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Some in Industry Question Washington Supreme Court Ruling Making Insurers Liable for Agents' Actions

Source: A.M. Best

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Posted on 07 Aug 2013 by Neilson

Insurance agency liabilityThe Washington state Supreme Court handed down a ruling that will make insurers liable for illegal activities of their agents.

The Aug. 1 decision reverses an earlier Court of Appeals ruling. "When the statute forbids the insurer or its agent from certain conduct, it means that the insurer may not do indirectly - through its agent - what it may not do directly," the ruling said.

The ruling has left some worried about the impact on insurers. Brian Kreger, partner at the Seattle law firm of Kreger Beeghley, said it would likely bring about a landslide of enforcement actions by the state regardless of what line of business or legal relationships with agents exist. "I think we have to be ready for that as lawyers who represent the companies and agents," he said.

Barry Zalma, of the California-based Zalma Insurance Consultants, told Best's News Service the ruling would alter contracts between insurers and any independent agents they have in Washington. "Guys who use independent agents could be in deep trouble," he said. "I would rewrite the contracts with independent agents, put in a hefty hold-harmless agreement and insist they carry insurance." He said the ruling could have a negative impact for insurers, whose costs to cover risk may increase.

The National Association of Mutual Insurance Companies issued a statement calling the ruling "rife with potential for legal abuse by litigants who will assert, for settlement negotiations leverage purposes, a merit-less claim against an insurer based upon the unauthorized and inappropriate actions of an insurance producer. "The potential for liability holds even when the producer's action exceeds the scope of the agency's relations with the insurer and the expectations of the insurer, producer, regulatory authorities and consumers, NAMIC's statement said. "Frivolous litigation, like the excessive expenditures alleged in this case, are insurance rate cost-drivers that adversely impact affordability of insurance for consumers, so legal opinions that create broad vicarious liability for insurers are conceptually concerning and fraught with unintended anti-insurance consumer ramifications."

The decision was a victory for consumers, state Insurance Commissioner Mike Kreidler said in a written statement. Kreidler's decision held Chicago Title Insurance Co. liable for the actions of Land Title Co. Kriedler said Chicago Title's arguments ran counter to century-old insurance law. "In order to effectively regulate insurers and protect consumers, it's important to hold insurers responsible for the actions of their agents," Kreidler said in a statement.

"When CTIC gave Land Title the authority to sell its insurance, CTIC also gave Land Title implied authority to perform other acts necessary to the sale of insurance and to act in accordance with industry norms," the Supreme Court ruling said. "Solicitation was necessary to effectuate Land Title's authority to sell CTIC insurance under the Agreement, and violating the anti-inducement provisions was customary in the title insurance industry."

The interpretation of the ruling by Kreidler appears to be vast, Kreger said. "[The ruling] is pretty broadly discussed in terms of agency law in the state of Washington and that troubles me a lot," he said.

The case stems from a 2005 investigation of 18 months of employee expense reports and ledgers for the largest title companies in King, Pierce and Snohomish counties. The examination found cases in which the companies provided gifts such as golf tournament sponsorships, parties, ski trips, sports tickets, meals and other inducements. New rules written in 2009 limit advertising, donations to trade groups, meals, training, and leasing work space.

The state had ruled that Land Title boosted its clientele by providing illegal gifts to real estate agents and others in excess of the state's $25 cap. Kreidler opted to fine Land Title and three other companies nearly $300,000 in fines.

The OIC brought disciplinary proceedings against CTIC and an administrative law judge threw the case out, ruling that CTIC's control over Land Title was limited and did not include Land Title's marketing practices. A review judge then reversed the initial decision, ruling that Land Title was performing within its statutory authority as an agent and it did not matter whether CTIC chose to be involved. The Court of Appeals, however, agreed with the ALJ that current law does not define what actions might have been within the scope of CTIC authority.


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