In Betty Douglas, et al. v. Fidelity National Insurance Co., a California Court of Appeal found prejudicial error where a trial court refused to give jury instructions on the role of an insurance producer, as either an agent or broker, in preparing an insurance application.  The issue arose in an action by insureds after their insurer denied coverage and rescinded the policy due to material misrepresentations in the application.  On Aug. 29, the court of appeal reversed a judgment in favor of the plaintiffs and remanded the case for a new trial.

Plaintiff Betty Douglas went to Cost-U-Less Insurance to purchase a homeowner’s policy.  There, Betty spoke over the telephone with an InsZone Insurance Services producer, Robert Lockefeer, about obtaining a policy with Fidelity National Insurance Co.  Betty testified that Lockefeer asked her only three questions: the year her house was built, the home’s square footage, and whether the house had fuses or circuit breakers.

Betty later returned to a different Cost-U-Less location so Jerry Douglas, her husband and the property’s owner of record, could sign the application.  Jerry testified that he was not asked any questions and was given a blank form to sign, which he did.  Fidelity then issued a homeowner’s policy to the Douglases.

A fire damaged the Douglases’ home, and they made a claim with Fidelity.  During the claim investigation, Fidelity discovered that the Douglases had used the property to operate a group home for minors.  Fidelity also learned they had at least two boarders in the home when the fire occurred.  These facts were not disclosed at the time of the application.  Thus, Fidelity denied the Douglases’ claim and rescinded the policy based on material misrepresentations in the application. 

The Douglases filed a lawsuit against Fidelity for breach of contract and breach of the implied covenant of good faith and fair dealing.  During trial, Lockefeer, the producer, testified about his work on behalf of customers to quote, secure, and issue insurance policies.  He stated that he always asked customers about home businesses because this affected eligibility for homeowner’s coverage with insurers writing policies through InsZone.  Lockefeer also testified that for Fidelity policies, he filled out an online application on Fidelity’s website.  The application had 43 questions, including about the existence of roomers or boarders in the home. 

The trial court denied Fidelity’s request to include language in the jury instructions regarding InsZone’s role in preparing the Douglases’ application.  The jury concluded the insurance application did not contain any misrepresentations of fact and awarded the Douglases nearly $825,000 in compensatory damages.  The jury also awarded substantial punitive damages, but the court struck this portion of the award. 

Both parties appealed.  The central question on appeal was whether the trial court erred in not allowing the jury to determine the precise role of the InsZone producer in preparing the insurance application for the Douglases. 

The court concluded that, even though Jerry signed a blank form that arguably did not misrepresent any fact, Fidelity issued the policy based on false information about how the Douglases were using the property.  A material misrepresentation in an insurance application entitles the insurer to rescind its policy even if the misrepresentation was unintentional.  A misrepresentation is material if a true statement would have affected the insurer’s underwriting decision.  The issue was the nature of InsZone’s relationship with the Douglases in providing information to Fidelity.

The term “producer” refers to both insurance agents and brokers.  Agents primarily represent insurers and have binding authority.  Brokers represent applicants for insurance, and their actions are not generally binding on insurers.  As a matter of law, if a broker prepares an application, its contents are the responsibility of the prospective insured.  The court held there was substantial evidence to support a finding that Lockefeer acted as the Douglases’ broker, not Fidelity’s agent.  The jury should have been permitted to make that determination and consider the effect in deciding whether Fidelity issued the policy based on a material misrepresentation.

The court reversed the judgment and remanded the case for a new trial.

Click here for the opinion.

This opinion in Betty Douglas, et al. v. Fidelity National Insurance Co. (August 29, 2014)____Cal.App.4th____; 14 C.D.O.S. 10315 is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority in California state courts.