Appellate Law Update: February 2022

The following published decisions may be of interest to attorneys practicing insurance law:

California Court of Appeal

Life insurer could be liable failing to supervise independent agent who acted negligently and engaged in elder abuse in connection with sale of annuity. Williams v. National Western Life Insurance (2022) __ Cal.App.5th.

Victor Pantaleoni allegedly defrauded the plaintiff into purchasing an annuity from the defendant life insurance company. While the insurer agreed to cancel the annuity, it charged the plaintiff a penalty. The plaintiff sued for negligence and elder abuse, and a jury awarded damages against the insurer, including punitive damages. The insurer moved for judgment notwithstanding the verdict on the ground that Pantaleoni was an independent agent who was therefore the plaintiff’s agent, not the insurer’s, and the insurer therefore could not be held liable for failing to supervise him and prevent his bad acts. The trial court denied the motion, but the appellate court reversed, reasoning that under Insurance Code sections 31 and 33, Pantaleoni was an independent agent selling insurance for various companies and therefore was acting as the insured’s agent, not the insurer’s. The California Supreme Court granted review and ordered reconsideration in light of the fact that Insurance Code sections 31 and 32 exclude life insurance from their scope, and under Insurance Code section 1704.5, an agent submitting an application for a life insurance or an annuity policy is the insurer’s authorized agent by operation of law. 

On reconsideration, the Court of Appeal (Third Dist.) affirmed the jury’s compensatory damages verdict against the defendant life insurer. Under Insurance Code section 1704.5, the defendant, who issued the annuity that Pantelioni sold to the plaintiff, was responsible for Pantelioni’s acts, even if they were beyond the scope of his actual authority. Thus, the defendant could be responsible for failing to prevent Pantelioni’s negligence and elder abuse. The appellate court reversed the jury’s punitive damage award, however, because there was no evidence that any managing agent from the insurance company had actual knowledge of Pantelioni’s propensity to commit the type of abusive acts that gave rise to liability.

Ninth Circuit

Company whose employee made a wire transfer in response to a fraudulent email purporting to be from the company’s principal was entitled to coverage for the loss under its commercial crime insurance policy. 
Ernst and Haas Management v. Hiscox (9th Cir. 2022) 23 F.4th. 1195.

An employee of the plaintiff property management company issued two $50,000 wire transfers in response to emails that appeared to be from the company’s managing broker. In fact, the emails were fraudulent. The money could not be recovered. The property management company then filed a claim with the defendant insurer under its commercial crime insurance policy. The policy provided coverage for financial losses “resulting directly from the use of any computer to fraudulently cause a transfer of that property from” the company to a person outside the company. The district court concluded that the loss did not fall within this coverage grant, reasoning that the language required the loss to result from an unauthorized use of the company’s computers or hacking. 

The Ninth Circuit reversed. The company lost the funds “directly” in response to the employee transferring the funds in response to the fraudulent email. There was no intervening event between the fraud and that loss that would defeat coverage.“ Further, the loss was also covered under the coverage for “loss of Money and Securities resulting from a Fraudulent Instruction directing a financial institution to transfer, pay or deliver Money and Securities from Your Transfer Account.” “Fraudulent Instructions” included “an electronic … instruction initially received by You which purports to have been transmitted by an Employee but which was in fact fraudulently transmitted by someone else without Your or the Employee’s knowledge or consent.” The fraudulent email purporting to come from one employee to another and instructing the first employee to transfer the funds fell within this definition.

This e-Bulletin was prepared by Emily V. Cuatto, Certified Appellate Specialist and Partner of Horvitz & Levy LLP. Ms. Cuatto is a member of the Insurance Law Standing Committee of the Business Law Section of the California Lawyers Association.