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Chicago Title Insurance Co. v. AMZ Insurance Services

September 9, 2010


Appeal from a judgment and postjudgment orders of the Superior Court of Orange County, Kirk H. Nakamura, Judge. Affirmed. (Super. Ct. No. 06CC08942).

The opinion of the court was delivered by: Fybel, J.




A binder is a contract of insurance that provides coverage pending the issuance of the insurance policy. (Adams v. Explorer Ins. Co. (2003) 107 Cal.App.4th 438, 451 (Adams).) The central issue in this case is whether a document entitled "Evidence of Property Insurance" (EOI) issued by AMZ Insurance Services, Inc. (AMZ), was an enforceable binder of homeowner's insurance extending coverage from appellant Pacific Specialty Insurance Company (PSIC) for a fire loss incurred by Cheryl Mustain.

After obtaining an assignment of rights, respondent Chicago Title Insurance Company (Chicago Title) brought this lawsuit asserting the EOI was an enforceable binder and alleging PSIC and its owner, The McGraw Company doing business as McGraw Insurance Services (McGraw),*fn1 breached the terms of the EOI and engaged in bad faith by denying coverage for Cheryl Mustain's loss. The trial court determined the EOI was an insurance binder as a matter of law. The court so instructed the jury, subject to the jury's determinations whether AMZ had actual or ostensible authority to issue binders on behalf of PSIC and whether the EOI was lawfully cancelled before Cheryl Mustain's loss.

The jury found the EOI was not lawfully cancelled, AMZ had actual or ostensible authority to issue the EOI as an insurance binder, and PSIC acted in bad faith by failing to properly investigate the loss and pay proceeds under the policy. The court awarded Chicago Title a stipulated amount of recovery under the EOI and its attorney fees.

We affirm. The trial court did not err by instructing the jury the EOI was a binder of insurance and by denying PSIC and McGraw's motion for a judgment notwithstanding the verdict (JNOV), which asserted the EOI was not a binder as a matter of law. The EOI included all of the required elements for a binder under Insurance Code section 382.5, subdivision (a) and was issued by AMZ in accordance with procedures established by PSIC for binding coverage in escrow transactions. We also conclude substantial evidence supported the jury's findings of agency and bad faith, and the trial court did not err by denying PSIC and McGraw's motion based on the doctrine of superior equities or by denying PSIC and McGraw's motion for a judgment of indemnity against AMZ.


I. The Mustains Refinance Their Home Loan

In August or September 2005, Thomas Mustain and Cheryl Mustain (the Mustains) contacted a mortgage broker, Security Mortgage Lenders (Security), to refinance their home. Security obtained a loan for them from New Century Mortgage (New Century) and contacted Chicago Title to open an escrow for the transaction. Kara Mrozek was the escrow officer at Chicago Title, who handled the Mustains' refinance escrow.

New Century conditioned the loan on the Mustains' obtaining a new policy of homeowner's insurance. New Century would not fund the loan, and escrow could not close, without evidence the new insurance policy was in place and "[a]n acceptable policy, with endorsements," had been received in escrow. The initial premium would be paid through escrow, and it was the escrow officer's responsibility to make sure the premium was paid and evidence of insurance was presented to New Century.

Thu Vu, a loan processor at Security, contacted Jorge Torres, an insurance agent at AMZ, and requested homeowner's insurance for the Mustains' home. AMZ is owned by Adel Zibara and had been writing homeowner's insurance with PSIC since 1997. After speaking with Torres, Vu sent him by facsimile a written request for insurance stating, "Need Evidence Insurance" and "Rush Please," along with a copy of the Mustains' loan application.

Torres selected PSIC, which represented 10 to 20 percent of AMZ's business, because its binding procedures were easier than those of other insurance companies. To bind coverage, Torres prepared the EOI, which is a computer-generated form, naming PSIC as the insurer and the Mustains as the insureds under a policy of homeowner's insurance. In escrow transactions for home mortgage refinance, using an EOI is the industry standard for providing proof of insurance.

