This story is reprinted with permission from FC&S Legal, an ALM digital resource for insurance coverage law professionals. Visit the website to subscribe.

An appellate court in California has ruled that there was “no legal basis” to find an insurance broker liable for failing to advise a beneficiary of a life insurance policy how to protect her interest under the policy.

The Case

In 1992, Judy Randle and her then-husband, Alan McConnell, asked Mark Hebson, the owner of the Hebson Insurance Agency, Inc., to obtain a policy insuring McConnell’s life. Hebson did so, obtaining a policy from Farmers New World Life Insurance Company with a $250,000 death benefit that named Randle as the sole beneficiary.

According to Randle, she and McConnell “developed a longstanding relationship with [Mr.] Hebson, who placed and serviced a variety of other policies” for them.

In 2004, Randle and McConnell divorced and entered into a stipulated divorce judgment. The divorce decree gave Randle “[a] beneficial interest of one-quarter (1/4) of” the Farmers policy. McConnell was required to maintain the policy for her benefit “to the extent of her one-quarter beneficial interest,” and was free to name any beneficiaries “as to his remaining 3/4ths interest.” If either party decided to discontinue paying premiums, he or she would “forfeit [her or his] ownership” as to his or her interest in the policy. If McConnell decided to discontinue paying premiums (as he did in 2008), he was required to notify Randle in writing and assign the policy to Randle if she chose to pay the premiums. If Randle chose to accept the three-quarter interest and pay the premiums, then she was “free to name any beneficiaries she chooses.”

Neither Randle nor McConnell provided the Hebson Insurance Agency with a copy of the divorce decree.

In 2006, McConnell submitted a form to Farmers, requesting a change in beneficiary. The form was signed by McConnell on May 4, 2006, and included with it were partial pages of the divorce decree. The requested change added the couple’s three sons, so that Randle and their sons each would be 25% beneficiaries of the policy.

Farmers stamped the request “Update Only” and “Not Registered.” No one ever told the Hebson Insurance Agency or Randle that McConnell had submitted the beneficiary change request to Farmers.

In 2008, Randle began paying all the premiums on the policy through a company of which she was the sole owner. According to Randle, “[a]round this time, I discussed with Mark Hebson and Alice Brooks [the Hebson Insurance Agency’s office manager and a licensed property and casualty broker/agent] the agreement I had with Alan McConnell and that the agreement was stated in the divorce decree.”

In her 2008 discussions, Randle said, she “also told Mark Hebson and Alice Brooks that I would only make the premium payments if I remained the only beneficiary on the [p]olicy.” She said that Hebson advised her “that it was possible to ensure that she would remain the policy beneficiary even if she’s not the listed owner of the policy.” According to Randle, Hebson “advised me that the only action I needed to take to ensure that I remain the 100% beneficiary was to pay the premiums and keep the [p]olicy in force.”

From 2008 until 2014, both Randle and the Hebson Insurance Agency believed that Randle was the sole beneficiary of the policy; the Hebson Insurance Agency confirmed with Farmers every time Randle inquired.

On April 11, 2014, McConnell died. A few days later, Randle informed Farmers of his death, and “was told again that she was the only beneficiary under the [p]olicy.” On April 16, 2014, she submitted a claim for 100% of the policy benefits.

On April 18, 2014, Farmers told Randle for the first time that “there was a dispute that she was the 100% policy beneficiary.” Farmers told Randle that McConnell had submitted a beneficiary change in 2006, to add the couple’s three sons as beneficiaries, “but the request was not accepted or registered, because Farmers requested the full divorce decree and [Mr. McConnell] never sent it.”

After McConnell’s death, his sons provided Farmers with a complete copy of the divorce decree.

Farmers paid the policy proceeds to Randle and her three sons as designated in the 2006 request for change of beneficiary. (The form stated that “[t]his change of beneficiary shall take effect only when recorded by the Company, but when so recorded, whether the Insured be living or not, shall relate back to and take effect as of the date of this designation.”)

In April 2015, Randle sued the Hebson Insurance Agency for professional negligence. The agency moved for summary judgment, contending that, as a matter of law, Randle could not maintain a cause of action for professional negligence against the agency. Randle opposed the motion, contending that the agency “failed to correctly advise” her on how to protect her interest in the policy; negligently misrepresented that she could ensure she remained the 100% beneficiary without becoming the listed owner of the policy; and failed to deliver her specific policy request to Farmers – that she would only continue making the policy premiums if she remained the 100% beneficiary.”

Randle argued that the agency owed a professional duty of care to her and incurred additional duties by holding itself out as an expert and misrepresenting how the policy worked in response to her specific questions about the policy.

The trial court granted the agency’s motion for summary judgment, concluding that it owed Randle no duty under the circumstances in this case. She appealed.

The Appellate Court’s Decision

The appellate court affirmed.

In its decision, the appellate court explained that Randle failed to identify any case law, statute, or other legal basis on which to premise a duty by the agency to do any of the things Randle said the agency should have done. The appellate court added that there was no evidence that the agency made any misrepresentation about the terms of the policy or assumed any special duty to Randle by holding itself out as an expert in life insurance.

Summary judgment, the appellate court ruled, was proper because “no duty existed as a matter of law.”

As the appellate court explained, insurance brokers owe a limited duty to their clients “to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.” An insurance broker does not breach its duty to clients to procure the requested insurance policy unless “(a) the [broker] misrepresents the nature, extent or scope of the coverage being offered or provided . . . , (b) there is a request or inquiry by the insured for a particular type or extent of coverage . . . , or (c) the [broker] assumes an additional duty by either express agreement or by ‘holding himself out’ as having expertise in a given field of insurance being sought by the insured.”

It is the job of a lawyer, not an insurance broker, to advise clients how to protect their interest in life insurance policies, the appellate court added. There was “no duty requiring an insurance agent to advise a beneficiary of a life insurance policy how to protect her beneficial interest,” the appellate court declared, adding that it “decline[d] to create a duty in the absence of any articulable legal basis on which to do so.”

The case is Randle v. Farmers New World Life Ins. Co., No. B276579 (Cal. Ct.App. May 18, 2018). Attorneys involved include: Shernoff Bidart Echeverria, William M. Shernoff, Travis M. Corby; Shernoff.Law and Howard S. Shernoff for Plaintiff and Appellant. Lewis Brisbois Bisgaard & Smith, Thomas G. Oesterreich and Dustin E. Woods for Defendant and Respondent Hebson Insurance Agency, Inc.


Meyerowitz

Steven A. Meyerowitz is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. He is a graduate of Harvard Law School. He was an attorney at a Wall Street law firm before he founded Meyerowitz Communications.

 

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