United States: Insurance Carriers May Be Held Accountable For Their Agents’ Wrongful Acts

Last Updated: December 6 2013
Article by Lowndes Christopher Quinlan

Insurance companies perform a significant amount of business through various agents. Agents and brokers solicit policies, collect premiums, issue policies, and report on, investigate and manage claims. An agent's negligence in these activities may adversely impact a policyholder's ability to recover in the event of a loss. A recent decision by the Washington Supreme Court reaffirms that when an insurer's agent commits wrongdoing, the insurer may also be held liable. Chicago Title Ins. Co. v. Washington State Office of Insurance Commissioner, 309 P.3d 372 (Wash. 2013). Accordingly, if an insurer's agent negatively affects an insured's ability to obtain indemnification for a loss, the insured may look to both the agent and the insurance company to be made whole.

Chicago Title Insurance Company appointed Land Title Insurance Company as its agent for soliciting Chicago Title's policies. As part of the relationship, Land Title entered into an issuing agency agreement that provided it with the specific authority to "sign, countersign and issue Principal's title assurances on forms supplied and approved by Principal" in a designated territory within Washington. Id. at 376. The agency agreement included provisions designed to limit Land Title's authority, and by implication, Chicago Title's liability. Specifically, the agreement provided that Land Title was not authorized to do "any other act for principal not expressly authorized herein." Id. Land Title could not use Chicago Title's name in advertising or printing other than to acknowledge its status as Chicago Title's policy-issuing agent.

In 2005, Washington's Office of the Insurance Commissioner (OIC) began a marketwide investigation into the marketing practices of title insurance. Washington law limited the amount of money title insurers could spend as inducements to middlemen who selected the title insurance consumers were required to buy in connection with land sales. The law limited inducements to no more than $25.00. RWC §48.30.150 (1990). The OIC found widespread violations throughout the industry, including violations by Chicago Title. With respect to Land Title, the OIC determined (and Chicago Title later stipulated) that the company had provided real estate agents, builders and mortgage lenders with meals, golf tournaments, advertising and professional football tickets in amounts in excess of $25.00, in violation of Washington law.

Following its findings, OIC sought Chicago Title's agreement to enter into a consent order levying a fine for Land Title's misconduct. Chicago Title refused and OIC brought administrative charges against the insurer. The Administrative Law Judge hearing the case, however, granted Chicago Title summary judgment on the grounds that the agreement between the two companies created a traditional agency relationship, and the judge determined Chicago Title had no right to control Land Title's marketing practices. Id. at 377. An Administrative Review Judge reversed the decision. The Review Judge noted RCW §48.17.010 (1985) defined "agent" as "any person appointed by an insurer to solicit applications for insurance on its behalf." Finding that Land Title was Chicago Title's statutory agent, the Review Judge reasoned Chicago Title was therefore liable for Land Title's conduct in connection with its solicitations.

The dispute made its way to the Washington Supreme Court, which ruled that Chicago Title was vicariously liable for Land Title's illegal conduct. The court noted the state's insurance code "comprehensively governs the relationship between agent and insurer, specifically enumerating the duties and powers an agent possesses." Id. at 378. The statutory definition of agent includes the power to solicit. Chicago Title argued that the definition provided Land Title with only the limited ability to solicit — without the power to market. The court disagreed, observing that "[t]he authority to solicit includes the authority to market." Id. at 379. By implication, the statute granted Land Title the authority to conduct the work necessary to solicit policies on behalf of Chicago Title.

Chicago Title also argued that the contractual limitations on Land Title's authority trumped the statutory authority granted Land Title to market. The court rejected this argument, reasoning:

an insurance company is bound by all acts, contracts, or representations of its agent, whether general or special, which are within the scope of his real or apparent authority, notwithstanding they are in violation of private instructions or limitations upon his authority, of which the person dealing with him, acting in good faith, has neither actual nor constructive knowledge.

Id. quoting Pagni v. N.Y. Life Ins. Co. , 23 P.2d 6 (Wash. 1933) (emphasis in original). Chicago Title, therefore, could not limit its vicarious liability through an undisclosed, private contract. Land Title had the authority to market for Chicago Title, and Chicago Title was aware of unlawful inducements within the title insurance industry. Because Chicago Title took no steps to stop its agent's illegal conduct, the court found Chicago Title vicariously liable for Land Title's conduct.

The court cautioned that the ruling did not create "per se" vicarious liability every time a statute created an agency relationship. "There must be some nexus between the act at issue and the prescribed duties of the agent." Id. at 382.

Although Chicago Title deals with an insurer's liability for regulatory violations, nothing in the decision limits the holding to such conduct. Under Chicago Title's reasoning an insurer may be held liable for misconduct of its agents in any context in which the agent is acting under statutory authority. The insurer's vicarious liability extends not only to the specific authority granted by statute (e.g., soliciting) but also to any misconduct by the agent in carrying out acts necessary to fulfill the authority granted by the statute (e.g., marketing, which is necessary for solicitation). Insurers may not limit their liability contractually.

Chicago Title is a major win for policyholders. State laws frequently create an agency relationship between the insurer and certain parties to the insurance transaction. For example, many states' laws deem a broker — normally the agent of the insured — to be the insurer's agent for certain transactions, such as collecting premium or accepting the notice of a claim. If a statutory agent's conduct harms the insured, the insured may look for recovery to both the wrongdoer and the insurance company. For example, if an agent gives improper advice to an insured on the type of coverage to buy for a particular risk, and the insured later has inadequate coverage for a loss stemming from that risk, the insured may seek to hold liable both the agent and the insurer employing him. The Washington Supreme Court has done a major service to policyholders by confirming that insurance carriers will be responsible for their statutory agents' errors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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