II. PSIC Authorizes AMZ to Bind Coverage with EOI's

AMZ was not an appointed agent of PSIC. Their relationship was governed by a producer's agreement between AMZ and McGraw, stating: "Only upon specific written instruction from McGraw, by which McGraw binds coverage on a risk, may the Producer furnish a written binder of coverage to an insured" and "Producer has no authority to issue certificates of insurance, identification cards, endorsements, or other evidences of insurance with insurers represented by McGraw without the express written consent of McGraw."

The 1997 personal lines producer's agreement between McGraw and AMZ stated AMZ "has no authority to act on behalf of, or to bind, [PSIC] . . . other than the limited authority specifically provided on each application for insurance" and "[AMZ] shall always be deemed a representative of the insured and not an agent for the company unless an agency appointment has been made with the California Department of Insurance."

The application for the type of homeowner's insurance policy at issue in this case included procedures requiring four conditions be met for AMZ to bind coverage: "1. All underwriting rules are followed. [¶] 2. Application is fully completed and signed by applicant and producer. [¶] 3. Disclosure form is fully completed and signed by applicant. [¶] 4. Items 2-3 above are mailed to [the insurer]. If paid in full, 15 days. If installment payment plan requested, 5 days." The final condition required PSIC to receive payment of the premium before issuing the policy. The application containing the binding procedures is an internal document available online to AMZ representatives.

Despite the producer's agreement and the conditions set forth in the application, AMZ had authorization from PSIC to bind coverage of homeowner's insurance for escrow transactions by issuing EOI's before receipt of the insurance premium payment and the signed application. Zibara testified that Jeff Jacob, PSIC's regional sales manager, had authorized him to issue EOI's as binders for escrow transactions. Before the EOI was issued in this case, AMZ had issued EOI's as binders on behalf of PSIC before receiving the premium payment on about 30 to 40 occasions. PSIC never objected to that practice.

Jacob had instructed AMZ representatives to use the producer code plus two random numbers as a temporary policy number on an EOI to use it as a binder. PSIC did not require AMZ to send it a copy of an EOI.

For escrow transactions, AMZ would obtain information from the escrow holder, issue and fax the EOI to the escrow, and send the application to the insured. Once AMZ received the signed application from the insured and the premium payment from escrow, AMZ would forward them to PSIC. If a signed application and premium payment were sent to PSIC within 15 days of the date of the EOI, then PSIC would issue a permanent policy effective retroactively to the date of issuance of the EOI.

If, after the EOI was issued, the premium was not paid or a signed application was not received by PSIC within 15 days, AMZ was authorized by PSIC to attempt to cancel the EOI by following certain procedures. Jacob instructed AMZ representatives to cancel an EOI by stamping the word "void" on the EOI issued in PSIC's name when the premium payment was not received within 15 days of the date the EOI was issued.

III. AMZ Issues an EOI in Accordance with PSIC's Authorization and Instructions

The Mustains' unsigned loan application provided all the information AMZ needed to bind coverage with PSIC. Torres prepared an EOI, using the producer code for AMZ plus two randomly selected numbers for the policy number. By using the EOI to bind coverage before receiving the premium payment and the signed application, and in assigning a policy number using AMZ's producer code, Torres was following instructions given by Jacob of PSIC for binding coverage in escrow transactions.

The EOI stated, "[t]his is evidence that insurance as identified below has been issued, is in force, and conveys all the rights and privileges afforded under the policy." The EOI identified the insurer as PSIC, the insureds as the Mustains, the property insured by address, the nature and limits of coverage, the amount of the deductible, the name of the AMZ representative, the amount of the annual premium, and the effective date of coverage.

Torres sent the EOI with a premium invoice to Vu within a few hours of her request for insurance. Based on the EOI, Vu believed homeowner's insurance on the Mustains' home was in place. Although Torres testified he prepared an insurance application, dated it October 5, 2005, and mailed it to the Mustains with a note to sign and return the application as soon as possible, Cheryl Mustain testified the Mustains never received the insurance application or a premium invoice.

