In American Way Cellular, Inc. v. Travelers Property Casualty Company of America, issued May 30, 2013, the California Court of Appeal for the Second Appellate District reaffirmed that insurers are not obligated to investigate and verify the accuracy of insurance application representations. 

American Way involved a commercial property policy issued by Travelers Property Casualty Company. American Way’s broker procured the policy and then submitted the application to Travelers’ agent on American Way’s behalf. The application, which had been completed by the broker, erroneously indicated that the subject property was equipped with smoke detectors, fire extinguishers and fire sprinklers. In fact, the property did not have fire sprinklers, and American Way’s principal purportedly never told the broker that the property was so equipped.

Travelers issued a policy to American Way which required it to maintain the fire sprinkler system as a condition of coverage. The policy further provided that Travelers had the right – but not the obligation – to inspect the property at any time.     

American Way subsequently made a claim on the policy for a fire loss. Travelers paid the claim pending its investigation of the loss; however, upon discovering that the property was not equipped with fire sprinklers, it informed American Way that the loss did not appear to be covered and that it would seek to recover the claim payment. 

American Way then sued Travelers for declaratory relief, breach of contract, bad faith and negligence. Travelers cross-complained for declaratory relief and reimbursement of the claim payment. The trial court granted summary judgment in favor of Travelers on both American Way’s complaint and Travelers’ cross-complaint. 

On appeal, American Way argued, among other things, that the trial court erred in granting summary judgment because Travelers negligently wrote an insurance policy without inspecting the premises and because there were triable issues of material fact regarding whether the broker was Travelers’ actual or ostensible agent. 

The appellate court disagreed, explaining that “an insurer does not have the duty to investigate the insured’s statements made in an insurance application and to verify the accuracy of the representations.” “Rather, it is the insured’s duty to divulge fully all he or she knows.” Moreover, while the policy permitted Travelers to inspect the property, it did not require that Travelers do so.   

Additionally, in order to prevail against Travelers, American Way had to show that the broker also acted as Travelers’ agent. The evidence presented to the trial court on summary judgment – including the broker’s own admission – showed that the broker acted on behalf of American Way only and was not Travelers’ agent. Accordingly, the appellate court concluded that Travelers could not be liable for the broker’s purported negligence.