Agent Who Kept Premium owed to Zurich Loses at Ninth Circuit

Agent Defrauds Insurer by Not Remitting Premium Collected

Insurance agents, by contract with insurers they represent, must place all premium collected on behalf of the insurer and place the funds in a separate trust account. Depending on the terms of the contract the agent then deducts the agreed commission and remits the remainder to the insurer. Failure to remit the premium, less the commission, is a theft or conversion of funds to which the agent had no entitlement.

In Zurich American Insurance Company v. Sealink Insurance Service Corp. And Yan Sara Zhang, and Phann Gelinda Keo, et al., No. 17-55776, United States Court of Appeals for the Ninth Circuit (October 15, 2018) Defendants Yan Sara Zhang and Sealink Insurance Service Corporation appealed from the district court’s denial of their motion to set aside the entry of default and default judgment against them.

In evaluating such a motion, an appellate court must consider three factors:

1. whether the party seeking to set aside the default engaged in culpable conduct that led to the default;
2. whether it had no meritorious defense; or
3. whether reopening the default judgment would prejudice the other party.

A finding that any one of these factors is true is sufficient reason for the district court to refuse to set aside the default.

The Ninth Circuit did not reach the issue of defendants’ culpable conduct because defendants’ lack of a meritorious defense was sufficient to justify the district court’s refusal to set aside the default and default judgment. Defendants have no meritorious defense to Zurich American Insurance Company’s breach of contract claim.

The defendants point to the lack of a written agreement and argue that the contract at issue does not exist. However, they do not dispute that Sealink sold insurance policies issued by Zurich in exchange for Sealink’s remittance of premiums, and there is ample evidence of an agreement governing that arrangement. Defendants offer no facts to dispute the existence of an agreement, and general objections to the existence of a contract are insufficient to satisfy the meritorious defense requirement.

Defendants also lack a meritorious defense to Zurich’s breach of fiduciary duty claim.

Defendants do not dispute that Sealink failed to maintain the premiums it owed Zurich in a segregated trust account as required by California Insurance Code sections 1733 and 1734. Defendants’ argument that those provisions do not provide Zurich with a cause of action is mistaken. The Ninth Circuit concluded that a civil action will lie for damages proximately resulting from a licensee’s breach of the fiduciary obligations imposed by sections 1733 and 1734.

Finally, defendants fail to assert a meritorious defense to the size of the default judgment award. The district court determined that the declaration of Zurich’s legal collection specialist and the billing statement generated by Zurich constituted proof sufficient to support Zurich’s requested damages. Defendants’ challenge to the sufficiency and reliability of that evidence does not amount to a meritorious defense.A mere general denial regarding the extent of the deficiency owed is not enough to justify vacating a default or default judgment.

Defendants fail to offer specific facts disputing the damages amount despite being in the best position to have the accurate records required to refute Zurich’s evidence. Defendants’ assertion that they lack records substantiating the claimed amount does not amount to an allegation of “sufficient facts that, if true, would constitute a defense.

The district court did not err in failing to set aside the default judgment pursuant to Federal Rules of Civil Procedure that provides for relief when a judgment is void. In contrast to the other grounds for relief a default judgment may be vacated on this ground even if the defendant lacks a meritorious defense.

The defendants argued that the judgment is void due to inadequate service of process. But Zurich’s service of process satisfied the statutory requirements. Zurich’s substituted service of the summons and complaint on Zhang was proper. Zurich’s service of the summons and complaint on Sealink complied with Federal Rules of Civil Procedure.

Finally, Zurich served both Zhang and Sealink with its motion to enter default judgment in accordance with the Central District of California’s Local Rules.


This case establishes that insurance fraud is not limited to people who are insured defrauding an insurer. In this case the insurer trusted the agents and allowed them to bind insurance with Zurich in exchange for a promise to remit premiums. Zurich was the victim of fraud by the agent and, rather than attempt a criminal prosecution for conversion, sued the agent and obtained a judgment which was upheld by the Ninth Circuit Court of Appeal. Zurich should execute on the judgment and obtain the full amount of the judgment. If not, it should seek prosecution of those who unlawfully converted Zurich’s funds to their own use. Hopefully this case will teach Zurich and other insurers to trust but verify the honesty of their agents.

© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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