Vu sent a copy of the EOI to Mrozek at Chicago Title. Mrozek had seen EOI's issued by AMZ naming PSIC as the insurer five to 10 times and believed AMZ had authority to prepare and issue the EOI as an insurance binder. The EOI did not have a due date for payment of the premium, and nobody from AMZ informed Mrozek the premium had to be paid within 15 days of the October 5 issuance date of the EOI.

New Century funded the loan, and escrow closed on October 12, 2005. When escrow closed, Chicago Title had not sent a check for the premium payment to AMZ. Mrozek testified that nobody contacted her about the premium payment until after the fire loss on November 11, 2005.*fn2

IV. AMZ Attempts to Cancel the EOI

When Torres noticed the premium had not been paid, he contacted Vu at Security and told her no insurance was in force because payment had not been received. Vu contacted an assistant of Mrozek at Chicago Title and asked why the premium had not been paid. The assistant told Vu the premium check was still in the file. Vu requested the premium check be sent to AMZ as soon as possible.

When, after 15 days from the issuance date of the EOI, payment had not been made and a completed application had not been received, AMZ stamped the word "void" on a copy of the EOI, as Jacob had instructed. On October 28, 2005, Zibara sent the EOI stamped "void" by facsimile to Security and to Chicago Title. A transmittal sheet of the facsimile sent to Security included a note stating, "[t]his fax letter is to inform that this policy # B20418-05 for THOMAS & CHERYL MUSTAIN is null and void from inception. As you know, we have not received the premium to remit to the insurance co." Zibara testified a copy of the EOI stamped "void" was mailed to New Century and to the Mustains. Torres never received a response from Chicago Title.

Mrozek testified she never received anything about voiding the policy and did not see the EOI stamped "void" or the facsimile sent to Security until trial. The Mustains never received a notice of cancellation of the policy and never received a copy of the EOI with "void" stamped on it. Vu also testified she never received an EOI stamped "void."

V. After the Mustains' House Burns Down, Cheryl Mustain Is Told She Has No Insurance

On November 11, 2005, the Mustains' house burned down. Thomas Mustain died in the blaze (a fact the trial court ruled inadmissible).

After the fire, Mrozek learned the premium check had not been sent to AMZ. The file for the Mustains' escrow revealed a premium check for the PSIC policy had never been cut. Mrozek testified that when she spoke with Torres after the fire, he mentioned the nonpayment of the premium but did not mention the EOI with the "void" stamp on it.

Cheryl Mustain timely contacted Vu at Security to report the loss to PSIC and make a claim. Vu gave her the telephone number for Torres and suggested she contact him. Cheryl Mustain contacted Torres, who told her he did not believe any insurance policy was in force but would investigate and call her back. Torres never called Cheryl Mustain and never responded to her phone calls.

Shortly after the fire, Zibara gave notice of the loss and claim to Jacob at PSIC. Zibara testified he provided Jacob with copies of all of the documents from the Mustains' file, including the original EOI and the EOI stamped "void." Jacob told Zibara, "don't be concerned" because "[w]e've done everything by the book," which Zibara understood to mean AMZ had followed PSIC's procedures. Jacob said he would take over handling the matter.

Jacob discussed the matter with Brian Weaver, PSIC's vice-president of sales and marketing. Jacob did not give Weaver a copy of the EOI or other relevant documents but threw away the copies he received from Zibara. When Jacob explained that PSIC had not received a signed application or a premium payment, Weaver commented, "it probably would end up in court." Jacob determined the EOI issued to the Mustains' escrow was legally "inconsequential" and not worth forwarding to PSIC's claims department. At some point, Jacob told Zibara that PSIC was denying coverage on Cheryl Mustain's claim.

Cheryl Mustain retained an attorney who sought payment from Chicago Title. In settlement, Chicago Title paid Cheryl Mustain and New Century $270,200--the full amount of coverage stated in the EOI--and in exchange received an assignment of rights.

