Serving one master--marine insurance and the agency status of insurance brokers

I.

INTRODUCTION

The wise attorney or underwriter knows there is nothing new under the sun. Also known is that which is, is that which will be. Yet even wizened and learned professionals are continually surprised by the consistency with which familiar positions are taken and stratagems pursued by assureds when coverage is being litigated. One of the most familiar, and perhaps the most consistently abused, of these positions concerns the issue of on whose behalf a broker acts when the latter is placing insurance coverage in the broad marine insurance market.

Important ramifications flow from this matter of for whom the broker acts. More precisely the issue becomes whose agent the broker is when disclosing or failing to disclose material information upon which underwriters issue quotes and policies. For example, as sometimes happens, an application for coverage might be the result of the joint efforts of a local agent, an intermediate or subbroker, and then a surplus lines broker. Somewhere along this circuitous route information critical to the underwriter may be misplaced, forgotten or, through some all too human failure, simply omitted from the instrument submitted to the underwriter over the insured's signature. In those situations assureds are quite likely to assume that because they gave the brokers all the information, any failure of disclosure cannot defeat their otherwise valid claim for coverage under the policy.

In addition, since no insurance policy, not even an "all risk" policy, can Cover every eventuality, frequently assureds may be in for painful surprises when they learn that damage to their vessel is excluded by some rather obscure provision in the policy. Nevertheless, if over a lengthy course of dealings with the underwriter, the broker is shown to have been well aware of the exclusionary language, the assured is likely to contend that the broker's knowledge and failure to fully inform the assured of the exclusion should be attributable to the underwriter not the broker.

Underwriters, too, need to understand that they may suffer unintended consequences and unexpected liabilities if they fail to maintain an arm's length relationship with the brokers that produce business for them. Constant interaction and ongoing commercial relationships can all too often result in underwriters neglecting to adhere strictly to the important outward forms and protocols that must be maintained if they are not to suffer for the acts or the omissions of brokers.

In this article, the author proposes to examine the familiar principles and the case law that apply to this issue of the agency status of marine insurance brokers. Several very recent cases have cast a clearer light on this poorly understood subject.

II.

COMMERCIAL REALITIES AND THE MARKET

The case of Edinburgh Assurance Co. v. R.L. Burns Corp.' has for almost twenty years stood as a thorough analysis of the workings of the marine insurance market in the United Kingdom, and as an authoritative precedent for the rule that brokers working in that market do so as agents of the insureds. The case and the lengthy opinion issued by the federal court in Los Angeles remains even to this day an excellent description of the structure of the Lloyd's and companies markets. It also illustrates how brokers work for their clients and how they interact with marine underwriters in the placing of insurance.

In the Edinburgh case, the Los Angeles-based insured approached a surplus lines broker that also had its principal place of business in that same city. Insurance was sought against the hazard of an actual total loss of an offshore drilling platform. The surplus lines broker contacted a Lloyd's broker in London for the critical purposes of actually approaching underwriters, negotiating the terms of coverage and agreeing on a premium.' The marine underwriters filed a suit for declaratory judgment. The critical issues were the meaning of the terms "actual total loss," and the agency status of the brokers that negotiated the placement of the coverage.

The court described the procedure by which the surplus lines broker in the United States communicates with and authorizes the activities of the Londonbased broker, with both acting on behalf the insured.' Noting, however, that the insured was contending that both brokers in this case were agents of the marine underwriters, the court was faced with having to review the activities of the brokers, as well as the custom and practice in the London market, in order to arrive at a decision.

The recognized custom and usage of the London insurance market is that the broker is the agent of the potential assured for most purposes, including the placement of insurance. The potential assured is recognized as the broker's client. The recognized role of the broker is to obtain the best possible terms and quotation he can from the market for his client.'

Applying English law to the question of an agency relationship between an insured and the London-based Lloyd's broker, the court noted that "English law is long settled that insurance brokers are agents of the assured for purposes of negotiation and placement of the insurance, including preparation of the broker's slip, and the broker is the agent only of the assured for these purposes."'

