Surplus Line Broker Not an Insurer

No Action Available Against Surplus Line Broker for Breach of Contract or Bad Faith

After her house burned to the ground and her insurer rescinded the policy Suzan E. Taylor sued the insurer and the surplus line broker who obtained insurance for her from certain underwriters at Lloyd’s, London. The broker, Burns & Wilcox moved to dismiss Taylor’s action in Hiscox Dedicated Corporate Member Limited v. Suzan E. Taylor  v.  The Society Of Lloyd’s, The Corporation At Lloyd’s, and Burns & Wilcox, Ltd., NO. 6:18-CV-06100, United States District Court Western District Of Arkansas Hot Springs Division (April 20, 2020)

Introduction

The Lloyd’s Policy (the Policy) provided fire insurance coverage for the high value home owned by Suzan E. Taylor, in Garland County, Arkansas. Taylor purchased fire insurance coverage from Certain Underwriters at Lloyd’s of London (the Insurer). Under the terms of the Policy, the dwelling was insured for $2.6 million and the personal property was insured for $1.3 million. Hiscox Dedicated Corporate Member Limited (“Hiscox”) is the majority underwriter of Lloyd’s Syndicate #33, the only syndicate subscribed to the Policy.

After investigating the cause of the fire and taking Taylor’s examination under oath (EUO) the Policy was unilaterally rescinded for alleged misrepresentations of material facts in the application. Hiscox sued seeking declaratory relief to validate the rescission of the Policy.

Taylor filed an amended third-party complaint against  Burns & Wilcox, Ltd. among others. Taylor alleged four causes of action against Burns & Wilcox: breach of contract, bad faith, improper rescission, and negligence. On March 18, 2020, Burns & Wilcox filed a 12(b)(6) motion to dismiss and brief in support, contending that Taylor has failed to plead facts sufficient to establish her third-party claims.

Background

Taylor purchased a fire insurance policy for her home from Smith & Company, an agency in Stuttgart, Arkansas. She completed her insurance application over the phone with one of Smith’s employees, Nicky Hodges. The Policy was procured through Burns & Wilcox as a surplus lines broker:

She alleged Burns & Wilcox, through their agents, with Lloyd’s visited the burned property with fire inspectors and canines with hopes of finding evidence of arson. She further alleged Burns & Wilcox, asked a contractor to wear a wire to get “Ms. Taylor to admit that she burned her house down or engaged in insurance fraud.”

After submitting to an EUO Underwriters advised Taylor it had discovered multiple material misrepresentations in her insurance application and that they rescinded the Policy based on the alleged misrepresentations.

Discussion

An insurance policy is a contract to which the standard provisions of contract interpretation apply. To state a cause of action for breach of contract, the complaint needs to only assert the existence of an enforceable contract between the plaintiff and defendant, the obligation of the defendant thereunder, a violation by the defendant, and damages resulting to the plaintiff from the breach.

The Policy identified Burns & Wilcox as the “Correspondent” of the Underwriters. It expressly states, “The Correspondent is not an Insurer” and shall not “be liable for any loss or claim whatsoever.” Under these terms, it is not possible for Taylor to state a claim for breach of contract or wrongful rescission against Burns & Wilcox, because Taylor cannot plead any fact demonstrating the existence of a contractual relationship. Accordingly, Taylor’s cause of action for breach of contract against Burns & Wilcox should be dismissed with prejudice.

Taylor cannot state a claim for wrongful rescission against Burns & Wilcox without first alleging the existence of an underlying contract with this defendant. Thus, the wrongful rescission claim against it should be dismissed with prejudice.

Bad Faith

Taylor offers inadequate factual allegations to plead that she entered an insurance contract with Burns & Wilcox. Taylor presents limited authority to suggest she can assert a bad faith claim against a non-insurer. Taylor does not cite binding authority recognizing bad faith as a cause of action that can be asserted against a party that is not her insurer. It would not be proper for the Court to expand the tort of bad faith in this manner.

Burns & Wilcox’s motion to dismiss was granted in its entirety.

ZALMA OPINION

An insurance broker is a person or entity that transacts insurance with but not on behalf of an insurer. They are not insurers. A Surplus Line broker is an intermediary between the person seeking insurance, that person’s agent, and the insurer. Under Surplus Line law the broker can provide a policy to the insured but may not be considered an insurer. It was overkill on the part of the insured to sue the broker when the policy, in clear and unambiguous language, explained Burns and Wilcox was not an insurer and liable for any claims.


© 2020 – 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 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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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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3 Responses to Surplus Line Broker Not an Insurer

  1. Hi Barry – Normally your analysis is very clear, not thiis time.
    What were those material misrepresentations on the application?
    Why didn’t the insured sue Broker Smith instead?
    And why is there no mention of why the insurer Lloyd’s/Hiscox was found
    not responsible affirming the rescission?

    No one has a problem with a criminal act causing a policy to be voided, but in the absence of proof of arson by an insured, where is the justice?

    • Barry Zalma says:

      Remember, I deal with appellate decisions only and they are often short of real facts. You don’t have to prove arson, just a material misrepresentation like the $50 t.v. was claimed to be a $5,000 tv or the Timex is claimed as a Rolex. I’ll try to do better. You might want to listen to my YouTube video on the EUO and on Claflin v. Commonwealth if you want more detail.

      • Barry Zalma says:

        The case tried to find the surplus line broker responsible as an insurer which it clearly is not. Fraud and arson were not the reason for the decision.

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