INSURANCE AGENT OR INSURANCE BROKER: A DISTINCTION WITH A DIFFERENCE
Advocate - Journal of Consumer Attorneys Associations for Southern California
- June 2013 issue
Robert S. Gianelli & Jully C. Pae
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Disputes often arise over whether a particular seller of insurance is an
"agent" or a "broker." The genesis of these disputes
typically is found in an insurer's denial of coverage for some claim
made by the purchaser of the policy.
If the insurer's denial of coverage is determined to be correct, the
inquiry inevitably turns to who can be held responsible and why for the
uninsured loss? Attendant to these questions is what may become the bigger
issue – can the insurer be held liable for an agent's or broker's
The terms "agent" and "broker" are more descriptive
of the conclusion one reaches about the status of the insurance seller
after an examination of that person's relationship with the insurer
and the insured as well as the specifics of the insurance sale at issue.
Some helpful guideposts are discussed below:
AGENT OR BROKER?
An "insurance agent" means "a person authorized, by and
on behalf of an insurer, to transact all classes of insurance other than
life, disability, or health insurance, on behalf of an admitted insurance
company." (Ins. Code, § 31.) An "insurance broker"
means "a person who, for compensation and on behalf of another person,
transacts insurance other than life, disability, or health with, but not
on behalf of, an insurer.
(Ins. Code, § 33.)
The primary difference between the two is that an agent has the authority
to bind an insurer to coverage because he typically acts on behalf of
an insurer; a broker has no such authority, as he typically acts on behalf
of the insured.
(Marsh McLennan of Calif., Inc. v. City of Los Angeles (1976) 62 Cal.App.3d
An agent has the authority to do any act that the insurer might do. (Preis
v. American Indem. Co. (1990) 220 Cal.App.3d 752, 761.) Unless the insured
is provided notice (actual or constructive) of any limits on authority,
an agent may bind the insurer by any actions, representations, or promises
that fall within the scope of the employment even if they violate any
restrictions on the agent's authority. (Troost v. Estate of DeBoer
(1984) 155 Cal.App.3d 289, 298.)
For example, an agent may bind the insurer to his interpretation of ambiguous
policy terms (Shade Foods, Inc. v. Innovative Products Sales & Marketing,
Inc. (2000) 78 Cal.App.4th 847, 874) or to misrepresentations expanding coverage
(Hartford Fire Ins. Co. (1987) 196 Cal.App.3d 1320, 1325).
A broker's primary obligation is to represent insureds during the application
process and negotiate with insurance companies about the terms of coverage,
including premiums. (Krumme v. Mercury Ins. Co. (2004) 123 Cal.App.4th
924, 929.) Because insurers are not liable for a broker's misconduct,
brokers must post and maintain a $10,000 bond, which will be used to resolve
any disputes with insureds.
(Ins. Code, §§ 1662, 1665.)
A presumption of a seller as a broker is automatically rebutted upon a
showing that there is a notice of appointment on file by an insurer and
the individual has written authority to bind the insurer on the risk without
prior approval. (Ins. Code, § 1623(c).) Even without a notice of
appointment or written authority, a broker may be considered an agent
based on the "totality of the circumstances."
(Id. at § 1623(d), (e).)
While agents and brokers are legally distinct, in practice, these roles
tend to merge to create a "dual" agency, where the seller represents
both the insurer and the insured during the application process. In fact,
for certain lines of insurance, such as automobile and homeowner's
insurance, the license issued by the Commissioner of Insurance reference
the licensee as a "broker-agent."
(Ins. Code, §§ 1625 [referencing property and casualty broker-agent
licenses]; 1625.5 [referencing personal lines broker-agent].)
A dual agency may arise where, for example, an agent appointed with numerous
insurers chooses a particular insurer but in doing so also represents
the insured's interests. (Eddy v. Sharp (1988) 199 Cal.App.3d 858,
865.) An appointed agent may also be a dual agent where he holds himself
out to the insured as an expert in the area of insurance for which a policy
is sought. By touting his expertise, the agent assumes a special duty
to the insured.