On the relationship between the insured and the Los Angeles-based surplus lines broker, however, the court noted that under the (infamous) decision in Wilburn Boat Co. v. Fireman's Fund Insurance Co.', there being no settled federal rule on the subject, California state law would provide the rule of decision. Under California law, both statutory' and decisional,' "it is settled that an insurance broker is the agent for the assured in the negotiation and placement of insurance." The fact that the surplus lines broker retains a commission on a policy would not alter the agency relationship, and the court specifically found that "[n]othing in the factual pattern concerning negotiation and placement of the insurance provides a basis for upsetting the general rule that insurance brokers are agents of the assured.""'

It is significant that the court reached its decision on the agency of the domestic surplus lines broker despite noting that such entities (as well as the Lloyd's broker) might also play a role in the handling of claims. For example, the court noted that brokers frequently maintain accounting arrangements with marine underwriters that result in the broker issuing its check to the insured in payment of a claim. Such arrangements for handling claims through accountings between the broker and the underwriter have no effect on the issue of the broker's agency relationship with the insured.

Virtually every state in the United States is in fundamental agreement with California as to the agency status of the brokers. II In the wake of the Edinburgh case, federal courts around the country issued rulings reaffirming that brokers act as agents of the insureds when they place insurance coverage in the world's marine insurance markets. The legal ramifications that flow from this fact were the subjects of litigation.

III.

ILLUSTRATIVE CASES

The cases that have been utilized to guide courts and counsel have, for the most part, faithfully applied the principles and the market realities enunciated by the federal court in the Edinburgh decision.

Perhaps the most noteworthy decision in the wake of Edinburgh, and one that illustrates very nicely how even a multiplicity of brokers must continue to be recognized legally as agents of the insured, is Washington International Insurance Co. v. Mellone." In that case a marine insurance company brought an action for declaratory judgment, contending that its insured failed to disclose a material fact during the application process. The insured responded by asserting that it had indeed disclosed the disputed factual matters by providing the information to one of the principals at the local insurance broker that assisted in the completion of the suspect application. The disclosure to the local broker was said to satisfy the stringent requirements imposed by both federal maritime law and California law. Most critically, the insured contended that both this local broker and also the next broker upstream that was consulted and retained by the first broker as part of a team effort to obtain the desired coverage, were acting as agents of the marine insurance company that issued the policy. Therefore, as alleged agents of the underwriter, it was argued that any knowledge on the part of these brokers of the facts allegedly disclosed by the insured would be ascribable to the underwriter.

Rejecting what was a clear effort to stand the world on its head and to reverse the familiar principles of the Edinburgh case, the federal district court granted summary judgment to the marine insurance company, The court noted that there was no evidence at all of the existence of an agency agreement between either the first broker and the underwriter, or the second broker and the underwriter. Absent evidence of an agreement by which one of the brokers was permitted or authorized to act on behalf of the insurer, the familiar rule of agency had to apply and the brokers in possession of the material information were held to be the agents of their client, the insured.

Defendant contends that the conduct of Continental and Plaintiff supports the theory of agency because Continental interacted with third parties at the request of Plaintiff, the application for insurance listed Plaintiff as agent, Plaintiff receives its remuneration from Plaintiff and Continental had the responsibility to make sure all Survey Recommendations were complete. Defendant cites no authority, however, which indicates that such conduct warrants an inference of agency relationship between an insurance broker and the insurer in the absence of an agency agreement ......

The court is saying in its decision that the common commercial activities performed by insurance brokers will not be construed, in and of themselves, to create an agency relationship with the marine underwriter. The mere fact that brokerage is paid out of the premiums due to the underwriter will not create agency. The fact that the broker is responsible for ensuring that certain underwriting conditions are carried out will not create agency. There will have to be something more.

In U.S. Fire Insurance Co. v. Liberati, 14 the insured once again contended that coverage should not be affected by virtue of its breach of a notice provision contained in the policy because notice allegedly had been provided to the broker that issued the policy on behalf of the marine insurance company. This time the federal district court denied a summary judgment motion made by counsel for the insurer, but only because the court determined that there remained a disputed issue as to whether the broker had authority to bind U.S. Fire to coverage. But for that single disputed point requiring resolution by the fact finder at trial, summary judgment as to agency for the insured would once again have been proper. In the event the facts were to establish that the broker had no authority to bind U.S. Fire, then summary judgment would be proper based upon the established principles confirming that a broker acts for the insured. Notice to the broker cannot be notice to the underwriter.