On February 23, 2006, Zibara faxed to counsel for Chicago Title documents from the Mustains' file at AMZ. The cover sheet included a note from Zibara, stating: "We followed the guidelines of [PSIC] in issuing the evidence of insurance which was faxed to SECURITY MORTAGE and CHICAGO TITLE." About a month later, in another facsimile cover sheet to Chicago Title's counsel, Zibara stated, "we followed the guidelines of Mcgraw/Pacific Specialty every step of the way." Zibara advised counsel to contact McGraw or PSIC "as they[']re the insurance carrier and binder was issued on their behalf by our office according to their procedures and guidelines."


Based on the rights assigned from Cheryl Mustain, Chicago Title sued PSIC for breach of insurance contract, bad faith, and declaratory relief, and sued PSIC, AMZ, Security, and McGraw for negligence, equitable subrogation, equitable indemnity, and tort of another. AMZ filed a cross-complaint against PSIC and McGraw for indemnity, and PSIC and McGraw filed a cross-complaint against AMZ for declaratory relief, negligence, indemnity, and contribution.

Chicago Title moved for summary adjudication of whether PSIC and McGraw had a duty to indemnify Chicago Title for sums paid to Cheryl Mustain. PSIC and McGraw moved for summary judgment or summary adjudication against Chicago Title on the ground no insurance contract existed between PSIC and the Mustains as a matter of law. PSIC and McGraw also sought summary judgment against AMZ on its cross-complaint. (AMZ did not oppose the motion, and the trial court granted PSIC and McGraw's summary judgment motion.)

The trial court denied Chicago Title's motion and PSIC and McGraw's motion against Chicago Title. In the minute order denying the motions, the court stated: "The Court rejects [PSIC and McGraw]'s contention that the [EOI] is not a binder. The Court finds that it is a binder under California Insurance Code Section 382.5 which temporarily obligates the insurer to provide insurance coverage pending issuance of the insurance policy. The Court specifically rejects the contention that the binder has no effect because of the failure to submit premiums or an application. Nothing on the [EOI] indicates that this is a condition precedent for the binder to be effective."

Just before trial, PSIC and McGraw filed a motion in limine to exclude reference to the EOI as a binder. At the hearing on the motion in limine, counsel for PSIC and McGraw argued the EOI was not a binder because it was not signed by an agent of PSIC and there was no mutual consent. PSIC and McGraw's counsel argued: "[A]s you mentioned in your ruling for motions for summary judgment, agency has not yet been established. So this is a potential binder; it is not binding on [PSIC] unless they have the opportunity to agree or disagree."

The trial court denied the motion in limine. In response to the court's invitation to "make a record," PSIC and McGraw's counsel stated: "Whether [the EOI] is a binder depends upon the facts in the case. It depends on a number of things, including whether or not AMZ was our actual or ostensible agent. That is the issue in the case. It doesn't become a binder on [PSIC] until there is a determination that AMZ was an agent."

At the outset of trial, before opening statements, the trial court preinstructed the jury on the applicable law and instructed the jury the EOI was a binder: "A document entitled 'Evidence of Property Insurance' naming [PSIC] was prepared and issued by AMZ Insurance, for the Mustains on 10-5-05. The court has already made a determination that: [¶] 1. The Evidence of Property Insurance was a legal binder or temporary policy; and [¶] 2. This binder or policy was not conditional upon payment of the policy premium or upon PSIC'S receipt of the signed application from the Mustains. [¶] You must determine whether or not: [¶] 1. The binder or temporary policy was legally cancelled before the Mustain's 11-11-05 loss; and [¶] 2. AMZ had actual or ostensible authority to issue the binder or temporary policy on behalf of PSIC."

PSIC and McGraw's counsel had objected to that instruction as contrary to the law and the facts of the case. PSIC and McGraw's counsel argued the EOI did not meet the requirements of a binder of insurance under Insurance Code section 382.5, AMZ was not PSIC's agent, AMZ had no notice of appointment as agent for PSIC on file with the Department of Insurance, PSIC had no agents, and PSIC required a signed application and payment of the premium before it would issue an insurance policy.

At the close of evidence, PSIC and McGraw moved for a non-suit on two grounds: (1) PSIC had "superior equit[ies]" barring recovery by Chicago Title and (2) no contract of insurance existed between PSIC ...

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