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November 2010

Chicago Title Ins. Co. v. AMZ Ins. Servs., Inc. ? Binder Was Proper and Broker Was Insurer's Agent Despite Express Terms of Producer's Agreement

Despite Insurer's Written Procedures, "Evidence of Insurance" Was Valid Binder Because It Met Statutory Requirements and Was Issued in Compliance with Insurer's Actual Policies and Practices

(2010) 188 Cal.App.4th 401; 10 C.D.O.S. 11923

The Fourth District Court of Appeal ruled that a document entitled "Evidence of Property Insurance" ("EOI") was an enforceable binder of homeowners insurance notwithstanding the nonpayment of premium.  The Court of Appeal concluded that the EOI constituted a binder as a matter of law and affirmed the trial court's finding that the insurance broker was the insurer's actual or ostensible agent.

Thomas Mustain and Cheryl Mustain hired a mortgage broker, Security Mortgage Lenders ("Security"), to refinance their home loan.  Security arranged a loan through New Century Mortgage ("New Century").  New Century instructed Chicago Title Insurance Company ("Chicago Title") to open an escrow for the transaction.

New Century would not fund the loan without evidence of a homeowners insurance policy for the property.  Security contacted an insurance agency, AMZ Insurance Services, Inc. ("AMZ"), and requested AMZ obtain a proper insurance policy and provide evidence of insurance.  The initial premium was to be paid through the escrow account, and Chicago Title was responsible for submitting payment.  AMZ placed a policy with Pacific Specialty Insurance Company ("PSIC") and prepared a corresponding EOI.

AMZ regularly did business with Pacific Specialty Insurance Company ("PSIC"), though AMZ was not an appointed agent for PSIC.  PSIC and AMZ had a written producer's agreement stating AMZ was not PSIC's agent, and did not have authority to bind coverage before receiving a signed application and an initial premium payment.  The agreement further stated AMZ could not bind coverage without PSIC's prior written approval.  On 30 to 40 prior occasions, AMZ had issued EOIs as binders in escrow transactions before receipt of a signed application and initial premium payment.  PSIC knew of the practice and had not objected.

AMZ provided Chicago Title with the EOI form.  After AMZ issued the EOI, New Century funded the loan and escrow closed.  Chicago Title failed to remit the premium payment.  Shortly after the close of escrow, a fire destroyed the house and killed Mr. Mustain.  PSIC refused to pay Ms. Mustain's claim, arguing the EOI was not a binder, no one had paid the premium payment, and AMZ was not PSIC's agent.

Chicago Title paid Ms. Mustain $270,200 (the limits under the PSIC policy) in exchange for an assignment of rights against PSIC and AMZ.  A jury found PSIC liable to Chicago Title for breach of contract and bad faith.  The court entered judgment in favor of Chicago Title for $270,200 as contract damages and approximately $210,000 in bad faith damages for Chicago Title's attorney's fees.  PSIC appealed.

The Court of Appeal affirmed, finding the EOI issued by AMZ qualified as a "binder" under California Insurance Code section 382.5 as a matter of law, and as such, temporarily obligated PSIC to provide insurance coverage pending issuance of the Mustains' insurance policy.  Pursuant to section 382.5, a binder is a writing that includes, among other things, the name and address of the insured (and any additional named insureds, mortgagees, or lienholders), a description of the property insured, a description of the nature and amount of coverage, any special exclusions not contained in a standard policy, the identity of the insurer and the agent executing the binder, and the effective date of coverage.

The EOI form prepared by AMZ complied with section 382.5's requirements.  It identified the insurer as PSIC, the insureds as the Mustains, the address of the Mustains' property, the nature and limits of coverage, the amount of the deductible, the amount of the annual premium, and the effective date of coverage.  The EOI also stated: "This is evidence that insurance as identified below has been issued, is in force, and conveys all the rights and privileges afforded under the policy." 

Though AMZ did not comply with the terms of the producer's agreement, evidence regarding PSIC and AMZ's pattern of dealing in prior escrow transactions established that PSIC had authorized AMZ to bind coverage by issuing an EOI before receiving a signed application and initial premium payment.

Furthermore, though PSIC had not filed a notice appointing AMZ as an agent, and notwithstanding the terms of the written producer's agreement, the same evidence was substantial enough to support the jury's finding that AMZ had actual or ostensible authority to bind PSIC by issuing EOI forms for escrow transactions.

The Court of Appeal also affirmed the jury's finding of bad faith.  The Court of Appeal stated, "[t]here was no question" the loss was covered, and held the "evidence supported the inference ? that PSIC's policies and practices for issuing EOI's were created in bad faith to allow PSIC to try to evade liability precisely in the circumstances presented by this case."  PSIC authorized and instructed AMZ to issue EOI's as insurance binders before receiving the premium payment and a signed application "[t]o capitalize on the need for immediate issuance of binders for escrow transactions?.  If a problem later arose, PSIC would claim, as it did here, that AMZ was not its agent, the EOI is not a binder, and PSIC's written guidelines and policies for issuing binders were not followed." 

This opinion is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority. 

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