The court recounted the applicable principles:

[T]he settled rule is that an insurance broker is an agent of the insured in negotiation and placement of insurance. While California Insurance Code sec. 33 states that a broker, in securing a policy for a client, acts only as agent for the client and not as agent for the insurer, the section does not declare that, if a broker assumes to act for and on behalf of the insurer, actual agency cannot be created. A broker may become an agent for some purposes. However, a broker's primary duty is to the insured."

Clearly, it is possible for a pattern of commercial behavior to develop or even for a single critical act or event to occur that constitutes a sufficient deviation from the familiar principles that would cause the broker to cease being the agent of the insured and to become instead the agent of the insurer. This is to be avoided if at all possible, since the result can be insurer liability for the knowledge of or the acts and omissions of the broker.

As we will see subsequently, this matter of authority to bind can be a critical element in maintaining the legal wall, between the underwriter and the brokers, that results in the broker being held to be the agent of the insured and not of the insurer.

In Howard Fuel v. Lloyd's Underwriters, 16 the issue was the timeliness of notice of a claim made by the insured under a policy of marine insurance issued in the London Market. As in the Mellone case, the insured had multiple brokers laboring on its behalf In fact, there were a total of three (3) separate intermediaries between the insured and the United Kingdom-based insurer. The insured contended that notice to the last of these was constructive notice to the Lloyd's underwriters because that last London broker should be considered the "de facto agent" of the insurer. Fortunately, the court disposed of this line of argument easily and quickly:

That argument lacks merit for two reasons. First, an insurance broker is the agent of the insured, not the insurance company, and notice to an insurance broker, absent exceptional circumstances not here present, is not notice to the insurer. Furthermore, plaintiff has offered no evidence to support its claim that Seascope was Lloyd's real or apparent agent."

Again it bears emphasis that marine insurers must exercise caution to avoid inadvertent creation of those "exceptional circumstances" that can give rise to an apparent or an actual agency relationship with a broker.

IV.

RECENT DEMONS

Two recent decisions from federal district courts in Los Angeles and in Miami illustrate that there has been no retreat from the settled rule that brokers act for insureds in obtaining marine insurance. These cases also confirm that insureds and their attorneys will continue to deny the well-established agency status of brokers whenever the facts in a particular case create such a perceived necessity.

In La Reunion Francaise, S.A. v. Barran," the marine insurer sought a declaratory judgment that its policy did not afford coverage for a dismasting of the insured's vessel that occurred during a race. The policy excluded incidents occurring while racing. Moreover, the only endorsement that was available to provide coverage during such events itself excluded damage to the mast. As in so many such cases, the chain of communication was lengthy and there was a breakdown somewhere along the line. The insured was a racing enthusiast who sought broader navigational limits than his existing policy provided so he had his local, California-based insurance agent seek the requisite coverage. This agent in turn contacted a California-based retail broker known to either directly represent, or at least to have access to, several marine insurance companies that might offer the desired coverage. When none of these companies would underwrite the expanded navigational limits, the retail broker went even further afield and contacted a South Florida-based surplus lines broker known to have access to the United Kingdom market that was thought to be the most likely to offer the full coverage being sought. Somewhere between or amongst these three entities and their communications, the insured's intention of engaging in racing become lost or misplaced, and the application that was submitted to the marine underwriting manager in the United Kingdom made no mention of racing. The policy that was issued contained the aforementioned standard exclusion, a fact that was shown to be well known by the surplus lines broker based upon its lengthy prior course of business dealings with the underwriter. Summary judgment was sought by the underwriter based on this knowledge, and on the established agency case law holding that such knowledge by an agent of the insured was the legal equivalent of knowledge by the insured himself.

Rejecting the usual assertion that agency was an issue of fact, the court granted summary judgment, finding that no material issue of fact prevented this:

Determining whether [the brokers] should be considered Barran's brokers or La Reunion's agents depends upon the nature and quality of their actions, rather than upon any titles they used to characterize themselves. In order to prove the existence of an agency relationship... Barran would have to show the exercise of either "actual" or "ostensible" authority on the part of [the brokers]."

