Krumme v. Mercury Ins. Co.

• Decision Date: 29 October 2004
• Docket Number: No. A103046.,No. A103742.,A103046.,A103742.
• Citation: 123 Cal.App.4th 924,20 Cal.Rptr.3d 485
• Court: California Court of Appeals
• Parties: Robert KRUMME, Plaintiff and Respondent, v. MERCURY INSURANCE COMPANY et al., Defendants and Appellants.

20 Cal.Rptr.3d 485

123 Cal.App.4th 924

Robert KRUMME, Plaintiff and Respondent, v. MERCURY INSURANCE COMPANY et al., Defendants and Appellants.

No. A103046.

No. A103742.

Court of Appeal, First District, Division 4.

October 29, 2004.

Rehearing Denied November 29, 2004.

Review Denied January 19, 2005.

Douglas L. Hallet, Joseph B. Miller, Marc J. Levine, Victor Poltrock, Los Angeles, Counsel for Defendants and Appellants.

Levy, Ram & Olson, Arthur D. Levy, San Francisco, Heather M. Mills, Norman Goldman, Los Angeles, Counsel for Plaintiff and Respondent.

Gary M. Cohen, San Francisco, Jose S. Aguilar, Jon A. Tomashoff, Counsel for Amicus Curiae California Insurance Commissioner.

Piper Rudnick, Margaret L. Parker, Jeffrey M. Hamerling, Lisa M. Sitkin, Kari S. Gregory, San Francisco, Counsel for Amicus Curiae American Agents Alliance.

KAY, P.J.

Insurance Code section 1704¹ requires that certain kinds of insurance may be sold only by what are known as "appointed agents" — persons for whom the insurer has filed with the Insurance Commissioner a notice of appointment formally designating the person to act on the insurer's behalf. A trio of related insurers (which for purposes of simplicity will hereinafter be collectively referred to as Mercury) sold policies of automobile insurance within the state through "broker-agents" who are not appointed agents. Suit was instituted to stop this practice, as well as permitting the "broker-agents" to charge consumers broker fees added to the advertised price of insurance. The trial court determined that both of these practices ran afoul of the unfair competition law (UCL) (Bus. & Prof.Code, § 17200 et seq.) and permanently enjoined them.

The primary issue pressed by Mercury is whether its practice of employing broker-agents who are not appointed agents has been sanctioned by the Legislature and therefore enjoys a "safe harbor" from liability under the UCL. Although the issue is not free from all doubt, on balance it appears from the governing statutes, particularly section 1704(a), that the Legislature has not created a safe harbor for this practice. We therefore affirm.

BACKGROUND

The trial court's findings of fact and conclusions of law are best comprehended in light of the extensive statutory history that underpins the trial court's reasoning. That history involves the evolution of the concepts of broker and agent in the insurance context.

(A)

Statutorily, an agent is defined as one who is "authorized, by and on behalf of an insurer, to transact all classes of insurance" except for life insurance (§§ 31, 1621) while a broker is "a person who, for compensation and on behalf of another person, transacts insurance other than life with, but not on behalf of, an insurer." (§§ 33, 1623.)

One of the leading treatises explains the fundamental distinction between an agent and a broker in these terms: "An `insurance broker' is one who acts as a middleman between the insured and the insurer, soliciting insurance from the public under no employment from any special company, and, upon securing an order, placing it with a company selected by the insured or with a company selected by himself or herself; whereas an `insurance agent' is one who represents an insurer under an employment by it. A broker is, in essence, employed in each instance as a special agent for a single purpose, while the very definition of agent indicates an ongoing and continuous relationship.... [B]rokers and insureds are ordinarily involved in what can be viewed as a series of discrete transactions, while agents and insureds tend to be under some duty to each other during the entire length of the relationship." (3 Couch on Insurance (3d. ed.1997) § 45:1, pp. 45-3—45-4, fns. omitted; see 7 Appleman on Insurance 2d (Holmes ed. 1998), § 44.2, pp. 2-11; Croskey et al., Cal Practice Guide: Insurance Litigation (The Rutter Group 1997) ¶¶ 2:2-2:7, pp. 2-1 to 2-3 (rev.# 1, 2004.)) In 1976 one Court of Appeal held that a broker is not an agent of the insurer, but is an independent contractor acting as agent for the insured. "The most definitive characteristic of an insurance agent is his authority to bind his principal, the insurer; an insurance broker has no such authority.... [T]he broker does not have authority to bind an insurer and ... the insurance company must first execute the binder or policy; a broker does not execute a policy without a prior authorization from the insurer. In contrast, the agent is authorized to execute the binder himself." (Marsh & McLennan of Cal., Inc. v. City of Los Angeles (1976) 62 Cal.App.3d 108, 117-118, 132 Cal.Rptr. 796.)

