Insurance Companies Should Be Responsible For Their Misconduct Of Their Agents

While it may seem obvious that an insurance company would be legally responsible for the misconduct of its agent, the law in some states is not so clear.  For example, a June 2021 decision from a California appellate court held that an insurance company had no duty of care to supervise its agent and therefore was not liable for the agent’s misconduct, egregious as it was.  See Williams v. National Western Life Insurance Company, Case No. C090436 (Third Appellate District, June 11, 2021)  https://scholar.google.com/scholar_case?case=6723238997375948811&q=williams+v.+national+western+life+insurance&hl=en&as_sdt=2006

LICAC believes that the decision in Williams is wrong even under pre-existing law, but it is a published decision that now represents California law.  It is therefore a precedent that is binding on trial courts.  California law should be restated to make clear that 1) an agent selling life insurance on commission is considered the agent of the insurer, not the insured, and 2) the insurer has a duty of ordinary care to supervise its agent.  Put another way: 1) whether the insurance company is liable for the misconduct of its commissioned agent under the doctrine of respondeat superior should be analyzed based on the recognition that the agent is not the agent of the consumer, but of the insurer; and 2) the insurer should be liable in negligence if it fails to exercise ordinary care in supervising its agent.

The Williams case shows why such clarification of the law is necessary. The agent in Williams tricked the plaintiff, a 78 year old senior, into buying an annuity that he did not want and that he was forced to surrender with payment of a $15,000 surrender penalty.  As established by the jury’s verdict, the agent’s misconduct included operating a “living trust mill” in order to sell annuities, unlawfully using a legal services company to sell insurance products, unlawfully using a business card that did not identify him as an insurance agent but instead suggested that he was a paralegal, and submitting a falsified request to withdraw the cancellation of an annuity that the agent had sold to the plaintiff.

The insurer appointed the agent even though it knew that the Department of Insurance had restricted his insurance agent’s license, and the insurer did not inquire why his license had been restricted.  That the agent had no errors and omissions insurance and had filed for bankruptcy three times also did not deter the insurer from appointing him as its agent.  The insurer issued an annuity even though the annuity application contained incorrect and inconsistent information, and the insurer issued a replacement annuity even though the falsified document revoking the cancellation of the first annuity was in the handwriting of two different people.

The court overturned the jury’s verdict for the plaintiff consumer.  It ruled that the agent selling the policy was legally the agent of the plaintiff consumer and that the insurer had no duty of care to supervise the agent’s conduct.   The court incorrectly relied on caselaw from the property/casualty insurance area, where a person who sells insurance for multiple insurers is considered a broker and the agent of the insured.  The court ignored the fact that Section 33 of the Insurance Code, which defines an “insurance broker,” applies only to insurance “other than life.”  The court then ruled that since the agent was the agent of the plaintiff consumer, not the insurer, the insurer had no duty to supervise the agent and could not be liable for negligent supervision.

The court’s ruling conflicts with common sense – an agent who sells insurance for an insurance company on commission is working for the insurer, not the consumer.  The insurance company establishes a commission scale that is designed to incentivize agent to sell policies (or annuities, which have a life insurance component), and the insurance company has an ongoing contractual relationship with the agent.  It is the insurer, not the consumer, that is in a position to supervise the agent and to implement rules and practices that deter and prevent agent misconduct.

Potential Public Policy Approach

The California Insurance Code (and similar laws in other states) should be clarified to state that 1) an agent selling life insurance on commission is considered the agent of the insurer, not the insured, and 2) the insurer has a duty of ordinary care to supervise its agent.  These principles apply whether the agent sells policies primarily or exclusively for one insurer or sells policies of multiple insurers.