The court went on to state that such evidence of authority was utterly absent from the record, along with any evidence of either careless or intentional actions by the underwriter from which it might be inferred that the brokers were his agents. The court seemed to be influenced most by evidence that the underwriter was particularly careful to avoid authorizing the brokers to bind coverage, personally retaining this critical function. For that reason, the surplus lines broker could not be considered an agent of the marine underwriter, and the brokers' "actions and/or knowledge would not be imputed to La Reunion. Therefore, summary judgment in favor of La Reunion is appropriate with respect to the agency status of [the brokers]."20

In Certain Underwriters at Lloyd's, London v. Giroire,21 the underwriters sought a declaratory judgment on a material misrepresentation set forth on an application. The insured was a professional sailor who purchased his vessel specifically for the purpose of competing in a solo, trans-Atlantic yacht race, and yet the question on the application asking whether the vessel would be used for racing had been answered "NO." The insured contended that he had fully disclosed his intentions with regard to racing to the wholesale broker and that he was assured his coverage would not be prejudiced so long as the vessel was not damaged while actually racing. The insured further contended that he himself did not complete the application, and specifically that he had not inserted the "NO" response to the question concerning racing. This section of the application was alleged to have been completed by the wholesale broker, who then faxed the application to the underwriters. However, the insured's signature was on the completed application.

Summary judgment was granted to the marine underwriters on the basis of the material misrepresentation. The court determined that the doctrine of uberimmae fidei was indeed entrenched precedent in the Eleventh Circuit, and that the undisputed material facts illustrated that the underwriter would not have written a private pleasure policy for the insured had the question concerning racing been answered correctly.22

The court rejected the insured's contention that he could not be liable for the misrepresentation because his broker had been the one who actually supplied the false information. Disposing of this canard, the court stated: "The Court disagrees. Giroire approached Williams, who he had known for many years, and asked him to obtain insurance. Williams then contacted. . . the Lloyds underwriting agent, to explore whether he could obtain coverage. Williams had no contractual relationship with Lloyds and no authority to bind coverage on behalf of Lloyds."23

Citing directly to the Edinburgh case, the court noted the rule that "courts have recognized that where a U.S. producing broker seeks to obtain insurance from Lloyds of London, the broker is acting solely as the agent for the insured."24 Nor would the court countenance an insured avoiding the burdens and requirements of ubeRimmae fidei by passing the responsibility along to his agent, stating that "[tlhe insurer is not to blame if the broker erroneously prepares the application .... The insurer is entitled to rely on the representations of the insured's agent."25

V.

CONCLUSION

It is clear from these most recent cases that, at least in the federal district courts, more than mere lip service will be paid to those established precedents that hold brokers act as the agents of the insureds when they are negotiating and placing marine insurance policies. These authorities will determine the outcomes in coverage cases such as Giroire where an application completed by the broker contains a material misrepresentation that is denied by the insured. Likewise, they will control cases such as Barran in which the broker is shown to have knowledge of perhaps obscure policy terms which come as a surprise to the insured. The acts or the knowledge of the broker will be charged against his client, the insured, with marine underwriters avoiding liability for those same acts or defaults.

It is, however, critical that underwriters bear in mind that there are certain elements or criteria, certain indicia, that must be maintained if they expect the courts to continue to affirm the familiar principles of agency that we now so assuredly rely upon. As the court stated in Barran, it is the nature and the quality of the actions undertaken by the brokers that will be scrutinized each time that coverage litigation is affected by the status of the broker. So long as underwriters are careful to maintain the wall of separation that must exist between themselves and the brokers, with which they must of necessity interact on a repetitive basis day in and day out, so long will underwriters be successful in coverage cases like the ones reviewed herein.

The courts have given a clear indication of what specific criteria they will look to when an insured contends that a broker was acting as the agent of the underwriter rather than of the insured. The mere fact that accounting systems are utilized in which amounts owed are offset against other amounts due will not adversely effect underwriters' position. Nor will the fact that brokers are allowed to possess forms such as applications or even rating guidelines that permit swifter completion of business. The courts understand that brokers will frequently be called upon to act as custodians of documents that are the property of marine underwriters.

