HNRK Coverage Corner

On November 8, 2019, Judge Gardephe of the SDNY issued a decision in XL Specialty Ins. Co. v. Prestige Fragrances, Inc., Case No. 18-cv-733 (PGG), holding that issues of fact precluded summary judgment on this issue of whether an insurance broker was an agent of the insurance company such that notice to the broker constituted notice to the insurance company.

Prestige Fragrances involved a first-party insurance claim for losses from a theft at the insured’s warehouse. The insurance company (XL Specialty) denied the claim and asserted that the policy was void ab initio because in applying for the policy, the insured (Prestige Fragrances) had failed to disclosure prior losses it had incurred. In the coverage action, Prestige Fragrances argued that it had disclosed the losses in question to its broker, which it claimed was acting as the XL Specialty’s agent. Judge Gardephe found that that there was an issue of fact as to whether the broker acted as an agent for the insurance company, and denied summary judgment, explaining:

Under New York law, an insurance broker generally is considered the agent of the insured, not the agent of the insurer. Where a broker is the insured’s agent, notice to the broker is not deemed notice to the insurance company.

The general rule is not without exceptions, however, and a broker will be held to have acted as the insurer’s agent where there is some evidence of action on the insurer’s part, or facts from which a general authority to represent the insurer may be inferred. Prestige contends that the Producer Agreement Frenkel and XL Specialty executed constitutes the requisite “some evidence” from which Frenkel’s authority to represent XL Specialty can be inferred.

The existence of an agreement between a plaintiff-insurer and a broker may raise a material dispute as to whether a broker was acting as an agent for the insurer—or even establish as a matter of law that the broker was acting on behalf of the insurer. In Fid. & Guar. Ins. Underwriters, Inc. v. Jasam Realty Corp., 540 F.3d 133 (2d Cir. 2008), for example, the plaintiff insurance company and a broker had executed an “Agency Agreement”; this agreement gave the broker authority to, inter alia, “accept applications for insurance; . . . bind the [insurance company] on coverages; . . . issue, endorse, provide certificates of insurance and cancel contracts for insurance; . . . [and] pay claims”; the agreement also required the broker to “promptly report all claims and deliver all relevant claims information” to the insurance company, and to “provide reliable underwriting information . . . .” Fid. & Guar. Ins. Underwriters, 540 F.3d at 136-37. The Second Circuit ruled as a matter of law that “[t]hese clear delegations of authority . . . establish [the broker’s] authority to represent [the insurance company].” Id. at 140. . . .

The Producer Agreement between Frenkel and XL Specialty is not an “express agency agreement.” Indeed, the Producer Agreement states that Frenkel “acknowledges that it is an agent of the insured and not an agent of [XL Specialty]. [Frenkel] will at all times act solely in the capacity of a broker on behalf of the insureds.” Nor does the Producer Agreement permit Frenkel to “bind [XL Specialty], alter[,] or cancel any coverage in the absence of specific authorization to do so.” Given this language, XL Specialty maintains that “Frenkel was not XL’s agent as a matter of law.”

The evidence of an agency relationship need not be as strong as in Fid. & Guar. Ins. Underwriters or Travelers Ins. Co. to raise a factual dispute sufficient to defeat summary judgment, however. . . .

In Erie Painting & Maintenance, Inc. v. Illinois Union Ins. Co., 876 F. Supp. 2d 222 (W.D.N.Y. 2012), for example, the district court concluded that the agency status of a broker could not be resolved on summary judgment where an agreement between the insurance company and the broker provided that the broker (1) “must promptly notify [the insurer] if [the broker] receives any notice of claims” and “cooperate with [the insurer] in the investigation, adjustment, and settlement of claims”; (2) “may communicate the terms of the insurance quotations to potential customers if quotations are provided by [the insurer]”; (3) “must collect, account for, and pay premiums on business it writes. . . .”; (4) “must hold such premiums in a fiduciary capacity for [the insurer]”; and (5) “must maintain records and make them accessible to [the insurer] upon [the insurer’s] request.” The agreement also provides that the broker “must indemnify [the insurer] for any violation of th[e] agreement.” Erie Painting, 876 F. Supp. 2d at 230. The district court explained that although other factors weighed against finding that an agency relationship existed between the broker and the insurance company, the “conflicting evidence regarding [the broker’s] and [the insurer’s] relationship precludes summary judgment.” Id.

The Producer Agreement here is very similar to the agreement at issue in in Erie Painting. Indeed, the Producer Agreement contains all of the features the Erie Painting court highlighted as indicative of an agency relationship. . . .

To be sure, XL Specialty has offered evidence indicating that no agency relationship existed between it and Frenkel, including deposition testimony from Frenkel and XL Specialty employees. But “credit[ing] all factual inferences that could rationally be drawn[]in favor of the party opposing summary judgment,” the “conflicting evidence regarding [Frenkel] and [XL Specialty’s] relationship precludes summary judgment” on this issue.

Often individual and corporate insureds do not deal directly with their insurance carriers but rather procure insurance, and even submit claims through a broker. Some brokers serve as agents for the insurance company, whereas other independent brokers represent the insured. As this case demonstrates, it can be important for the insured to know what type of relationship the broker has with the insurer. Communications with the broker do not necessarily satisfy obligations to give notice to the insurance company unless the broker is an agent.