Foran Glennon Palandech Ponzi & Rudloff

December 2013

Distinction Between “Brokers” and “Agents”: American Way Cellular, Inc. v. Travelers Property Casualty Company of America

By Michelle Law

The California Court of Appeal (Second District, Los Angeles) recently addressed whether an insurance “broker” is an agent or representative acting on behalf of the insurer.  The Court’s answer is a resounding “no.”  The holding in American Way Cellular, Inc. v. Travelers Property Casualty Company of America, 216 Cal. App. 4th 1040 (2013), is particularly significant because if a broker is not an agent of an insurer, then accordingly, liability will not attach against the insurer under agency liability theories for actions, or omissions, of the broker.

American Way Cellular Inc. (“American Way”) applied for a commercial property insurance policy through its insurance broker, A & J Financial Services, Inc. (“A & J”).  A & J assisted in the completion of the insurance application and incorrectly indicated, in relation to information for “FIRE PROTECTION (Sprinklers, Standpipes, CQ/Halon Systems),” that American Way possessed an automatic sprinkler system.  Travelers Property Casualty Company of America (“Travelers”) issued a policy containing a protective safeguards endorsement that required American Way to maintain an automatic sprinkler system on the premises as a condition precedent for coverage.

Following a fire loss, Travelers learned that the insured premises did not in fact include an automatic sprinkler system.  Travelers subsequently denied coverage based on American Way’s failure to meet the endorsement.  American Way filed an action against Travelers for breach of contract, bad faith, and negligence.

On appeal from the trial court’s granting of a motion for summary judgment, American Way argued that triable issues of material fact existed, including whether the insurance broker was an actual or ostensible agent of Travelers.  American Way also contended that it had never indicated or been asked if the premises were equipped with automatic sprinklers, and that Travelers had a duty to conduct inspections of the premises.  The Court of Appeal disagreed.  In affirming the trial court’s decision granting Travelers’ motion for summary judgment, the Court concluded that an insurance broker, such as A & J, in these circumstances was not an actual or ostensible agent of the insurance company.  A broker, the Court explained, acts as a middleman, soliciting insurance from the public and is not under employment from any particular insurance company.

Further, the Court held, the insurer does not have a duty to verify the accuracy of all statements on the insurance application.  While an insurer has a right to conduct inspections of the premises to be insured, it is not obligated to do so.  The particular facts of the case warrant attention as they may shed light on the Court’s decision.  A & J never held itself out to be an agent or representative of Travelers.

Furthermore, although the broker completed the insurance application, there was evidence that one of the owners of American Way had made representations to the broker regarding the existence of a sprinkler system.

As a result of American Way, the law in California is that it is the policyholder’s responsibility to ensure the content of the insurance application is accurate regardless of whether an insurance broker assists with procuring the policy.