By Donald S. Malecki, CPCU

As a first step in the agency "service" process, producers often complete applications for insurance for the applicant. What happens next varies. The ACORD applications, for example, set aside space for the signature of the applicant and the producer. How these are completed and accepted by the underwriter is anyone's guess.

One of the purposes for the signature line is to give both signers a last chance to review the information before it is sent to the underwriter, who is certainly justified in relying on the statements made therein. Once the applicant is accepted, additional information may be necessary, in order to determine the extent to which coverage will be provided.

Tailoring the policy is what is often required; that is, determining what coverage the applicant is seeking and then determining what underwriters are willing to provide. The two may be different. That is why the idea of a meeting of the minds between the applicant and the underwriter is utopian.

As is commonly the case, some of the information provided in applications seldom is questioned by the underwriter, which means it's unchallenged until the policy is issued and after something happens.

A game of roulette

Various sections of commercial insurance applications are mine fields that cause both applicants and their producers more problems than they would have ever thought possible. In this column we'll examine the section that has to do with identifying the form of business organization to be insured.

Most applications that seek to confirm the nature of a business simplify matters by providing the appropriate boxes for the applicant or producer to check: Individual, Partnership, Corporation, Joint Venture, Subchapter "S" or Corporation, Not For Profit, or Other. Seems easy enough.

The problem is that it is not always easy to check the right box, because applicants do not understand the composition of business organizations. What, for example, does the term "Individual" mean? Does it mean someone who is not a partner of a partnership, member of a joint venture, executive officer or director of a corporation? Or, does it mean someone who is the sole proprietor of a business?

The Who Is An Insured provision of the standard ISO Commercial General Liability policy, for example, defines an individual as the person listed in the policy declarations and his or her spouse, but only in regard to the conduct of a business of which that person is the sole owner. Suppose the individual is not the sole owner of a business. Can that person obtain liability coverage unrelated to any business organization? The answer is yes, it can be done, but it takes more than simply checking the application or policy section identifying the appropriate business organization.

It may come as a surprise, but most problems having to do with the declaration of appropriate business organization on an application concern individuals. One scenario is where an individual operates a business under a trade name that uses the word "Company, such as "Dan D. Dough d/b/a DDD Company." For some reason, these persons often are under the impression that their businesses are corporations--a mistake that can be costly. If there is any caveat to remember it is that reference to "Company" unto itself is not sufficient to encompass a corporation.

The insured in the case of Young v. Ray America, Inc. 673 S.W.2d 74 (Mo.Ct.App.1984) was lucky, because the court found the following named insured designation ambiguous: "Dennis and Marjorie Klatt DBA Klatt Real Estate, Inc." The court stated that the policy could be construed as providing coverage to the Klatts individually, to Dennis Klatt Real Estate, Inc., or to both the Klatts individually and Dennis Klatt Real Estate, Inc.

Another common trouble area is where the applicant is unsure of the business organization and checks off two boxes, such as Individual and Corporation. This situation may arise when a closed corporation exists; that is, where the majority ownership is in the hands of one shareholder.

A case in point is D.C. Concrete Management, Inc. et al., v. Mid-Century Insurance Company, 39 P.3d 1205 (Colo. App. 2001) where the dispute arose following theft of certain equipment valued in excess of $264,000. The producer testified that he sent the insurer two different versions of the application for a premium quote: One showing the applicant as "DC Concrete Management, Inc." and the other identifying the applicant as "DC Concrete Management, Inc., Rafael Sanchez dba." The producer said he added "Rafael Sanchez dba," in his own handwriting, at the request of the applicant. The insurance binder, on the other hand, was issued in the name of "Rafael Sanchez DBA: D.C. Concrete Management, Inc."

When the policy was issued, it identified the named insured as "Rafael Sanchez DC Concrete Management," with a printed legend that stated: "The named insured is an individual unless otherwise stated." The policy form included boxes for indicating that the named insured was a business entity, such as a corporation, partnership or joint venture. None of the boxes was checked.

The proof of loss form reflected that the named insured was "Rafael-D.C. Concrete Management," and signed by Rafael Sanchez. With the insurer making no commitment either way to pay or deny coverage, the named insured filed suit for payment. However, claims of Rafael Sanchez were dismissed, because he testified he did not suffer any personal loss, thus leaving the corporation as the sole claimant.

