Broker Not Liable for Problems With Insurance Policy Application
Sealink brought action against insurance broker Frenkel & Company alleging that it was denied coverage under marine insurance policy placed by its broker, because of the broker's alleged negligent misrepresentation of past casualties associated with its vessel the M/V Sealink Express. Sealink alleged that the broker had failed to adecuately explain and advise on the terms and conditions of Sealink's insurance policies. The Court dismissed the case on the grounds that under Puerto Rico law a broker has no duty to review an insurance application for truthfulness or accuracy of the information contained therein before sending it to underwriters. In such cases, the broker was simply carrying out the instructions given by the assured. It was up to the assured who knew all the circunstances material to the risk- to disclose the facts to the underwriter; rather than waiting for the underwriter to ask. By failing to disclose material facts, the underwriter could void the policy. Sealink v. Frenkel & Co., US District Court Puerto Rico, Civil No. 04-1709 (DRD), July 31, 2006.
In this case, the insurance application was almost entirely prepared by Sealink's President an CEO. He signed the application warranting that the information was complete and accurate. He also signed acknowledging that the underwriters were relying "on the information and representations listed in determining acceptability, rates, and conditions of coverage. . . ;" that any misrepresentation or omission would be “ground for immediate cancellation of coverage and denial of claims;” and that Sealink was “under a continuing obligation” to notify underwriters of any material alteration to the “nature, extent or size” of the operation. The broker verified that the application was signed but did not review its contents.
Sealink's vessel suffered a fire and was declared total loss. The Insurance Company later denied coverage and voided the policy because Sealink had allegedly engaged in:
(1) material misrepresentations on the application related to the affiliation with an entity involved in bankruptcy proceedings; (2) failure to disclose uncommonly high number of detentions by the U.S. Coastguard due to the poor maintenance and structural damage to the vessel; (3) failure to disclose threats of physical violence made by the crew while on the Dominican Republic during a wage dispute; (4) material misrepresentation or failure to disclose the true market value of the vessel; and (5) material failure to disclose grounding and repeated instances of contact damage and casualty loss history.
Sealink sued its insurance broker blaming it for the voidance of the policy. The Court ruled that maritime law was not at issue because the contract was one to procure the insurance. It did not involve the (maritime) insurance itself. The issue was grounded on Puerto Rico law, between the broker and the assured; not the insurance company.
The query the Court must now address is, under a broker-assured relationship, whose responsibility is it to properly fill out the insurance application and ensure the accuracy and completeness of the information contained therein. From the text of the Insurance Code of Puerto Rico, the Civil Code of Puerto Rico, and interpretations of the Supreme Court of Puerto Rico, the Court can only conclude that it is the sole responsibility of the assured to complete the insurance application and ensure its accuracy.
This case illustrates what can happen when an assured fails to provide all the facts in an insurance application. Besides paying the premium, the other obligations an assured has are - to provide accurate and timely information and; "notify the insurer or broker of any claims covered by the insurance policy in a timely manner; and make truthful and complete representations on the insurance application of material matters."
