American Casualty Company v. Krieger, No. 97-55926, (9th Cir. June 30, 1999)
The Court of Appeals for the Ninth Circuit has held that an independent broker may have ostensible authority to extend additional-insured coverage on behalf of a carrier even though it had no actual binding authority and even though the carrier never issued or been paid a premium for an additional-insured endorsement. Krieger may pose practical problems for many CGL carriers, especially those underwriting in the construction, merchandising and entertainment industries. Independent brokers typically are used by these insureds as their speediest measure of obtaining the additional-insured endorsements and, thereafter, the additional insured certificates, that they need in order to conduct business. Krieger, however, suggests that this practice may eliminate, or at least seriously undermine, insurers. control over underwriting decisions in these situations. Insurers concerned about such a result therefore may want to issue periodic reminders to brokers and insureds (where appropriate) that brokers have no authority to bind the carrier to additional-insured coverage.
The facts that produced the Krieger decision were not particularly remarkable. Doing business as Playscool Productions, Zweig promoted and produced an annual entertainment event known as "Playscool." Krieger contacted Zweig about performing bungee jumping demonstrations. Zweig agreed, provided that he was named as an additional insured to Krieger's liability policy with American Casualty Company. Krieger subsequently contacted his insurance broker, SEIS, and SEIS issued a certificate of insurance listing Zweig and Playscool Productions as additional insureds. SEIS, however, never actually obtained an additional insured endorsement from American Casualty covering Zweig or Playscool Productions.
While rehearsing for a Playscool event, two individuals were seriously injured and subsequently filed suit against Zweig and Krieger. Both tendered the suit to American Casualty. American Casualty denied their claims based on an exclusion in the policy which excluded coverage for injuries sustained while participating in a sporting event. American Casualty also denied Zweig's claim because neither Zweig nor Playscool Productions were listed as additional insureds on the policy. Judgment in state court was eventually entered against Zweig for approximately $4.2 million. American Casualty then filed a declaratory relief action in federal court. The district court granted American Casualty's motion for summary judgment, finding that Zweig could not show that he was an additional insured under Krieger's policy.
The Ninth Circuit reversed and ruled that Zweig had raised a triable issue of whether SEIS was American Casualty's "ostensible agent." The Court rejected American Casualty.s argument that it could not be liable under an ostensible agency theory because Zweig did not have any direct communications with American Casualty or its underwriting agent, AON. The Court also rejected American Casualty.s argument that, because the certificate of insurance issued to Zweig was a standard form that is widely used in the insurance industry and did not have American Casualty's named printed anywhere on the form, there was no evidence to support Zweig's claim that SEIS was authorized to name Zweig as an additional insured.
The Court explained that one can be liable under an ostensible agency theory "where the principal knows that the agent holds himself out as clothed with certain authority, and remains silent." The Court noted that testimony established that SEIS fielded many requests for certificates of insurance and that American Casualty.s agent, AON, had received a fax from SEIS forwarding Krieger's initial application for insurance and his request to add Zweig as an additional insured. In the Court's view, this was sufficient to show that AON planned to issue a certificate of insurance to Zweig before the particular bungee jumps took place.
American Casualty countered that it generally requires an additional fee, reviews proposed certificates of insurance and issues an endorsement to the policy before it agrees to add an additional insured. American Casualty also pointed out that the standard form certificate of insurance in question expressly stated that it was issued for informational purposes only and that it did not "amend, extend or alter the coverage afforded by the policies." The Court nonetheless found these facts irrelevant to the issue of whether SEIS had ostensible authority to issue certificates of insurance . which serve as notification to insureds that they are covered under a policy. The Court noted that evidence indicated that AON and American Casualty were aware that SEIS: (1) used standard form certificates to notify others that additional insured coverage existed; and (2) held itself out as authorized to issue such certificates. The Court found that silence in the face of such knowledge could create ostensible agency. The Court also observed that it was logical that one who has obtained insurance through a broker would ask the same broker to have an additional insured added to the policy "and that once that broker issues a certificate of insurance identifying the additional insured, the broker in fact had the carrier.s authority to bind coverage for that added risk."