"An individual cannot act as an insurance agent in California without a valid license issued by the commissioner of insurance. (Ins.Code, § 1631.) In addition to possessing a license, an insurance agent must be authorized by an insurance carrier to transact insurance business on the carrier's behalf. This authorization must be evidenced by a notice of agency appointment on file with the Department of Insurance. (Ins.Code, § 1704, subd. (a).)." (Loehr v. Great Republic Ins. Co. (1990) 226 Cal.App.3d 727, 732-733, 276 Cal.Rptr. 667.) Unlike an agent, a broker does not act for the insurer, and the insurer is not liable for the broker's acts or omissions. (E.g., Kurtz, Richards, Wilson & Co. v. Insurance Communicators Marketing Corp. (1993) 12 Cal.App.4th 1249, 1257-1258, 16 Cal.Rptr.2d 259; Reid v. Northern Assur. Co. (1923) 63 Cal.App. 114, 127, 218 P. 290.) Because a broker, unlike an appointed agent, does not have the insurer available as a source of compensation for aggrieved insureds, the broker is required to post a bond before being allowed to operate. (§ 1662.)

Nevertheless, there is no absolute dichotomy between agents and brokers. In 1917, in a noninsurance context, our Supreme Court recognized that a person could be the agent of both parties to a commercial transaction. (Glenn v. Rice (1917) 174 Cal. 269, 272, 162 P. 1020.) This principle of "dual agency" is well established as a general principle of agency law. (See Rest.2d Agency, §§ 313, 391, 392.) In January of 1953, a Court of Appeal applied it for the first time to the insurance context. In Maloney v. Rhode Island Ins. Co. (1953) 115 Cal.App.2d 238, 251 P.2d 1027, it was held that a broker acting for the insured could also act as the agent of the insurer "[w]hen the broker accepts the policy from the insurer and the premium from the assured, he has elected to act for the insurer to deliver the policy and to collect the premium." (Id. at p. 244, 251 P.2d 1027.)

Brokers liked the result in Maloney but did not want to be required to be licensed as agents as well as brokers. At their prompting, the Insurance Commissioner sponsored a bill that would codify the result of Maloney and authorize brokers to act as the insurer's agent while collecting premiums and delivering policies. (See Cal. Ins. Com., Enrolled Bill Rep. on Assem. Bill No. 1417 (1952) Reg. Sess.) (prepared for Governor Warren (June 16, 1953).) The bill was signed into law in July 1953, six months after Maloney was decided. (Stats.1953, ch. 1732, § 2, p. 3482 [enacting former § 1660.5].) The basis for what is now section 1732 provided: "A person licensed as an insurance broker may act as an insurance agent in collecting and transmitting premium or return[ing] premium funds and delivering policies and other documents evidencing insurance."

Here matters more or less remained until passage of Proposition 103 in 1988. That initiative made the Insurance Commissioner (Commissioner) an elected official (§ 12900), rolled back car insurance rates (§ 1861.01), and made rates subject to the Commissioner's approval (§ 1861.05). It also directed that every person who meets the statutory standards as a "good driver" (§ 1861.025) was entitled a rate "at least 20% below the rate the insured would otherwise have been charged for the same coverage." (§ 1861.02, subd. (b)(2).) "An insurer shall not refuse to offer and sell a Good Driver Discount policy to any person who meets the standards" (§ 1861.02, subd. (b)(1)).

In 1990 the Legislature added the term "broker-agent" to section 1625, which defines "fire and casualty licensee," and to section 1732. (Stats.1990, ch. 1420, §§ 4, 57, pp. 6446, 6463.)² The same bill amended section 1704(a) to provide in pertinent part: "Every applicant for a license as a life agent, a fire and casualty broker-agent to act as an insurance agent, or a travel insurance agent shall have filed on his or her behalf with the commissioner a notice of appointment to act as an agent executed by an insurer ... appointing the applicant, upon licensing, its agent within this state" (Stats.1990, ch. 1420, § 38, p. 6457).

Five years later "broker-agent" was added to the statute governing the termination of a broker or agent operating pursuant to a written contract. (§ 769, as amended by Stats.1995, ch. 921, § 1, p. 7029.) Applicable to "a written agency or written brokerage contract[] where the broker-agent represents the insurer," the amended statute specified that advance notice of termination was not required if "the broker-agent [¶] ... [¶] Exceeded his or her binding authority under the agency or brokerage contract." (§ 769, subds.(a), (b)(1).)

In January of 2000, the Commissioner sent Mercury a draft "Notice of Noncompliance." The gist of the notice was much the same as this litigation—that Mercury was employing brokers who "are operating as de facto agents" but who were being advertised by Mercury as independent. The notice was discussed at a meeting later that month between Mercury and representatives of the Department of Insurance. Mercury took the position that "statutes and court decisions do not clearly define the difference between agents and brokers." One of the Commissioner's representatives proposed that Mercury "draft a bill that defines agents and brokers" for submission to the Legislature. Mercury did so, but...