To Protect Itself, Insurer Must Consider Agency Principles Before Issuing Payment to Joint Payees

by Eric Scott Peabody

Insurers frequently issue checks to multiple payees – usually to some combination of the insured, adjuster/third-party administrator, mortgagee or lienholder, and attorneys.  Carriers had long considered themselves protected when issuing payment to joint payees by simply including all payees on the check; if a bank cashed the check without the signature of all payees – or with the forged signature of a payee – liability for that error rested squarely with the bank. See, e.g., Benchmark Bank v. State Farm Lloyds, 893 S.W.2d 649, 651 (Tex. App.–Dallas 1994, no writ) (payment to joint payees discharged obligation under policy). But a set of 2014 opinions from the Texas Supreme Court and the Dallas Court of Appeals created significant uncertainty for insurers on this issue.  McAllen Hospitals, L.P. v. State Farm County Mutual Insurance Co. of Texas, 433 S.W.3d 535 (Tex. 2014); ViewPoint Bank v. Allied Property & Casualty Ins. Co.,439 S.W.3d 626 (Tex. App.–Dallas 2014, pet. denied).  In McAllen Hospitals, the court held that an insurer’s checks issued jointly to patients and a hospital (which had given notice of its liens pursuant to the Texas Hospital Lien statute) did not discharge its payment obligation to the hospital when the patients deposited the checks without obtaining the hospital’s endorsement.  433 S.W.3d at 540-41.  The court applied the Uniform Commercial Code (“UCC”) as codified in Texas, which provides: “If an instrument is payable to two or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them.”  TEX. BUS. & COM. CODE § 3.110(d).   While the hospital could have pursued the payor bank directly (and usually did) for cashing the checks without all necessary signatures, the court held that availability of this remedy did not affect the insurer’s obligation under the UCC. McAllen Hospitals, L.P., 433 S.W.3d at 541. The hospital had not been “paid.”

In ViewPoint Bank, the Dallas Court of Appeals applied the reasoning of McAllen Hospitals to hold that an insurer was liable to the mortgagee bank included on a property settlement check after the insured obtained payment without the mortgagee’s endorsement or consent. 439 S.W.3d at 630-31.  Because a claim on a check is considered a claim on a written contract, the court further held that the bank was entitled to attorneys’ fees for its action against the insurer.  Id. at 636-37.

A recent case out of Houston provides further clarification of these 2014 opinions.  Gusma Properties, L.P. v. Travelers Lloyds Ins. Co., No. 14-15-00892-CV, 2016 WL 7478360 (Tex. App.–Houston [14th Dist.] Dec. 29, 2016, n.p.h.).  After a property insurer issued a check in payment of an appraisal award to the insured and its attorney, the attorney negotiated the check without the endorsement of the insured and converted the funds.  Id. at *1.  The insured argued that the carrier, Travelers, was liable under the UCC and McAllen Hospitals.  The court of appeals disagreed; because the attorney was the insured’s agent with a fiduciary duty to the insured, delivery of the check to the attorney was not just constructive delivery to the insured as in the case of other joint payees – it constituted actual delivery and payment to the insured because the attorney served as the insured’s agent for purposes of delivery of the instrument.  Id. at *5-7. Through the common-law principles of agency, the attorney and the insured were essentially one and the same.

In short, while delivery of a check to one payee constitutes delivery to other joint payees, the obligations on a check do not necessarily end with delivery.  Unless the insurer is confident that the joint payees are in an agency relationship, it must carefully monitor what happens to a joint payment by giving notice to co-payees of payment issuance, ensuring that the payee who takes delivery obtains the necessary endorsements from other payees, or obtaining those endorsements itself.  Even if an insurer forced to pay one joint payee for another payee’s malfeasance has remedies against the bank that cashed the check, paying and chasing takes time . . . and time is money.