(Kurtz, Richards, Wilson & Co. v. Insurance Communicators Marketing
Corp. (1993) 12 Cal.App.4th 1249, 1257.)
Often, both brokers and agents will present themselves as an "independent
insurance agent." Do not let the reference to "agent" fool
you – you must look behind the label and determine whether, based
on the individual's statements and conduct, he was acting as an agent,
a broker, or both.
(Loehr v. Great Republic (1990) 226 Cal.App.3d 727, 734.)
STANDARD FOR AGENT LIABILITY
Even though, under general agency principles, an agent owes the insured
a general duty to use reasonable care, diligence, and judgment in procuring
the coverage requested, an agent's violation of this duty does not
give rise to personal liability. As a general rule, where an agent acts
within the scope of his employment and discloses the agency relationship,
he cannot be held personally liable for failing to obtain the requested
coverage because such liability ultimately attaches to the insurer as
the principal. (Lippert v. Bailey (1966) 241 Cal.App.2d 376, 382 [granting
summary judgment for agents as insured knew of agency relationship]; see
Lab. Code, § 2802.)
Nor can an agent be held personally liable for failing to spontaneously
recommend additional coverage, obtain additional, unrequested coverage,
or advise that such additional coverage is available. For example, in
Fitzpatrick v. Hayes (1997) 57 Cal.App.4th 916, 927928, even though the
insureds had worked with the State Farm agent for 20 years, they could
not hold the agent personally liable for failing to recommend a "personal
umbrella" policy that would cover damages above the uninsured motorist
limits of their automobile insurance policy.
The limitations on an agent's duty, however, do not apply in three
circumstances that give rise to a special duty. The first is where the
agent affirmatively misrepresents the nature, extent, or scope of coverage,
or fails to disclose a material fact regarding coverage. The second occurs
when the insured requests a specific type or extent of (not just "adequate")
coverage. And the third circumstance arises when the agent either expressly
agrees to assume additional duties or holds himself out as an expert in
the particular area of insurance in which coverage is sought.
(Paper Savers, Inc. v. Nacsa (1996) 51 Cal.App.4th 1090, 1095-1098.)
To illustrate, in Paper Savers, the insured purchased a "replacement
cost coverage" endorsement based on the agent's representations
that, in the event of a total loss, the additional coverage would replace
all the business equipment. After the business was completely destroyed
by a fire and the benefits the insurer paid on the claim did not cover
the cost of replacement, the insured sued the agent, claiming that he
assumed a special duty based on misrepresentations and could be held personally
liable. The court agreed and reversed the grant of summary judgment for
the agent. (Id. At 1101; see also, Westrick v. State Farm Ins. (1982)
137 Cal.App.3d 685, 691-692 [reversing directed verdict for agent because
his failure to disclose that auto policy did not cover six-wheel truck
constituted a misrepresentation for which he could be held tortiously liable].)
The same result obtained in
Butcher v. Truck Ins. Exchange (2000) 77 Cal.App.4th 1442, where the agent both failed to obtain the
personal injury coverage the insured had specifically requested and misrepresented
that such coverage existed. After judgment was entered against the insured
in a malicious prosecution case (which Truck Insurance had refused to
defend), the insured sued the agent and Truck Insurance for indemnity.
The court upheld the denial of the agent's summary judgment motion
because there were triable issues of fact as to whether the agent assumed
a special duty and could be held personally liable.
(Id. at 1462-1465.)
Williams v. Hilb, Rogal & Hobbs Ins. Servs. of Calif. (2009) 177 Cal.App.4
th 624 provides a good example of liability befalling an agent who claims
specific expertise. There, the owners of Rhino Linings of Santa Fe Springs
obtained a CGL policy from an agent who had touted her familiarity with
the Rhino Linings dealerships and her expertise in obtaining coverage
that met the business's needs. After an employee got severely injured
on the job, the insurer denied the insureds' claim, advising that
their CGL policy did not include workers' compensation coverage. The
Court of Appeal affirmed the trial court's conclusion that the evidence
showed the agent had assumed (and breached) a special duty by touting
(Id. at 637.)