If there can be said to be a single critical mark of distinction between a broker that acts in the traditional role of the insured's agent and one who has crossed over the line and is acting for the underwriter, it would be the matter of the authority to bind. This ability or status must be carefully husbanded by the cautious underwriter who is anxious to avoid taking on the extra liabilities of the broker in addition to those which he or she is otherwise content to bear as part of the policies that he issues. Giving over to a broker the unique and special status of being able to bind the underwriter, without separate and specific authorization in each instance, is virtually certain to create the type of agency relationship that the jurisprudence clearly would not otherwise allow. Such authority is therefore to be avoided, unless the marine underwriter understands that in doing so he is making additional room within his tent for the types of liabilities addressed in the cases reviewed in this article.

1479 F. Supp. 138 (C.D. Cal. 1979).

'The "Lloyd's broker" was Hogg Robinson, and as the court noted, "[o]nly brokers who have been approved by the Committee of Lloyd's are permitted to place risks with Lloyd's underwriters. Such brokers are known as 'Lloyd's brokers."' Id. at 145.

'The court noted that in these circumstances the surplus lines broker was also correctly characterized as the "producing broker" in that this broker had been initially contacted by the insured and then passed along to the Lloyd's broker, or "placing broker," all the information provided by the insured. See id. at 146.

4Id. at 144.

'Id. at 151 (citing Anglo-African Merchants, Ltd. v. Bayley, (1970) 1 Q.B. 311, 322. 6348 U.S. 310 (1955).

'CAL. INS. CODE 33 (West 1999).

'Maloney v. Rhode Island Ins. Co., 251 P.2d 1027 (Cal. Ct. App. 1953). 9Edinburgh Assur. Co., 479 F. Supp. at 151 (citations omitted).

"Id. (citations omitted).

ISee, e.g., Dreiling v. Maciuszek, 780 F. Supp. 535 (N.D. 111. 1991) (Illinois law); Northwestern Nat'l Ins. Co. v. Federal Intermediate Credit Bank, 839 F.2d 1366 (9th Cir. 1988) (Washington law); Royal Ins. Co. of Am. v. Cathy Daniels, Ltd., 684 F. Supp. 786 (S.D.N.Y. 1988) (New York law); Florida East Coast Properties, Inc. v. TIFCO, Inc., 556 So. 2d 750 (Fla. Dist. Ct. App. 1989)(Florida law).

12773 F. Supp. 189 (C.D. Cal 1990). 131d. at 192.

14 1989 A.M.C. 1436 (N.D. Cal. 1989). 15 Id. at 1443-44 (citations omitted).

16588 F. Supp. 1103 (S.D.N.Y. 1984).

17 Id. at 1108 (citations omitted)(footnote omitted). 18 1998 A.M.C. 2144 (C.D. Cal. 1998).

19 Id. at 2146-47 (citations omitted).

20 Id. at 2147.

21 27 F. Supp.2d 1306 (S.D.-Fla. 1998).

"This continues to be itself a somewhat controversial point, with the Fifth Circuit having departed from established precedents to hold that this familiar doctrine imposing upon insureds the duty of full disclosure is no longer well entrenched in that circuit. See, Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882 (5th Cir. 1991).

21 Certain Underwriters at Lloyd's, London, 27 F. Supp.2d at 1313.

24M

15 Id. (citing Dreiling v. Maciuszek, 780 F. Supp. 535 (N.D. 111. 1991) (for the proposition that the vessel owner is charged with the knowledge that the broker possesses but fails to pass along to the underwriter.))

Steven E. Goldman is a partner in the firm of Goldman & Heilman, P.A. and is a member of the New York and Florida bars, where the firm maintains its offices. He holds degrees from Harvard University and Tulane Law School, and has been a Visiting Scholar at Harvard Law School. Mr. Goldman's practice concentrates on the representation of marine insurers in coverage matters and in third party litigation.

Copyright Federation of Insurance & Corporate Counsel Fall 1999
Provided by ProQuest Information and Learning Company. All rights Reserved