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When Independent Insurance Producers are Not-So-Independent: Illinois Appellate Court Rejects Insurer Request for Policy Rescission Due to Producer Conduct

February 27, 2018

Independent insurance producers often are thought to be, well, independent from the insurance companies for which they sell policies. Independent producers typically sell insurance policies for a number of carriers, and often work with intermediaries to sell policies for even more carriers, so that they can offer their policyholder clients the insurance product most suitable to their needs.

A recent unpublished decision from the Illinois Appellate Court, Fifth District, in Founders Insurance Company v. Flores, 2018 IL App (5th) 160404-U, however, shows that in some situations a producer’s conduct can transform him into an agent for the insurance company. If that agent handles a policyholder’s application for insurance improperly, the insurance company may be left to deal with the consequences, such as potentially forgoing the right to rescind the policy due to misrepresentations in the application.

Flores examined whether an insured’s alleged misrepresentation in his application for auto insurance justified the rescission of his policy. Martin Flores Sr. entered the offices of Joseph Huffman Sr. and Associates, Inc. to acquire auto insurance on four vehicles. John Williams, an agent at Huffman, obtained a policy for Martin Sr. from Founders Insurance Company based on information Martin Sr. provided to him on a single sheet of paper. That sheet listed the names, social security numbers, and driver’s license numbers of Martin Sr. and his wife, as well as the makes, models, and vehicle identification numbers of four vehicles. Martin Sr. had one of his sons join him for the meeting with Williams because Martin Sr. spoke very limited English and could not read English. Williams filled in the application on a computer using the information provided on Martin Sr.’s sheet. The application was signed by Martin Sr.’s son in front of the agent. At the time, the son was 15 or 16 years old.

The application included the following language: “[a]pplicant warranties that there are no other residents of insured’s household (aged 15 and older) and no regular drivers other than those listed below.” At the time the application was completed, Martin Sr. apparently had two children living with him who were 15 or older: the son who attended the meeting with the agent and another son named Martin Jr. Neither son was disclosed on the application. Williams apparently did not ask Martin Sr. about any children living in his household.

After the policy was issued, Martin Jr. was involved in a single-vehicle accident while driving a vehicle listed on his father’s policy. Two passengers died in the accident. After Founders learned that Martin Jr. was a member of Martin Sr.’s household, the insurance company rescinded the policy on the grounds of misrepresentation. It then filed an action for declaratory judgment to confirm same. The trial court conducted a bench trial and held that Founders did not prove a misrepresentation on the part of Martin Sr. It concluded that Williams had served as the agent of Founders and that he had failed to investigate whether Martin Sr. had any children of driving age in his household. On appeal, the Fifth District affirmed.

Specifically, the appellate court rejected Founders’ argument that Williams served as the broker for Martin Sr. (and not as the agent for the insurance company). Founders contended that Williams was an independent agent, not a captive agent, with no obligation to send applications for insurance to Founders. The Fifth District, however, generously applied the four-factor agent-broker test from Farmers Automobile Insurance Ass’n v. Gitelson, 344 Ill. App. 3d 888 (2003), in favor of Martin Sr. That test considers: (1) who first set the agent in motion; (2) who controlled the agent’s actions; (3) who paid the agent; and (4) whose interest the agent was attempting to protect.

The appellate court conceded that Martin Sr. first came to see Williams and that the producer agreement between Huffman and Founders was never submitted into evidence. However, the Fifth District noted that Founders paid Williams a commission for the policy. Perhaps most importantly, the Fifth District held “there is no evidence that Williams actions were for Martin Sr.’s benefit.” The court came to this conclusion by questioning how effectively Williams served Martin Sr.’s interests:

Williams could not recall his conversation with Martin Sr. and could not recall whether he asked any questions of Martin Sr., including inquiring about other members of the household, despite the fact that a 15-year-old family member was present at the office. In fact, Williams did not remember the son being present and signing the application and testified that he could not recall whether anyone had accompanied Martin Sr. to Huffman that day. Also, it is unquestioned that a language barrier existed. Martin Sr. was not questioned by Williams directly, did not sign the application himself, did not have the ability to read it, and was not allowed to take the application out of the office. Martin Sr. had only a single interaction with Williams and did not have an ongoing relationship.

Because Williams apparently served Martin Sr. poorly, the appellate court seemed to conclude that Williams did not serve him at all.

The Fifth District also appears to have agreed with the trial court’s holding that Williams had a duty to inquire about other drivers in Martin Sr.’s household. The trial court had concluded that Williams was “put…on notice to inquire” because he did not specifically ask Martin Sr. about other drivers during their meeting; one of Martin Sr.’s young sons was present at the meeting; that son may have answered questions during the meeting; that son signed the application; and Martin Sr. demonstrated difficulties with the English language.

Although the Fifth District issued its decision in this matter under Rule 23, the court’s analysis demonstrates why insurance companies need to tread very carefully when considering whether to rescind a policy due to policyholder misrepresentations. The insurer needs to examine not only the circumstances surrounding the alleged misrepresentation and its materiality, but also the role that the agent or broker played in the application process and the relationship of that agent or broker to the insurance company.