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Insurance Law

Insurer Avoids Liability for Agent’s Fraud

Barry Zalma   By Barry Zalma, Attorney and Consultant

Contract between Agent and Insurer

The relationship between insurance agents and brokers with insurers is based upon the contract between the insurer and the agent or broker. When the agent or broker breaches the contract with an insurer by defrauding an insured the insurer, unless it directs or ratifies the fraud, has no liability to the insured. In National Western Life Insurance Company v. Sheila Newman, No. 02-10-00133-CV, 2011 Tex. App. LEXIS 6401 (Tex.App. Dist.2 08/11/2011) National Western Life Insurance Company (National Western) appealed the trial court’s judgment against it for the fraudulent acts of its agent, Lynn Strickland, Jr., upon Shelia Newman.

( subscribers can access the Lexis enhanced version of the National Western Life Insurance Company v. Sheila Newman, No. 02-10-00133-CV, 2011 Tex. App. LEXIS 6401 (Tex.App. Dist.2 08/11/2011) decision with summary, headnotes, and Shepard’s. Non subscribers can access the free unenhanced version of the National Western Life Insurance Company v. Sheila Newman, No. 02-10-00133-CV, 2011 Tex. App. LEXIS 6401 (Tex.App. Dist.2 08/11/2011) decision available from lexisONE Free Case law.)

Background Facts

In late 2005, Newman decided to invest a large amount of her savings. She was uneducated in investing so she researched companies online and chose to purchase an annuity from National Western because “[i]t was a reputable company that had been in business for many years.” Newman called National Western, who told her an agent would contact her.

Soon after, Strickland called Newman and made an appointment to speak with her at her home. Strickland told Newman that if she invested $200,000, she could live off the interest received. He also told her that if she invested that amount, she would receive a $20,000 bonus.  In November 2005, Newman phoned Strickland and agreed to the $200,000 amount. Strickland told her to get two cashier’s checks, one for $75,000 and another for $125,000. He also told Newman to make both checks out to Lone Star Financial “in order for him to be able to handle the money.” Lone Star Financial is owned by Strickland.

In January 2006, Strickland went to Newman’s house, where he gave her a two-page application for the annuity. The first page contained a section for Newman’s personal information, which she filled out. The first page also contained blanks for identifying the type of plan, the beneficiary, and a blank for the amount of money submitted with the application. Newman left the amount blank because Strickland “was in a hurry that day . . . and [she] trusted that he would take care of it.” At the bottom of the first page was the following statement:

I have read the statements above and to the best of my knowledge and belief they are true and correct. Any statement made by either the agent of this application or by any other person shall not be binding on [National Western] unless such statement is reduced to writing by [National Western] and made a part of the annuity contract. I have received and read a copy of the annuity information brochure and understand the features of the plan of insurance applied for.

Evidence at trial showed that, regardless of her signature, she did not read the application because on the application in bold print was the statement, “***ALL CHECKS MUST BE PAYABLE TO NATIONAL WESTERN LIFE INSURANCE COMPANY***.” Strickland was also supposed to give Newman a document titled “Consumer Disclosure Signatures.” That document contained the statement that said:

If you have any questions after you receive your annuity Policy, please contact your agent or call National Western’s Customer Service Department at 1-800-922-9422. We want to be sure that you read all 10 pages of this Disclosure and are aware of the benefits and features explained herein.

Newman’s initials were next to the statement that the policy had been explained to her, and Newman’s and Strickland’s signatures were under the statement that she had received a copy of the Disclosure and had reviewed it with her agent. Newman testified at trial that she did not recall ever seeing the disclosure and that her signature on it was forged.

Strickland kept the $75,000 and ordered and received from National Western a policy in the amount of $125,000 in favor of Newman. National Western sent Strickland a copy of the insurance policy for him to hand-deliver to Newman but he did not.

Between January 2006 and December 2007, Newman drew on the annuity a number of times. She also received checks from National Western, some that she received in the mail and some that she claims were hand-delivered by Strickland, although they were all addressed to her.

Finally in December 2007, Newman complained to National Western that she never received a copy of her $200,000 policy. National Western told Newman that her policy was only for $125,000. National Western contacted Strickland about Newman’s complaint. He responded that the amount of the annuity Mrs. Newman bought was for $125,000. National Western sent Newman a letter reaffirming receipt of only the $125,000 check, and provided her a copy of the check and another copy of her policy. After Newman’s complaint that she did not receive her policy, National Western terminated Strickland’s contract. Newman demanded that National Western reimburse her $200,000. National Western refused.

Newman filed suit against Strickland and National Western. After striking Strickland’s answer as sanctions for failing to appear at scheduled depositions, the trial court rendered judgment against Strickland, awarding Newman treble damages under the Deceptive Trade Practices Act.

The jury awarded actual damages of $112,736.49 ($200,000 plus a $20,000 bonus less the amount Newman withdrew on the policy). At the bifurcated punitive damages phase, the jury found clear and convincing evidence that Newman’s damages “resulted from gross negligence” and awarded Newman $150,000,000 in punitive damages. Newman elected to recover for fraud, and the trial court entered judgment on the verdict for the actual damages awarded and prejudgment interest, attorney’s fees, and the punitive damages found by the jury.


