Beef Between Wholesale and Retail Agents Should Go to Trial, Court Finds

A federal judge has ruled that a wholesale insurance agent’s claim against a retail agent for allegedly misrepresenting the exposure of an insured regarding violations of the federal telemarketing law should proceed to trial.

In a case with origins back to 2012, wholesaler All Risks alleges that it was fraudulently induced by retail agent USI to remove an exclusion for Telephone Consumer Protection Act (TCPA) claims from a policy for its insured, Monitronics International, a Texas-headquartered alarm monitoring company.

After the insurance was in place, Monitronics was hit with as many as 14 class action lawsuits alleging TCPA violations, which Everest Indemnity Insurance Co., the insurer on the policy placed by All Risks, was forced to cover.

Everett sued All Risks for removing the TCPA exclusion without its permission, as required by its contract with Everest. All Risks paid more than $2.8 million to settle that dispute in 2020. All Risks also settled claims it brought against Monitronics.

All Risks maintains that USI is responsible for its liability to Everest and sued USI to recover its costs and damages, alleging that USI knowingly downplayed Monitronic’s exposure in getting it to remove the exclusion pertaining to TCPA claims, an exclusion known as the recording or distribution of material (RDM) exclusion.

All Risks alleges that USI “grossly misrepresented” the exposure of Monitronics in order to induce its underwriter into removing the exclusion, thus forcing Everest cover the TCPA claims. All Risks’ allegations against USI included breach of contract, warranty and implied duty of good faith and fair dealing, as well as fraud in the inducement, negligent misrepresentation, and common law indemnity.

USI moved for summary judgment. In June 2023, the court granted summary judgment for USI on multiple counts except fraud in the inducement, negligent misrepresentation and common law indemnity, noting that the parties disagreed on which state laws —Maryland’s or New Jersey’s — should be applied to these counts. USI then sought summary judgment on those three remaining claims.

The federal district court for New Jersey noted that the case is unusual in that it concerns the relationship between two insurance intermediaries, namely an insurance agent for an insured and insurance agent for an insurer.

U.S. District Judge Georgette Castner on July 18 dismissed All Risks’ negligent misrepresentation and common law indemnity claims against USI but ruled that the remaining count related to fraud should proceed to trial.

In dismissing the negligent misrepresentation claim, the court noted neither the court nor the parties could find any cases where any court had recognized a duty on tort between two insurance intermediaries. The federal judge said it is up to the states to decide whether to expand their common law to recognize any such tort and the federal court would respect that tenet of federalism.

All Risks asserted that USI must indemnify it for its lability to Everest under the doctrine of common law indemnity. However, the judge noted that common law indemnity distinguishes between active and passive negligence. She found that indemnity is not available to All Risks because it had shown “active negligence” when it removed the exclusion without seeking permission from Everest.

The judge found that there are questions of material fact surrounding the fraud in the inducement question that should be resolved by a finder of fact and not by summary judgment.

Fraud in the inducement arises when damages result from a misrepresentation of a material fact with knowledge or belief by the speaker that it is false, where there is intent that the other part will rely on it, and there is reasonable detrimental reliance by the other party. This fraud must be established by clear and convincing evidence.

The court noted that according to All Risks: USI represented that Monitronics’ prior policies did not exclude TCPA without disclosing whether the prior insurer was willing to renew without the exclusion; USI said Monitronics did not directly engage in telemarketing but it did not disclose the insured has third party vendors who did; USI represented that Monitronics had hold harmless agreements to protect it from such claims but those were not a real shield against TCPA; and USI also told All Risks that Monitronics had a cyber liability policy that was “first line of defense” against TCPA without disclosing the Monitronics was in process of getting a new cyber policy that did not cover TCPA.

All Risks argues these misrepresentations were false and materially misleading because they downplayed the risk of TCPA claims against Monitronics. It maintains that its underwriter was deceived into believing TCPA claims were covered elsewhere.

In its defense, USI said it answered the questions All Risks asked truthfully and if All Risks did not ask the right questions, All Risks is liable, not USI. USI maintains that All Risks did not adequately review the loss run report on Monitronics that USI gave it. Had All Risks performed “proper underwriting” and not exceeded its authority under its contract with Everest, All Risks would not have removed the exclusion and Everest would not have sued All Risks, USI contends.

The court found that “each party has a competing narrative” and the extent to which USI may have made false and misleading statements and whether All Risks was reasonable in relying upon statement by All Risks are questions for trial.

All Risks is a Maryland corporation while USI is headquartered in Texas. According to the New Jersey federal court, it has jurisdiction because each party transacts significant business in New Jersey.

Topics Agencies