Are Producers Always the Agents of Insurers’

Texas has a statute, section 21.02 of the Insurance Code, which makes insurance intermediaries the legal agents of carriers for many purposes. Lots of people believe producers are always the agents of insurers with respect to insureds for all purposes. Many insureds, and the lawyers who represent them, simple-mindedly believe this idea with sweating conviction.

I.

The real world is both less certain and more complex. For one thing, the language of 21.02 is complicated. Some might even suggest it is confusing. For another, the reported appellate cases interpreting the statute are few. There is also a very clear section of the statute which is usually ignored.

By its terms the statute applies only when the producer is acting on behalf of an insurer. It is not always clear when this is happening, for example, in commercial contexts. Producers usually see themselves as working for insureds.

Suppose Zeitgeist Brokerage usually undertakes to procure property and liability insurance for Stumble and Bum, an oil company, from Lloyd’s of London. Zeitgeist has heard that some syndicate has capacity and is interested in writing oil industry cover. (It seems the syndicate has developed a coherent substitute for the opaque and confusing ISO “Oil Industry Amendatory Endorsement” — a disgraceful piece of draftsmanship on the very best of days.)

In any case Zeitgeist contacts an American intermediary, Yo Yo Yoachim, with a channel to London. Yoachim, in turn, contacts Xena Brokerage, London brokers who have the right to go onto the floor at Lloyds. Now, as amongst X, Y, and Z, who acts on behalf of the insurer? Probably X does, under Texas law, if it applies, but what about Y and Z?

One thing about §21.02 is clear. The statute does not provide the status of legal agent to any intermediary trying to alter the policy. Changing, adding and deleting are not authorized to agents.

II.

The common law complicates this picture some. The Mississippi Supreme Court recently addressed this issue in American Income Life Insurance Company v. Hollins, decided on June 21, 2001. Obviously, Mississippi decisions do not bind Texas, but this well-reasoned case expresses the common law accepted in most places, and it will be influential everywhere.

Hollins had a history of “female problems.” They did not appear on the application, and she subsequently made a claim arising out of those problems. The policy provided a liquidated sum-$100-for each day she spent in a hospital. Hollins had to have fibroid tumors removed. She did not know of these tumors at the time of the application.

The carrier denied the claim and rescinded the policy for failure to make a material disclosure in her application. Hollins swore-as did several members of her family-that she had in fact told the agent about the problem when he filled out the application and that it was he who said that these problems were of no consequence.

The agent denied that any of this happened. He did this in his answer and in his deposition. The poor fellow died before trial, however.

The jury awarded Hollins $400 in actual damages and $100,000 in punitive damages. The legal theory justifying the award of punitive damages was tortious breach of contract, which is Mississippi’s name for bad faith.

The Supreme Court of Mississippi affirmed the trial court’s judgment on the verdict. The court set forth significant holdings both as to substantive insurance law and as to the law of bad faith damages.

III.

When an insurance agent, said the court, takes charge of filling out an application or suggests answers to questions, the insurer may not rescind the contract when the answers are false, if the applicant made full disclosure to the agent. Under those circumstances, there has been no misrepresentation by the applicant.

This rule holds even if the applicant signs the application. Hollins did just that, although she did not read it, she said.

The court scoffed at AILIC’s position. The court denounced the position as “disingenuous,” and it condemned its “postclaims underwriting.” The court said that insurers are bound by the conduct of producers when it falls within their apparent authority. Apparent authority-as opposed to actual authority-is based upon how things look. If a principal goes along with and permits a pattern of appearances, they become reality for legal purposes.

The court also noted that AILIC had some notice of Hollins’ “female problems.” Hollins had a policy of ordinary medical insurance with the same insurer, and she had filed relevant gynecological claims under that policy. One wonders why the court mentioned this fact. Surely, an insurer should not be held omniscient at all times with respect to any disclosure made to it. That would be a very unrealistic rule-not to mention economically inefficient.

IV.

AILIC tried to defeat or reduce the award of punitive damages on the grounds they were unconstitutionally disproportionate when compared to the actual damages. Surely, a ratio of 250 to 1 is a very, very large ratio. The court let them stand.

There was no arguable basis for denying the claim, said the majority, and the jury found the insurer had acted with out-and-out (real) malice or-at the very least-recklessness.

Moreover, one function of punitive damages is to punish a wrongdoer. Hence, punitive damages must be related to an insurer’s financial worth. A second function is to deter others from similar conduct. And a third is to compensate the plaintiff for her public service of holding the miscreant insurer accountable.

There was no arguable basis for den- ing the claim, said the majority, and the jury found the insurer had acted with out-and-out (real) malice or-at the very least-recklessness.

When actual damages are small, even a multiple of 20 times actuals will not do that. Here, that number would have been $8,000. Punitive damages of that size will not pay even minimal legal fees.

V.

Agents often feel as though they are stuck in the middle somehow. Insureds pull them in one direction, while insurers pull them in another. This feeling has reality to it.

In fact, the situation of producers is even more delicate and difficult. For one thing, there is another force pulling on them and that is the law. Public policy has goals other than simply serving the interests of insurers and insureds. There are also the interests of the public. This sort of tension is the natural state of the modern broker. It’s hard to imagine how things could really ever be otherwise. Life is difficult. Buck up!

I have repeatedly seen-several times firsthand-the temptation brokers have to help insureds get coverage by suppressing or distorting information. This is completely understandable, of course, when an insurer is demanding information it does not need or even really want.

Furthermore, agents have a natural impulse to serve their customers. When selling insurance, the most obvious customer is often the person sitting across the table from you.

Nevertheless, producer-created distortions can create eventual problems for everyone. The opposite idea-that mild dishonesty is usually harmless-is also false.

Quinn is an Austin shareholder in the law firm of Sheinfeld, Maley & Kay. He litigates and testifies on insurance-related problems and is currently the chair of the Insurance Section of the State Bar of Texas. He also is a Visiting Professor of Law at the University of Texas-Austin.

Topics Carriers Texas Agencies Mississippi London