Broker Only Agent of the Insured

Evidence from Insurer Needed to Prove Agency

It is axiomatic that no one reads their insurance policy until a claim arises. When they find that the policy does not provide the coverage they needed they sue the insurer and the agents and brokers involved in the transaction even if the facts establish that the error was made by the insured and no one else. It is a fact of life in the world of insurance. It isn’t right, it isn’t politically correct, it isn’t nice, but it happens with great regularity.

In KMAG Holdings Group, Inc., et al., Plaintiffs, v. J. Phillip Chubb…, United States District Court, N.D. Ohio, Eastern Division, Slip Copy 2016 WL 815604 (03/02/2016) the U.S. District Court for the Northern District of Ohio was faced with a case attempting to obtain – by argument – insurance coverages not ordered or paid for.

FACTS

Plaintiffs, Dr. Amgad William Abdou and Albair Guirguis (collectively “Abdou”), bring this lawsuit against defendants, J. Phillip Chubb Insurance Agency, J. Phillip Chubb, (collectively “Chubb”) and Lexington Insurance Company (“Lexington”) seeking coverage for serious injuries sustained by Abdou on an inflatable obstacle course located at Pump It Up Avon (“Pump It Up”).

Pump It Up is a family entertainment business. The Family Entertainment Centers Safety Association (“FECSA”) insurance program was administered by Sterling & Sterling, Inc. (“Sterling”). Sterling in turn obtained coverage from CRC Insurance Services, Inc. (“CRC”). CRC is a wholesale producer of insurance.

In 2010, Pump It Up was owned by Mullikin. On September 22, 2010, Sterling sent Mullikin and Chubb, an insurance agent, a renewal quotation for both commercial general liability and umbrella coverage. The umbrella coverage option was not selected.  In addition, Chubb testified that he was instructed by Mullikin to reject umbrella coverage because it was no longer a franchise requirement. On December 23, 2010 KMAG purchased all of the assets from Mullikin, including any existing insurance coverage.

Although Mullikin declined coverage and paid no premium, Chubb sent three certificates of insurance which show that umbrella coverage from Lexington exists.  Chubb testified that he mistakenly listed umbrella coverage from Lexington because he carried over previous years’ coverage information in preparing the certificates.

Abdou suffered serious injuries at Pump It Up on May 29, 2011.

Thereafter, Abdou filed a six-count complaint. Counts five and six are the only counts asserted against Lexington. Count five is a claim for breach of contract and count six seeks a declaratory judgment.

ANALYSIS

Lexington argues that summary judgment is warranted because there is no evidence that coverage exists. Rather, the undipsuted evidence shows that Millikin rejected umbrella coverage and did not pay any premium for such coverage. Any error Chubb may have made in connection with issuing the certificates does not bind Lexington to provide coverage.

Chubb testified that Millikin rejected umbrella coverage and never paid a premium for any such coverage. The undisputed evidence shows that Millikin did not purchase umbrella coverage from Lexington. Therefore, no coverage existed at the time KMAG purchased Pump it Up.

Although not expressly arguing as such, it appears that Abdou may be claiming that a separate contract arose when Chubb issued KMAG a certificate of insurance showing the existence of such coverage. In response, Lexington argues that the only way that liability could arise is based on a theory of agency.

The “application,” wherein the “umbrella” coverage box is not checked and is in fact crossed out, clearly shows that Millikin did not elect coverage. Further, there is no indication that KMAG ever applied for insurance and no policy was issued to KMAG. Nor is there any evidence that KMAG ever paid a premium for such coverage.

Under Ohio law, the mere fact that one undertakes to make a contract as agent for a party does not necessarily result in such party being bound by the contract made. Rather, in order to enforce the terms of a contract entered into by an agent, it is necessary to establish that the one who assumed to act as agent for that party had power to make the contract for that party.

Actual authority can be either express or implied. In both instances, the court must examine manifestations of authority conveyed by the principal to the agent. Express authority is directly granted to or conferred upon the agent or employee in express terms by the principal, and it extends only to such powers as the principal gives the agent in direct terms. There can be no recovery against the principal if the agent knew that he had no authority to make the contract for the principal.

There was no evidence from which a factfinder could conclude that Chubb possessed actual authority to bind Lexington. Chubb expressly testified that he had no authority to bind Lexington and that he was not Lexington’s agent. Rather, Chubb repeatedly testified that he was the agent of Pump It Up. Abdou himself argues in his brief that “Chubb never directly communicated with Lexington.” Because there is no evidence of any “manifestations of authority conveyed by the principal to the agent,” no question of fact exists with regard to actual authority.

Lexington successfully argued that there is no evidence that Chubb possessed actual or apparent authority to bind it to the certificates. According to Lexington, it never conveyed to anyone that Chubb was its agent.

Abdou failed to present sufficient evidence from which a reasonable trier of fact could conclude that Chubb possessed the apparent authority to bind Lexington. The parties do not dispute that Lexington and Chubb had no contact. Nor do they dispute that KMAG had no contact with Lexington. To the contrary, Sterling secured coverage from CRC, who is a wholesale producer of insurance. Chubb testified that it communicated only with Sterling and its customers, i.e., insurance consumers.

Moreover, the contents of the certificate, including the signature block, is not evidence of an agency relationship. The certificate is not a Lexington document and nothing on the certificate would give a third-party any indication that Lexington clothed Chubb with the apparent authority to issue the document. The majority of evidence Abdou points to consists of communications with Chubb. Communications between KMAG and Chubb, however, do not provide any support for an agency relationship, because the Court was required to look to Lexington’s conduct and manifestations in assessing apparent authority.

The Court concluded that no enforceable contract exists between Lexington and KMAG or Millikin and that no agency relationship exists between Chubb and Lexington.

ZALMA OPINION

Agents must be made by the principal by affirmatively acting to create an agency relationship. In this cases the proof did not exist. An insurance broker, like Mr. Chubb, transacts insurance with but not on behalf of the insurer. As a broker, who obtained insurance through an intermediary and never contacted nor contracted with the insurer, cannot bind the insurer.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness 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 founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm

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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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