Court of Appeals Rules Insurance Brokers ARE Agents of Insurance Companies

The rules of evidence allow out-of-court statements made by either party or agents of either party to be admissible in court. In a recent Minnesota Court of Appeals case, Western National Mutual Ins. Co. v. Prospect Foundry, 2018 WL 1787687 (Minn. Ct. App. April 16, 2018), an insurance broker was found to be acting as an agent of the insurance company and his statements to customers were therefore admissible  to prove breach of contract.

Western National Mutual Insurance Company (“Western National”) sold Prospect Foundry (“Prospect”) three workers’ compensation insurance policies between 2011 and 2014 through their insurance agent John Mares (“Mares”). Each policy included a plan where Prospect’s premiums could be returned as a dividend if a certain loss-ratio was met.  Prospect did not receive a 2013-2014 dividend and claimed it was owed a refund for the 2012-2013 policy period as well. Western National sued Prospect. Prospect counterclaimed, alleging breach of contract and breach of the implied warranty of good faith and fair dealing. A jury found that (1) Prospect did not breach; (2) Western National breached, but Prospect was not entitled to damages; and (3) Western National breached the implied warranty of good faith and fair dealing and awarded $53,300.00 in damages. Although the jury found that Prospect did not breach its contracts, when confronted with the special verdict’s question asking how much money Western National should be awarded for damages for Prospect’s breach, the jury answered $101,407.64. Western National appealed the decision. The Court of Appeals affirmed.

Due to the dispute, Prospect eventually stopped paying  premiums. Under Minnesota law, a party who breaches first cannot use the other party’s later breach to avoid liability. Space Ctr., Inc. v. 451 Corp., 298 N.W.2d 443, 451 (Minn. 1980). The court pointed to four pieces of evidence in its decision: (1) Mares told Prospect the two open claims on the policy would be resolved and closed resulting in Prospect receiving a dividend; (2) Mares told Prospect those claims were not closed in time due to the adjuster in charge being on vacation; (3) expert witness testimony concluding the claims should have been closed before the policy period ended; and (4) there was confusion on how Western National arrived at its numbers for calculations.

The court of appeals concluded that the jury reconciled the conflicting testimony at trial in favor of Prospect’s witnesses, and given the evidence of Western National’s fluctuating numbers and questionable statements from its representatives, it was reasonable for the jury to conclude that Western National unjustifiably hindered the contracts and acted in bad faith.

Western National claimed the broker’s  statements to Prospect should have been excluded as hearsay. The court of appeals disagreed, and ruled that Mares was acting as an agent of Western National and that his statements would qualify as opponent statements under Minn. R. Evid. 801(d)(2)(C) – (D). The court based its decision on Minn. Stat. § 60K.49, subd. 1, which states, “[a] person performing acts requiring a producer license . . . is at all times the agent of the insurer and not the insured.” Western National and Mares had an agreement giving him some authority to act and speak on their behalf. Specifically, the agreement gave brokers the authority to provide “all usual and customary services of an insurance agent on all insurance contracts placed by the Agent with the [Western National].” Minnesota has a well-developed body of case law making brokers the representative of the insured, not the insurer. The case is significant by providing  context to when brokers are deemed the agents of the insurer.