A Risk Management Reminder
A Risk Management Reminder12.01.2016
A recent third party action commenced in Federal Court in New Jersey provides a good risk management reminder that insurance brokers could be liable for an insurer’s damages arising out misrepresentation made in connection with applying for insurance. During my representation of brokers, when faced with a claim arising out of a misrepresentation on an application, there was a misconception that an insurer’s sole remedy was policy rescission or the fact that a policyholder signed an application provided an absolute defense to an E&O claim. In fact, insurers have long sought other avenues to pursue when a policy was issued based on a purported misrepresentation whether in an application or otherwise given the obstacles to succeed with a rescission claim whether it be materiality (i.e., the causal relationship between the alleged misrepresentation and the particular loss at issue) or ambiguity in the question that gave rise to the alleged misrepresentation.
In the case in question, Monitronics, Inc. is being sued for robocalls allegedly violating the Telephone Consumer Protection Act. All Risks Ltd. underwrote a policy for Monitronics with Everest Indemnity Insurance Company, and is being sued by Everest for $1.4 million incurred in defending and indemnifying Monitronics in the robocall lawsuits. All Risks, in turn, is seeking damages from Monitronics’ broker, Summit Global Partners of Texas (which was bought out by USI Southwest, Inc.) for alleged misrepresentations in the application process.
In connection with the third-party claim again Summit/USI, the initial quote provided by All Risks included an exclusion pursuant to which Everest would not have covered any claims again Monitronics arising under the TCPA. It is claimed that Summit requested All Risks that the exclusion be removed on the falsehoods that (i) Monitronics’ prior coverage did not have such an exclusion; (ii) Monitronics is an alarm company not engaged in telemarketing activities that would lead to TCPA exposure; (iii) Monitronics requires its vendors that do conduct telemarketing activities were contractually required to defend and indemnify Monitronics for claims that would fall within the exclusion; and, (iv) Monitronics cyber liability policy covered such TCPA claims. As a result, All Risks argues it removed the exclusion in question and the Everest policy was issued without it.
It remains to be seen whether All Risks will succeed with these claims since, on their face, it seems a stretch that All Risks would not conduct its own due diligence looking at the expiring and cyber policies, and Monitronics’ vendor contracts. (There is conflicting law among jurisdictions as to the obligation to investigate representations, and a distinction here may be that the alleged falsehoods were not on the application but made by the broker in the application process imposing a duty that may not otherwise exist.)
Either way, the lesson to be learned is that, faced with these misrepresentation fact patterns, insurers will likely not only examine grounds for rescission but also investigate the culpability of the insurance broker. Such claims again brokers have been recognized as legally cognizable in many jurisdictions on the basis that, while insureds are ‘generally” responsible for material representations or concealment, it is unreasonable to not allow a remedy against an insurance broker that participated in the fraudulent application process. A good discussion can be found the California Appellate Court decision in Century Surety Company v. Crosby Insurance, 124 Cal.App.4th 116 (2004).
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