Insurers Can Be Vicariously Liable for Fraudulent Misrepresentations by Independent Producers under Utah Law
Contact: Richard A. Vazquez
The Utah Court of Appeals recently clarified the relationship between independent producers and insurance carriers whose policies they sell in Drew v. Pacific Life Ins. Co., 2019 UT App 125 (Utah Ct. App. July 18, 2019).
In Drew, the policyholders appealed summary judgment in favor of Pacific Life Insurance Company (Pacific) and the court’s denial of their crossmotion for partial summary judgment on the issue of vicarious liability. The policyholders contended that the district court erroneously determined that Pacific was not vicariously liable for fraudulent misrepresentations made by one of its appointed insurance producers.
According to the Court of Appeals:
In 2009 Pacific appointed an independent producer and authorized it to “solicit and procure applications for [Pacific’s] life insurance and annuity products.” The agreement, however, prohibited the producer from soliciting insurance products that did not meet the “customer’s insurance needs and financial objectives.” At the time the parties executed the agreement, Pacific had appointed other many other companies and individuals to sell its insurance products. Similarly, the producer also sold annuities and insurance policies on behalf of numerous other insurance companies and individuals.
The policyholders were senior citizens who sought out one of the producer’s employees as a financial adviser after seeing an advertisement. That employee ended up advising the policyholders that, even though they were approaching eighty, they could purchase a life insurance policy with a high death benefit and resell it on the secondary market for a large profit. Utah law prohibited this sales tactic. Nonetheless, based on this information, the policyholders purchased two $1.5 million life insurance policies and financed the premiums on those policies with a reverse mortgage on their home.
The producer was unable to sell the policies on the secondary market. After the policyholders paid more than $300,000 in premiums and lost much of the equity in their home, the policies lapsed when the policyholders could no longer afford the premiums. They lost three-fourths of their life savings.
The policyholders sued Pacific, claiming that it was vicariously liable for the tortious conduct of the producer’s employee, whom the policyholders contended was acting as Pacific’s agent. Pacific and the policyholders submitted cross-motions for summary judgment, and the district court granted summary judgment to Pacific. Although the court did not address whether an agency relationship existed between Pacific and the producer, it concluded that, even assuming such a relationship existed, the producer’s employee was not acting within the scope of Pacific’s agency authority. The policyholders appealed.
The Utah Insurance Code suggests that the existence of an agency relationship turns on whether an insurance salesperson is a “producer for the insurer” or a “producer for the insured.” If a producer is “compensated directly or indirectly by an insurer for selling, soliciting, or negotiating an insurance product of that insurer,” that producer is a producer for the insurer and is therefore its agent. In contrast, if a producer is “compensated directly and only by an insurance customer,” that producer is a producer for the insured and is not an agent of the insurance company.
The district court record conclusively showed that the producer’s employees received compensation directly from Pacific. Thus, the Court of Appeals concluded that under the plain terms of the Utah Insurance Code, the producer’s employees were producers for Pacific and were therefore acting as its agents. The Court of Appeals rejected Pacific’s argument that the producer’s employees were independent insurance brokers rather than its agents, and expressly found that case law which relied on since-replaced sections of the Utah Insurance Code dealing with the agent/broker/producer distinction was “of limited utility at best.”
Continuing its analysis, the Court of Appeals also found that the producer’s employee acted within the scope of Pacific’s agency authority when he advised the policyholders to enter into a transaction prohibited by Pacific’s producer agreement. The Insurance Code provides: “There is a rebuttable presumption that every insurer is bound by any act of its appointed licensee performed in this state that is within the scope of the appointed licensee’s actual (express or implied) or apparent authority, until the insurer has canceled the appointed licensee’s appointment and has made reasonable efforts to recover from the appointed licensee its policy forms and other indicia of agency.”
The Court of Appeals concluded that because Pacific authorized the producer’s employees to solicit life insurance policies, Pacific could be vicariously liable for torts committed during that solicitation process. In support of its conclusion, the Court cited the Restatement of Agency 2nd, stating that “an act, although forbidden, or done in a forbidden manner, may [nonetheless] be within the scope of [agency.]” The Court of Appeals further reasoned that “the doctrine of respondeat superior exists irrespective of contract” and that principals may still be liable even when agents act “contrary to the express instructions of the [principal].”