The trial court ruled against the named insured, holding that the designation of named insured as an individual and corporation was not ambiguous, even though the insurer's claim supervisor testified that from the designation of insured on the policy, he was unable to tell whether there were two insureds or only one.

However, on appeal the court disagreed with the lower court's decision--holding that the designation was unclear. "From the language 'Rafael Sanchez DC Concrete Management,' one cannot tell whether there is one named insured or two. Nor can it be ascertained whether DC Concrete Management is intended to be a d/b/a designation for an individual or refers to a separate business entity." Coverage therefore applied to the corporation for its loss.

Auto coverage issue

Once the business organization is incorrectly declared on the application for one coverage, the error may continue to apply as additional applications for other coverages are completed. A complex case involving an auto policy is Simmons v. Insurance Company of North America, 17 P. 3d 56 (Sup. Ct. Alaska 2001).

This case involved a business owned by two people who operated a bed and breakfast and school bus operation known as Happy Puppy Enterprises. When the insurance was written, the named insured was identified as Carol Mills d/b/a Happy Puppy Enterprises. It did not also show the other person, James Walldow, as an owner.

The declarations page of the policy contained squares listing "corporation," "partnership," "individual," and "other." The square opposite "individual" was checked.

As fate would have it, Mr. Walldow's teen-age daughter was involved in an accident as a passenger in a friend's auto and sought underinsured motorist (UIM) benefits under the business auto policy (BAP) issued to Happy Puppy Enterprises.

The UIM endorsement stated that coverage extended to the insured and if the insured is an "individual," to any "family member."

The insurer denied coverage, maintaining that Mr. Walldow was not a named insured. The claimant (daughter of Walldow) argued that both Walldow and Mills were partners, that the business had operated as a "de facto partnership" even though the business license was in the name of Ms. Mills, and that the policy should be reformed as such. As noted by the court, if the policy were to be reformed so that the named insured were Mills and Walldow d/b/a Happy Puppy Enterprises, both would appropriately be a partnership in which case the "partnership" square should have been checked, rather than the "individual" square.)

The insurer responded saying that the policy could not be reformed because Happy Puppy Enterprises is a sole proprietorship and no partnership exists between Walldow and Mills. The insurer also argued that there was no mutual mistake in listing only Mills as the policy's named insured.

One of the questions before the court was: Assuming the policy had named Walldow d/b/a Happy Puppy Enterprises as an insured, could Walldow have reasonably expected the policy to cover him as an "individual," thereby affording coverage to his family members?

The court concluded affirmatively. In doing so, it stated that, "[given] the broad consensus that a private noncorporate business is not separate from the individuals who comprise it, and that a trade name is merely 'the alter ego' of the individual, we conclude that Walldow's expectation was reasonable."

The court went on to say that case law, other legal authority, and its analysis of reasonable expectations all supported the conclusion that, where individual persons are listed as insureds under their trade names or partnerships, coverage extends to those individuals as well as to their businesses.

It therefore was in error, the court said, to conclude that Walldow would not have been covered as an individual even if the policy had listed him along with Mills under their trade name, Happy Puppy Enterprises, and it was in error for the lower court to grant judgment to the insurer on these grounds.

Conclusion

Considering how problematic it can be when the business organization is not properly designated, applicants for insurance should probably be advised to consult with their legal counsel before checking the appropriate square or box, since there is no fail-safe system.

Do not count on underwriters to question the business organization. They do not usually have any reason to do so anyway. The applicant is assumed to be the best judge of the business's composition. So, if legal advice is impractical, producers must be extremely careful about completing this part of the application. Documentation about an applicant's direction in this regard would be helpful, but it would even be better if the applicant completed and signed the application.

Rest assured that those producers who have found themselves in court on these issues will be somewhat more hesitant in completing the business organization section for applicants in the future. In fact, among producers who have been queried about attending trials as defendants, in general, all say that the process is boring, time-consuming, and for those who must make a living based on commissions, very non-productive. *

The author

Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is an active member of the CPCU Society, on the Examination Committee of the American Institute for CPCU, and an active member of the Society of Risk Management Consultants.