Actual authority for another to act for a party must arise from the party’s agreement that the other act on behalf and for the benefit of the party to act on behalf of National Western. If a party so authorizes another to perform an act, that other party is also authorized to do whatever else is proper, usual, and necessary to perform the act expressly authorized.

Apparent authority exists if a party:

1. knowingly permits another to hold himself out as having authority to act on behalf of another, in this case, National Western or,

2. through lack of ordinary care, bestows on another such indications of authority that lead a reasonably prudent person to rely on the apparent existence of authority to act on behalf of [National Western] to his detriment.

Only the acts of the party sought to be charged with responsibility for the conduct of another may be considered in determining whether apparent authority of another to act for the party exists. When a person has notice of the limitations of an actor’s authority, then that such person cannot detrimentally rely on the apparent existence of the authority of the actor to act for the party.

The fact that Strickland had authority to act for National Western was never in doubt. National Western and Strickland had a contract that specifically authorized Strickland to procure applications and collect monies on behalf of National Western. National Western claims throughout its argument on appeal that there is no evidence to support any finding that it authorized Strickland’s misdeeds, controlled his fraudulent actions, or ratified his conduct after the fact.

Absent a showing that Strickland had the authority to bind National Western through his actions, or a showing that National Western ratified Strickland’s conduct after the fact, National Western cannot be liable for Strickland’s fraud.

An agent’s authority to act on behalf of a principal depends on some communication by the principal either to the agent (actual or express authority) or to the third party (apparent or implied authority). Actual authority is authority that the principal intentionally confers upon the agent, or intentionally allows the agent to believe he has, or by want of ordinary care allows the agent to believe himself to possess. Apparent authority is based on estoppel, arising either from a principal knowingly permitting an agent to hold himself out as having authority or by a principal’s actions which lack such ordinary care as to clothe the agent with the indicia of authority, thus leading a reasonably prudent person to believe that the agent has the authority he purports to exercise.


Newman argued that Strickland’s fraudulent acts were incidental to his authorized duties, and thus should be attributable to National Western. As the supreme court has said, “In determining a principal’s vicarious liability, the proper question is not whether the principal authorized the specific wrongful act; if that were the case, principals would seldom be liable for their agents’ misconduct.” Celtic Life Ins. Co. v. Coats, 885 S.W.2d 96, 99 (Tex. 1994). Therefore, the proper test for actual authority is whether the agent’s acts were within the course and scope of his agency. If an employee deviates from the performance of his duties for his own purposes, the employer is not responsible for what occurs during that deviation.

Had Strickland performed his duties consistent with his contract after being referred to and meeting with Newman, there would have been no fraud. An entity’s liability must arise from its own injury-causing conduct. The injury-producing event occurred when Strickland convinced Newman to write two checks to his company instead of National Western; sign an application with critical information (i.e., the amount of the policy) left blank; and not to contact National Western with her concerns.

Because National Western did not retain control over those aspects of Strickland’s job that led to Newman’s injury, liability cannot be based on the right to control. The Court of Appeals concluded that, therefore, there is no evidence to support the jury’s findings that Strickland was not an independent contractor and that National Western retained the right to control. The evidence conclusively establishes the opposite.

The Court of Appeals concluded that there was no evidence that National Western intentionally conferred, or intentionally allowed Strickland to believe, or by want of ordinary care allowed Strickland to believe that he possessed the authority to defraud National Western clients or the company itself. Nor were Strickland’s acts in furtherance of his duties as an agent of National Western.

It was undisputed that Newman received the product that National Western received payments for – a $125,000 annuity. Newman testified that she never spoke to anyone at National Western concerning an amount until after Strickland’s fraud was discovered. National Western therefore did not have the full knowledge necessary to establish apparent authority. Further, none of the acts were the cause of Newman’s damages.

The Court of Appeals concluded that Newman was injured because she followed Strickland’s instructions to write two checks to Lone Star Financial, sign an incomplete application, and not contact National Western because they would not have her information. None of these directions may be attributable to National Western because there is no evidence that National Western was aware of them or authorized them. It concluded, therefore, that there was no evidence of any conduct by National Western that would have reasonably led Newman to believe that Strickland was authorized to defraud her.


Insurers using agents who are independent contractors should be careful to require the agent to sign a well written contract that clearly establishes the relationship between the agent and the insurer and set forth the duty of each in detail. This case establishes what all insurers know, but not all work to protect themselves against, that some people in the business of insurance are dishonest. The dishonest, like Mr. Strickland, have no qualms about taking money from clients by fraud and will leave the insurer holding the bag for defending a lawsuit for actions that it did not do.

Insurance criminals must be eliminated from the insurance industry. If any facts exist that indicate fraudulent acts by an agent the insurer must move quickly to void that agent’s contract and terminated all relationship with the criminal agent.

To avoid problems like that faced by National Western it would be prudent for every insurer to audit the files of its independent contractor agents and or brokers and its appointed agents. Insurers should also work with their local insurance fraud investigators and prosecutors to see that the criminal agent is prosecuted tot the full extent of the law.

Reprinted with Permission from Zalma on Insurance, (c) 2011, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” “Murder and Insurance Fraud Don’t Mix” and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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