviewed and the review is not limited to any particular fact or factors and this section does not require that any particular circumstance receive greater or lesser weight.

The question of whether an insurance agent can be successfully sued for failing to obtain enough policy limits is a question asked in many total loss cases throughout the country. Underinsurance is a plague upon policyholders suffering a total loss. In California, there is a voluntary duty to set limits. An agent is not required to do so, but if chosen, a California agent must do the following:

10 Cal. Code Regs. Section 2695.183

Requires agent to consider specific list of elements of a home

Requires agent to give a copy of the estimate to the insured if in connection with application or issuance

Requires estimate to be of the specific home

Requires carrier to regularly ensure methods of estimating are cutting edge

If you have an interest regarding insurance agent negligence in California, I would suggest that you use our blog’s search function, and type “California insurance agent negligence.” This will take you to a number of prior articles. One article by Dan Veroff, Negligence by Captive Agents Is on the Rise Because They Don’t Understand the California Fair Plan But Are Now Brokering Them By the Truckload, noted the following:

We are likely to continue seeing other examples of negligence in this area as more and more captive agents write Fair Plan policies as brokers of record. Agents and brokers are liable in California only in certain situations – but errors like these may constitute liability situations. The law will surely continue to develop as more cases rise to the appellate courts with fact patterns like these. Until the law is clear, you can count on agents and carriers doing whatever they can to avoid paying for their mistakes.

My suggestion is to immediately find competent counsel when faced with a question about whether an insurance agent failed to properly sell the right insurance. It is usually a complex inquiry needing legal analysis and guidance.

Thought For The Day    

If You Want To Succeed In Insurance Sales, Then Stop Selling Products! Instead, Help People To Find A Solution To Their Problems!

—Lew Nason