A common argument the insurers made in
Paper Savers, Butcher, and Williams is the general rule set forth in Hadland v. NN Investors Life Ins. Co.
(1994) 24 Cal.App.4th 157 – that an insured has a duty to read the
policy and is bound by its clear and conspicuous terms. In each case,
the court rejected this contention, finding that where an agent affirmatively
misleads the insured as a result of his negligence, the Hadland rule does
not apply. (Paper Savers, supra, 51 Cal.App.4th at 11011102; Butcher,
supra, 77 Cal.App.4th at 1463; Williams, supra, 177 Cal.App.4th at 637-639.)
Indeed, as the court in Paper Savers noted, the Hadland rule's applicability
appears limited to the interpretation-of-policy-terms context where the
insured sues the insurer for coverage.
(Id., 51 Cal.App.4th at 1102.)
STANDARD FOR BROKER LIABILITY
If the "independent insurance agent" turns out to be a broker
and the presumption of broker status is not rebutted, the broker may be
held personally liable for an uninsured loss resulting from a breach of
a duty owed to the insured. Liability cannot be imputed to the insurer.
(Ins. Code, § 33.)
But since many brokers have agency agreements with various insurers, more
often than not, a broker will be a dual agent where liability may attach
to the insurer. (See, e.g., Greenfield v. Insurance Inc. (1971) 19 Cal.App.3d
803 [brokerage firm had agency agreements with numerous insurers and was
thus a dual agent]; Kurtz, Richards, Wilson & Co. v. Insurance Communicators
Marketing Corp. (1993) 12 Cal.App.4th 1249 [insured sued both broker and
insurer for uninsured loss].)
While a broker represents the insured's interests, the duties owed
to the insured are not boundless. For instance, like an agent, a broker
has no duty to spontaneously recommend adequate coverage or advise the
insured about specific insurance matters. (Jones v. Grewe (1987) 189 Cal.App.3d
950, 954 ["The general duty of reasonable care which an insurance
[broker] owes his client does not include the obligation to procure a
policy affording the client complete liability protection, as appellants
seek to impose here."]; Wallman v. Suddock (2011) 200 Cal.App.4th
1288, 1313-1315 [finding that broker had no duty to advise insureds to
obtain excess coverage over existing and past primary policies that covered
liability as insureds never disclosed need for such coverage].)
And because a broker's duties to an insured are limited to the procurement
of the policy, brokers have no duty to notify insureds of an insurer's
insolvency (or change in financial condition) or that the policy has been
cancelled. (Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Ins.
Services West, Inc. (2012) 203 Cal.App.4
th 1278, 1283 [no duty to notify of insurer's insolvency]; Kotlar v.
Hartford Fire Ins. Co. (2000) 83 Cal.App.4th 1116, 1123 [no duty to notify
of policy cancellation].)
There are three circumstances in which a broker breaches the duties owed
to an insured: (1) the broker misrepresents the nature, scope, or extent
of coverage; (2) the insured requests a particular type or extent of coverage;
and (3) where the broker either expressly agrees to assume additional
duties or holds himself out as an expert. (Pacific Rim Mechanical Contractors,
Inc., supra, 203 Cal.App.4th at p.1283.) In ascertaining whether a broker
has breached a duty, courts consider additional factors such as the length
of the relationship and whether the broker knew of the risks involved
in the insured's business.
Thus, in Greenfield v. Insurance, Inc. (1971) 19 Cal.App.3d 803, 809-810,
the court upheld the judgment against the broker because the record showed
that the insured had relied on the broker for over a decade for his business
insurance needs; the broker knew of the risks involved in the insured's
business if there were gaps in coverage; the insured had specifically
requested that the policy cover the costs of any mechanical breakdown
of the business's equipment; and the broker had represented to the
insured that such coverage was provided under the policy it had procured.
