Barry Zalma

SURPLUS LINE BROKER NOT AN INSURER Expert Analysis & Commentary by Barry Zalma, Esq., CFE

No Action Available Against Surplus Line Broker for Breach of Contract or Bad Faith

After her house burned to the ground and her insurer rescinded the policy Suzan E. Taylor sued the insurer and the surplus line broker who obtained insurance for her from certain underwriters at Lloyd’s, London. The broker, Burns & Wilcox moved to dismiss Taylor’s action in Hiscox Dedicated Corporate Member Limited v. Suzan E. Taylor v. The Society Of Lloyd’s, The Corporation At Lloyd’s, and Burns & Wilcox, Ltd., NO. 6:18-CV-06100, United States District Court Western District Of Arkansas Hot Springs Division (April 20, 2020)

Introduction

The Lloyd’s Policy (the Policy) provided fire insurance coverage for the high value home owned by Suzan E. Taylor, in Garland County, Arkansas. Taylor purchased fire insurance coverage from Certain Underwriters at Lloyd’s of London (the Insurer). Under the terms of the Policy, the dwelling was insured for $2.6 million and the personal property was insured for $1.3 million. Hiscox Dedicated Corporate Member Limited (“Hiscox”) is the majority underwriter of Lloyd’s Syndicate #33, the only syndicate subscribed to the Policy.

After investigating the cause of the fire and taking Taylor’s examination under oath (EUO) the Policy was unilaterally rescinded for alleged misrepresentations of material facts in the application. Hiscox sued seeking declaratory relief to validate the rescission of the Policy.

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Taylor filed an amended thirdparty complaint against Burns & Wilcox, Ltd. among others. Taylor alleged four causes of action against Burns & Wilcox: breach of contract, bad faith, improper rescission, and negligence. On March 18, 2020, Burns & Wilcox filed a 12(b)(6) motion to dismiss and brief in support, contending that Taylor has failed to plead facts sufficient to establish her thirdparty claims.

Background

Taylor purchased a fire insurance

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

policy for her home from Smith & Company, an agency in Stuttgart, Arkansas. She completed her insurance application over the phone with one of Smith’s employees, Nicky Hodges. The Policy was procured through Burns & Wilcox as a surplus lines broker:

She alleged Burns & Wilcox, through their agents, with Lloyd’s visited the burned property with fire inspectors and canines with hopes of finding evidence of arson. She further alleged Burns & Wilcox, asked a contractor to wear a wire to get “Ms. Taylor to admit that she burned her house down or engaged in insurance fraud.” After submitting to an EUO Underwriters advised Taylor it had discovered multiple material misrepresentations in her insurance application and that they rescinded the Policy based on the alleged misrepresentations.

Discussion

An insurance policy is a contract to which the standard provisions of contract interpretation apply. To state a cause of action for breach of contract, the complaint needs to only assert the existence of an enforceable contract between the plaintiff and defendant, the obligation of the defendant thereunder, a violation by the defendant, and damages resulting to the plaintiff from the breach. The Policy identified Burns & Wilcox as the “Correspondent” of the Underwriters. It expressly states, “The Correspondent is not an Insurer” and shall not “be liable

A Surplus Line broker is an intermediary between the person seeking insurance, that person’s agent, and the insurer. Under Surplus Line law the broker can provide a policy to the insured but may not be considered an insurer. “

for any loss or claim whatsoever.” Under these terms, it is not possible for Taylor to state a claim for breach of contract or wrongful rescission against Burns & Wilcox, because Taylor cannot plead any fact demonstrating the existence of a contractual relationship. Accordingly, Taylor’s cause of action for breach of contract against Burns & Wilcox should be dismissed with prejudice.

Taylor cannot state a claim for wrongful rescission against Burns & Wilcox without first alleging the existence of an underlying contract with this defendant. Thus, the wrongful rescission claim against it should be dismissed with prejudice.

Bad Faith

Taylor offers inadequate factual allegations to plead that she entered an insurance contract with Burns & Wilcox. Taylor presents limited authority to suggest she can assert a bad faith claim against a non-insurer. Taylor does not cite binding authority recognizing bad faith as a cause of action that can be asserted against a party that is not her insurer. It would not be proper for the Court to expand the tort of bad faith in this manner.

Burns & Wilcox’s motion to dismiss was granted in its entirety.

ZALMA OPINION An insurance broker is a person or entity that transacts insurance with but not on behalf of an insurer. They are not insurers. A Surplus Line broker is an intermediary between the person seeking insurance, that person’s agent, and the insurer. Under Surplus Line law the broker can provide a policy to the insured but may not be considered an insurer. It was overkill on the part of the insured to sue the broker when the policy, in clear and unambiguous language, explained Burns and Wilcox was not an insurer and liable for any claims.