Notice To Broker May Be Notice To The Insurer
I. NOTICE TO BROKER MAY BE NOTICE TO THE INSURER
The CGL policy’s notice requirement may be met by constructive notice under the law of a number of jurisdictions. Where an insured gave notice orally and in writing to its broker, that notice may suffice to place the insurer at risk. Indeed, all four state Supreme Courts to address the issue have found that putting an insurer on notice of a claim constitutes “tender.” The Home Ins. Co. v. National Union Fire Ins. Co., 658 N.W.2d 522, 532 (Minn. 2003). It is not uncommon for brokers to “analyze” coverage and find that a particular exclusion, typically that for “intellectual property,” may bar a defense. More inquiry is often required as coverage analysis is driven by the facts alleged, not the labels of causes of action. Curtis-Universal, Inc. v. Sheboygan Emergency Medical Services, Inc., 43 F.3d 1119, 1122 (7th Cir. (Wis.) 1994).
The complaint may not be clear on its face in answering the questions raised by the policy one way or the other. By analyzing the theories of recovery asserted therein, the statute of limitations pertaining to same, and the actual damage remedies available, it is clear that the earliest date when damages could be cognizable under the theories asserted may go back to a broader policy provision than that analyzed by the broker.
II. CONSTRUCTIVE NOTICE UNDER CALIFORNIA LAW
An insurer’s duty to defend may arise upon receiving constructive notice of the insured’s need for a defense. Tender is not recognized as a discrete requirement to establish a defense under California law. California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal. App. 3d 1, 221 Cal. Rptr. 171 (1985) (An insurer breaches its duty to defend by failing to make necessary inquiries that would have led it to discover that a claim for defense had actually been submitted by the insured.); Nelson v. West Am. Ins. Co., No. B143838, 2004 Cal. App. Unpub. LEXIS 5606, at *15-16 (Cal. App. June 14, 2004) (“Generally, insurers have a duty to follow reasonable standards in investigating claims. (Ins. Code, § 790.03, subd. (h)(3).) Whether the insurer conducted an adequate investigation under the circumstances implicates the principle of constructive notice. (KPFF, Inc. v. California Union Ins. Co. (1997) 56 Cal.App.4th 963, 974-975; California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 37, 221 Cal.Rptr. 171.) Under Civil Code section 19, ‘every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact.’ In an assessment of whether an insurer properly declined to offer a defense, the insurer is ‘charged with notice of all those facts which [it] might have ascertained had [it] diligently pursued the requisite inquiry. (California Shoppers, Inc. v. Royal Globe Ins. Co., supra, 175 Cal.App.3d at p. 37; see KPFF, Inc. v. California Union Ins. Co., supra, 56 Cal.App.4th at p. 974; State Farm Mut. Auto. Ins. Co. v. Martinez-Lozano (E.D.Cal. 1996) 916 F.Supp. 996, 1005.) Accordingly, ‘the risk that an insurer takes when it denies coverage without investigation is that the insured may later be able to prove that a reasonable investigation would have uncovered evidence to establish coverage or a potential for coverage.’ (American Internat. Bank v. Fidelity & Deposit Co. (1996) 49 Cal.App.4th 1558, 1571.)”).
California law provides that a principal is responsible to third parties for the acts of its agent even if the principal is completely innocent. Warshauer v. Bauer Constr. Co., 179 Cal. App. 2d 44, 49 (1960) (“The courts have consistently held that the principal is responsible to third parties for the misconduct of an agent committed within the scope of his authority even though the principal is completely innocent and has received no benefit from the transaction. (Wells Fargo Bank v. Dowd, 139 Cal.App.2d 561 [294 P.2d 159]; Rutherford v. Rideout Bank, 11 Cal.2d 479 [80 P.2d 978, 117 A.L.R. 383]; Rest., Agency, § 261.)”).
Where an insurer had an agency relationship with a broker, evidenced by an agency agreement, the insurance policies and binders and an Appointment of Agency, and the broker represented to the insured that it was the insurer’s authorized agent relative to those insurance policies, without limitation, the insured’s notice to the broker was notice to the insurer. Indeed, such a broker’s subsequent failure to communicate that notice to the insurer would not relieve the insurer of its obligations to the insured. Warshauer at 50 (“The law reasons that where one of two innocent parties must suffer the loss should be accepted by the principal who is responsible for the selection of the agent and for the definition of his authority. As stated in Eamoe v. Big Bear Land & Water Co., 98 Cal.App.2d 370, 374 [220 P.2d 408]: ‘. . . the agent has been negligent in the performance of his duties, and some innocent person must be the loser. Should it not be the one who gave the agent the power he misused, intentionally or unintentionally?’ ”).
