California Indemnity Insurance Premium Finance Co. v. Fireman's Fund Insurance

This appeal raises a difficult legal issue from the arcane world of insurance premium financing. When an insurance agent arranges a fraudulent insurance premium financing transaction for an insured which purports to be—but is not—authorized or ratified by the insured, is the risk of liability for the insured’s subsequent loss of premium borne by the insurer issuing the original policy to the insured? Or is this risk borne by the lender relying on that agent’s purported but fraudulent authorization in financing the policy premium?

We conclude the trial court properly found the lender must bear the loss in this situation, because the transaction was not, in fact, authorized by the insured; and the documentation for the transaction was signed by an agent who was not, in fact, authorized to sign “on behalf of’ the insured he purportedly acted for, as required under the terms of Insurance Code section 673.

I. Facts and Procedural History

The relevant facts may be briefly stated, and in large part were stipulated to by the parties. In 1992, an insurance agent (R. James Fries) used unauthorized premium financing transactions in an attempt to convert funds to his personal use,…