Consequences at the Intersection of Insurance and Corporate Law

By | March 23, 2015

Nothing is more exciting than reading the latest updates on insurance law, unless, of course, you can get updates on corporate law at the same time.

Fortunately, there are two recent Louisiana cases where the outcome of insurance law issues intersected with and depended upon principles of corporate law.

Now, before your eyes glaze over, these cases do not involve intricate details of corporate law, but rather basic principles of corporate law that people deal with every day without realizing it in normal and routine business transactions. Most people generally understand that when they deal with big companies, they are dealing with a corporation or some corporate entity rather than an individual. Similarly, when individuals start a business, they are frequently advised to form a corporation or other legal entity, such as a limited liability company or a partnership, for their business.

One does not need to watch television or listen to the radio very long to see or hear an ad about forming a corporation on your own. However, most non-lawyers do not completely grasp that the law considers these corporate entities as having a legal existence separate and apart from the individuals who create and own them. In the eyes of the law, a corporate entity created to own and operate a business is, in fact, the owner of that business with all legal rights and obligations associated with such ownership; the individuals who formed and own the corporate entity are simply the owners of the corporate entity and not, legally, the owners of the business.

Based on principles of corporate law, the court dismissed the claims against the insurance agent.

This legal distinction can be significant in an insurance context as illustrated by two recent Louisiana cases: one dealing with the liability of an insurance agent and the other involving rejection of uninsured motorist (UM) coverage.

Insurance Agent Liability

Even 10 years after the event, there are still cases arising out of Hurricane Katrina floating around. One such case is Collins v. State Farm, in which an insurance agent was sued for failing to advise the insured that his homeowners insurance policy had been non-renewed by the insurer several months before Hurricane Katrina.

Significantly, and unrelated to corporate law, the court ruled that an insurance agent has no duty to inform an insured of an insurer’s decision to not renew an insurance policy based on a Louisiana statute that requires that the insurer send a notice of non-renewal to the insured in order to be effective. It states that the insurance agent is not required to give separate or additional notice to the insured of the non-renewal.

However, in Collins, the insured also alleged that he had been specifically told by the office manager who worked for his insurance agent that he had homeowners insurance coverage when he did not. The issue thus facing the court was whether the insurance agent could be held personally liable for the alleged misrepresentations of his office manager.

The court began by pointing out that the agent operated his insurance business as a corporation. Consistent with the basic corporate principles cited above, the court noted that a corporation “is itself considered a juridical entity, possessing its own legal personality, separate and distinct from that of its shareholders.”

Although the insurance agent owned the corporation, his insurance business was legally owned by his corporation and the office manager was employed by the corporation, not by the insurance agent individually. Accordingly, the court concluded that even if the office manager had made the misrepresentations alleged by the insured, any potential liability for that misrepresentation would flow to the corporation, but not to the individual insurance agent himself. Therefore, based on principles of corporate law, the court dismissed the claims against the insurance agent.

Rejection of UM Coverage

The second case involved a more complicated issue of the effect of corporate law on insurance coverage.

In Melder v. State Farm Mutual Automobile Insurance Co., an employee was involved in an accident with an uninsured motorist while she was working in the course of her employment and driving a vehicle provided by her employer, Grimes Industrial Supply LLC.

The vehicle she was driving, however, was owned by a related company, Grimes True Value Hardware LLC. The insurance policy covering the vehicle was issued to “Grimes, Floyd & Grimes, Frank d/b/a Grimes True Value Hardware Store.”

Louisiana has a strong public policy favoring uninsured motorist coverage and such coverage is read into every automobile policy unless validly rejected in a written waiver that complies with Louisiana law.

The waiver of UM coverage under the policy was signed by Floyd Grimes on a signature line designated for the “named insured or legal representative.” The issue was whether this waiver was valid for the vehicle in question.

The first argument made by the plaintiff who was seeking UM coverage was that the named insured under the policy was Grimes True Value Hardware LLC and it was required to execute the waiver. In fact, the declaration page provided that the named insureds were Floyd & Frank Grimes “d/b/a Grimes True Value Hardware Store.”

As the court correctly pointed out, under basic corporate law principles, the designation “d/b/a” or “doing business as” is “merely descriptive of the person or corporation who does business under some other name. Doing business under another name does not create an entity distinct from the person operating the business.”

Accordingly, the court determined that Floyd Grimes was a named insured and could, as such, execute a waiver of UM coverage under the policy in question.

However, the truck was owned by Grimes True Value Hardware LLC. Thus, the next issue addressed by the court was whether Floyd Grimes had the authority to waive UM coverage for a vehicle owned by Grimes True Hardware LLC, which was a legal entity separate and distinct from Floyd Grimes himself and which was not a named insured.

To resolve the issue, the court first looked to whether Floyd Grimes had an insurable interest in the vehicle owned by Grimes True Value LLC.

In deciding this question, the court noted that an insurable interest is “any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage.”

Although Floyd Grimes did not own the vehicle in question, he was an owner of Grimes True Value Hardware LLC, which did own the vehicle. In addition, Floyd Grimes used the vehicle in the daily operation of the business, which he owned. Therefore, the court found that Floyd Grimes had an insurable interest due to his “right to possess and use the truck as part of his business” and was subject to “pecuniary loss due to his inability to operate his business without the truck.”

The court also noted that Floyd Grimes had the capacity to sign the UM wavier on behalf of Grimes True Value Hardware LLC because he was both a member (owner) and the manager of Grimes True Value Hardware LLC.

A related issue, though, was whether Floyd Grimes had the authority to waive UM coverage on behalf of Grimes True Value Hardware LLC.

To determine the scope of his authority to act on behalf of Grimes True Value Hardware LLC, the court looked to its Articles of Organization and Operating Agreement. The Operating Agreement provided that the manager did not have the power to sign contracts on behalf of the LLC unless authorized by the members, such power otherwise remaining with the members. Nonetheless, the court did not find this provision to be an impediment to Floyd Grimes’ waiver of UM coverage on behalf of Grimes True Value Hardware LLC because (1) Grimes was a member of the LLC and had the authority, as a member, to waive UM coverage and (2) the evidence was that Floyd Grimes was in any event authorized by the members to waive UM coverage as manager.

For all of these reasons, the court determined that despite the lack of precision in identifying the owner of the vehicle as the named insured, the waiver of UM coverage for the vehicle involved in the accident was valid.

Conclusion

The important takeaway from these cases is to be aware of distinctions drawn by the law. In daily life, people deal with corporate entities through other people and, particularly in the case of small businesses, are not always cognizant of the fact that the law views them as dealing with a corporate entity and not the individual in front of them. Although it might seem unimportant on a daily basis and in routine matters, this legal distinction is significant and can have important consequences with regard to potential insurance liability and coverage.

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Insurance Journal West March 23, 2015
March 23, 2015
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