02.25.2009 Jurisdiction Over Insurance Brokers Transcends Physical Presence
02.25.2009NC Bar Association The Litigator Newsletter; Vol. 29, No. 2
Reproduced with the express and limited permission of the North Carolina Bar Association. All rights reserved.
A recent North Carolina Court of Appeals decision raises questions about how easily insurance brokers and agents can subject themselves to personal jurisdiction in the North Carolina courts. In Wells Fargo Bank, N.A. v. Affiliated FM Insurance Co., the Court of Appeals upheld a trial court decision to deny an insurance broker’s motion to dismiss for lack of personal jurisdiction.
The case involved a suit by the bank holding the promissory note on an apartment complex in Greensboro, N.C., in which the bank alleged that the broker hired to obtain insurance for the complex had negligently failed to provide the coverage and misrepresented that the property was covered. Although the broker had no officer, property, agents or employees in North Carolina, did not advertise in North Carolina or in other media that might be seen in North Carolina, and did not solicit clients or do regular business in North Carolina, the Court found that the company had purposely engaged in activity centering on North Carolina such that it had the necessary contacts with the state, both under the state’s “long-arm” statute and the U.S. Constitution’s due process requirements, to make jurisdiction appropriate.
The property at issue was acquired in 1998 by a real estate development group who executed a promissory note that was later transferred to Wells Fargo. The deed of trust required the development group to obtain insurance against loss and damage to the property. They hired Knapp, Schenck & Co. Insurance Agency to purchase the insurance. Knapp Schenck purchased the insurance from Allied FM Insurance, and Knapp Schenck issued “Evidence of Property Insurance” forms indicating that the property was covered.
In 2003, the apartment complex was flooded, and shortly thereafter the development group defaulted on its note. Wells Fargo foreclosed on the property and purchased it at the foreclosure sale in 2004. In August 2006, Wells Fargo filed a claim with Allied to recover for the damage caused by the flood. After receiving no response from the insurance company, it filed for a declaratory judgment in North Carolina, requesting a determination of coverage. It listed Allied, Knapp Schenck, the debtor, and the debtor’s guarantors as defendants.
Before trial, Knapp Schenck filed a motion to dismiss for lack of personal jurisdiction. Knapp Schenck filed an affidavit from its president stating that the company had no offices, property or employees in the state, that it did not advertise in the state or in media that might reach the state, and that it did not solicit clients or do business in North Carolina. Although they admitted to having obtained a Certificate of Authority from the North Carolina Secretary of State, the president stated that this was obtained in a later, unrelated matter for another client who owned real property in North Carolina. However, the trial court noted that Knapp Schenck did have a registered agent with a North Carolina mailing address. The trial court denied Knapp Schenck’s motion to dismiss, and they appealed to the Court of Appeals.
The Court’s Decision
The Court of Appeals noted that the determination of personal jurisdiction involves two steps: first, the transaction must fall within the state’s long-arm statute, and second, assertion of personal jurisdiction must not violate a defendant’s constitutional due process rights. In looking at the long-arm statute, the Court held that the transaction at issue here fell into the subsection giving North Carolina courts jurisdiction over actions arising out of a promise made by the defendant to, among other possibilities, protect real property in North Carolina. The statute explicitly states that it does not matter if the promise was made outside of North Carolina. Rather, all that it requires is that the promise concerns property in North Carolina.
Knapp Schenck argued that this provision of the statute could not apply to it as a broker. Any promise made to protect the property, it argued, came from the insurance company while Knapp Schenck had merely promised to help obtain the insurance. The Court rejected that argument and discussed cases from several states reaching conclusions that insurance brokers and agents could subject themselves to personal jurisdiction under similar statutes. The Court held that a promise by the broker to procure insurance for the property is a promise to protect real property in North Carolina and thus satisfied the requirements of the statute.
Turning to the constitutional analysis, the Court noted that due process requires a defendant have sufficient minimum contacts with a state before that state can try to assert jurisdiction and force the non-resident defendant to come to the state to defend. Essentially, allowing the suit to go forward against the non-resident defendant must be fair and just, and courts will look for some act by which the defendant purposely avails himself of the privilege of conducting activities within the state such that he invokes the benefits and protections of its laws. The Court also noted that a contract alone can be sufficient contact where it has a substantial connection with North Carolina. Furthermore, the Court stated that personal jurisdiction is appropriate where a party purposefully derives benefits from its interstate activities.
Here, the Court found that Knapp Schenck should have reasonably anticipated being sued in North Carolina if it failed to meet its promise to obtain insurance for North Carolina property. The Court relied on facts that showed that Knapp Schenck had promised to obtain insurance on North Carolina property, that it represented that it had obtained the coverage, that it sent formal representations that the insurance had been obtained, and that it received compensation for its services, and that all these facts centered on property inside North Carolina.
The decision suggests that anyone who promises to insure or procure insurance for property in North Carolina might subject himself or herself to jurisdiction for suits related to that agreement. In a business environment that continues to move toward a more global approach, with few of us serving clients only in our local communities, the ease with which it now appears that one can subject himself to jurisdiction in another state is an important consideration. Having to travel elsewhere to defend against claims may be a new cost of doing business.