Third Eye Blind, Inc. v. Near North Entertainment Ins. Servs. (2005) 127
Cal.App.4th 1311 presented the circumstance of a broker who was found
liable for touting its expertise. There, the band, Third Eye Blind, obtained
a CGL policy from the broker and was thereafter sued by a former band
member for trademark infringement. After the insurer denied the claim,
citing the trademark infringement exclusion, the band sued both the broker
and the insurer.
The insurer ultimately settled with the band and covered the loss. The
broker argued that, in light of the settlement, its liability for the
loss was therefore precluded and the case should be dismissed. The court
disagreed, finding that because the broker, which had touted its expertise,
failed to "secure more direct, and certain, coverage," it could
be held liable for the attorneys' fees the band had incurred in bringing
the coverage action.
(Id. at 1323, 1324.)
Of note, there is no indication that the holding in Third Eye Blind is
limited to brokers. If an agent, therefore, assumes a special duty to
an insured or is a dual agent and the insurer ultimately covers the loss,
the insured should try to recover from the agent all damages stemming
from his negligence.
Like agents, brokers also tend to raise the duty-to-read argument to avoid
liability. This is no defense. "Absent some notice or warning, an
insured should be able to rely on a [broker's] representations of
coverage without independently verifying the accuracy of those representations
by examining the relevant policy provisions."
(Clement v. Smith (1993) 16 Cal.App.4th 39, 45.)
INSURER'S LIABILITY FOR AGENT'S MISCONDUCT
Under respondeat superior, an insurer may be held vicariously liable for
an agent's misconduct committed during the course and scope of employment.
(Desai v. Farmers Ins. Exch. (1996) 47 Cal.App.4th 1110, 1118.) Even if
the insurer did not specifically authorize the agent's acts, it may
still be held liable if it ratifies those acts (e.g., by retaining the
(R&B Auto Ctr., Inc. v. Farmers Group, Inc. (2006) 140 Cal.App.4th
In Desai, the insured specifically requested that any earthquake, fire,
and hazard policy provide 100 percent replacement cost coverage. The policy
the agent obtained, however, contained no such coverage. The court held
the insurer could be held liable under the theory of ratification (as
well as ostensible authority) for the agent's negligence in failing
to provide the specifically requested coverage.
(Desai, supra, 47 Cal.App.4th at 1119-1121.)
An insurer can, likewise, be held liable for its agent's misrepresentations
regarding coverage. In R&B Auto Center, the agents represented to
the insured, a used car dealership, that the policy provided lemon-law
coverage for used cars when, in reality, coverage only extended to new
cars. After the insurer refused to defend the insured in a lawsuit brought
by a customer, the insured sued the insurer and the agents for fraud,
among other things. The Court of Appeal concluded that the insurer could
be held vicariously liable for the agents' misrepresentations.
(Id. at 345-346.)
Particularly interesting was the court's statement that, upon remand,
the insureds could assert a claim for reformation of the policy so that
it provided lemon-law coverage for used cars. The insurer could then be
held liable for breaching the contract as reformed.
(Id. At 349, fn. 11.)
Like agents and brokers, insurers commonly raise the insured's duty
to read as a defense. While several courts have held that a duty to read
is no defense to an agent or broker's misrepresentations (e.g., Paper
Savers, supra; Westrick, supra), some courts have held the opposite.
In Hadland v. NN Investors Life Ins. Co. (1994) 24 Cal.App.4th 1578, 1589,
for instance, the court found the insured had unjustifiably relied on
the agent's representations because the policy's clear and unambiguous
terms contradicted the representations. But if the policy terms are neither
clear nor unambiguous, the Hadland rule has no application.
Robert Gianelli is a partner in the Los Angeles law firm of Gianelli &
Morris, specializing in insurance-related class actions and insurance
bad- faith cases. He has successfully prosecuted insurance-related class
actions in state and federal courts. He also serves as a Contributing
Editor for the Rutter Group publication California Practice Guide: Insurance