Even if the insurer were to claim that the broker was not authorized to accept notice of the claim, the insurer is still liable to its insured for the allegedly unauthorized acts of the broker. Nuffer v. Insurance Co. of N. Am., 236 Cal. App. 2d 349, 355 (1965) (“[A] principal is responsible to a third person for wrongful acts committed by his agent in and as a part of the transaction of the business of the agency, regardless of whether the wrong is authorized or ratified by him, and even where it is intentional and malicious (Civ. Code, § 2338; Hudson v. Nixon, 57 Cal.2d 482, 484 [20 Cal.Rptr. 620, 370 P.2d 324]; Mercado v. Hoefler, 190 Cal.App.2d 12, 17 [11 Cal.Rptr. 787]); and under these rules an act of the agent may be within the scope of his authority even though it is not authorized (Deevy v. Tassi, 21 Cal.2d 109, 125 [130 P.2d 389]), or is unlawful (e.g. see Hudson v. Nixon, supra, 57 Cal.2d 482, 484; Carr v. Wm. C. Crowell Co., 28 Cal.2d 652 [171 P.2d 5].)”).
The duty of an insurer to investigate applies outside the bad faith context and may support a breach of contract claim. In Estate of Parker v. AIG Life Ins., 317 F. Supp. 2d 1167, 1171 (C.D. Cal. 2004), the court addressed an insurer’s duty to investigate, which was allegedly undertaken through an agent investigator, citing Everett Associates, Inc. v. Transcontinental Ins. Co., 159 F. Supp. 2d 1196, 1201 (N.D. Cal. 2001) (An insurance contract imposes on the insurer, inter alia, “the duty to make immediate inquiry into the facts of any serious accident as soon as practicable after its occurrence . . . .”). An insurer owes its insured the same duty of investigation that is implied into the insurance contract via the covenant of good faith and fair dealing, separate and apart from such covenant. Id. 1202-04 (breach of duty to investigate defined in Egan v. Mutual of Omaha Ins. Co., 620 P.2d 141 (Cal. 1979) can support claims for both bad faith and breach of insurance contract). “When investigating a claim, an insurance company has a duty to diligently search for evidence which supports its insured’s claim. If it seeks to discover only the evidence that defeats the claim it holds its own interest above that of its insured.” Mariscal v. Old Republic Life Ins. Co., 42 Cal. App. 4th 1617, 1620, 50 Cal. Rptr. 2d 224 (1996).
The failure of an insurer’s agent to perform contractual duties is imputed to the insurer for purposes of finding liability against the insurer based upon the wrongful acts of the agent. In Hillenbrand v. Insurance Company of N. Am., 104 Cal. App. 4th 784, 792 (2002), a California Appellate Court affirmed the judgment of the trial court in which the insurer, Aetna, was found liable for malicious prosecution based upon decisions that were made solely by Aetna’s agent, Insurance Company of North America. The insurer was found liable for compensatory and punitive damages based upon the agent’s wrongful conduct. Id.
One of the claims by the insured was that the insurer, through its agent, failed to adequately investigate and consider the nature of the claims made against the insured when it decided to file a declaratory relief action while the underlying suit was ongoing. Id. at 801 (“The record reflects that the insurer considered the possibility that there was damage to other property, a covered risk, slight in comparison to the compelling evidence that the damage was caused by Hillenbrand’s faulty workmanship, an excluded risk.”).
While Hillenbrand is not a breach of insurance contract case, it does provide compelling discussions of the damages for which an insurer may be liable based upon the conduct of its agent, without the insurer itself performing any affirmative wrongful act. The insurer there was liable for punitive damages resulting from its malicious conduct which was necessarily imputed from its agent’s conduct since the insurer did not commit any wrongful acts beyond those committed by its agent.
III. CONCLUSION
Insurance brokers may not owe a fiduciary duty to their insureds, but when a claim is received from an insured they should not supplant the role of insurance coverage counsel. Claims should be tendered to all carriers on risk and then any denial letters received carefully analyzed. Where the notice provided goes no further than the broker, however, that need not preclude any right to recovery against the insurer.
