Suit Against Broker Not Precluded By Finding Of Coverage Against Insurer06.01.2005
On March 29, 2005 the California Court of Appeal, First Appellate District, issued its decision in Third Eye Blind, Inc. v. Near North Entertainment Insurance Services, LLC (2005) 127 Cal.App.4th 1311, 26 Cal.Rptr.3d 452, holding that a trial court's ruling that an insurer was required to provide coverage to an insured did not preclude the insured from maintaining a suit against its insurance broker for failing to advise the insured to obtain more extensive coverage.
In Third Eye Blind, the Band, Third Eye Blind, retained an insurance broker, who was a purported expert in the entertainment insurance field, to assist the band in obtaining insurance coverage. The broker, Near North Entertainment Insurance Services, LLC, obtained a commercial general liability policy, which contained exclusions for personal injury and advertising injury arising out of the "Field of Entertainment Business." These exclusions barred coverage for: (1) invasion, infringement or interference of the right to privacy or publicity; (2) copyright or trademark infringement; (3) defamation, except for claims arising out of a public appearance unrelated to the Band's professional entertainment work; (4) plagiarism, piracy or unfair competition regarding unauthorized use of others' ideas or work; and (5) breach of contract regarding the Band's professional entertainment work. In 2000, the band fired guitarist Kevin Cadogan, citing personality conflicts. Cadogan sued the Band, alleging misappropriation of his right of publicity by making unauthorized use of his name, likeness and goodwill; violation of the Lanham Act by creating public confusion regarding Cadogan's affiliation with the Band; and trademark infringement for continuing to use the name Third Eye Blind. The insurance company, North American Specialty Insurance, refused to defend members of the group, who spent in excess of $3 million of their own money in defending and ultimately settling Cadogan's suit.
Third Eye Blind sued the insurer and the insurance broker. The insurer was alleged to be liable for breach of contract, while the broker was alleged to be liable for negligence and breach of contract for failing to advise the Band that the insurance policy contained the Field of Entertainment Business exclusions, and for failing to advise that an additional errors and omissions insurance policy was necessary to guaranty full coverage. The trial court granted summary judgment in favor of Third Eye Blind on its claim that the insurer had a duty to defend the Cadogan case. In reaching its decision, the trial court ruled that Cadogan's claims were potentially covered under the CGL policy, and that the Field of Entertainment Business exclusion was ambiguous as applied to the allegations in the Cadogan complaint. Ultimately, the Band and the insurer settled out of court but the Band continued to sue their insurance broker.
The broker moved for judgment on the pleadings, arguing that the ruling that the insurer owed a defense obligation precluded the insured's claims against the broker, because the earlier ruling established the insurer was responsible for the Band's losses. The trial court granted the motion, but the appellate court reversed.
The California Court of Appeal, First District, held that the insurance broker could be liable for failing to provide competent advice, notwithstanding the judicial determination that the insurer was required to provide coverage. A claim was stated by the allegations that the Band was forced to incur expenses in assuming its own defense in the Cadogan case due to the broker's failure to advise about the existence of the exclusions in the policy and the need to obtain an errors and omissions policy to cover any potentially excluded claims.
The Court of Appeal reasoned that the insurer's denial of coverage, even if wrongful, was a foreseeable harm that could have been avoided if the broker had provided competent advice. The independent intervening act must be unforeseeable to be considered a superseding cause of harm the court held. The court also pointed out that there may be more than one proximate cause of an injury.
The court reiterated that although the broker could not be liable for procuring the policy with the exclusions, since the insurer was required to provide coverage under the policy, the broker could be liable for failing to procure a policy that would have left no doubt as to whether there was coverage. The Court of Appeal emphasized that the broker was retained for the very purpose of insuring that the Band had adequate insurance coverage; therefore, litigation over coverage was a foreseeable result of the broker's negligence.
This decision is in direct conflict with earlier cases out of other appellate districts. The Third Eye Blind case suggests that a broker can be liable for malpractice even if the client ultimately obtains coverage under the insurance policies that the broker obtained. This effectively renders the broker the policyholder's guarantor in the event the insurer denies coverage. This is inconsistent with the longstanding decision of Jones v. Grewe, 189 Cal.App.3d 950, 954 (1987) where the Second Appellate District held an insurance broker or agent owes a general duty to "use reasonable care, diligence, and judgment in procuring the insurance requested by an insured. However, the mere existence of such a relationship imposes no duty on the agent to advise the insured on specific insurance matters." The Court further stated "an agent may point out to the insurer the advantages of additional coverage and may ferret out additional facts from the insured applicable to such coverage, but he is under no obligation to do so; nor is the insured under an obligation to respond."
As the Court expressly stated in Jones:
"The general duty of reasonable care which an insurance agent owes his client does not include the obligation to procure a policy affording the client complete liability protection. . . . An insurance policy arises out of the insured's desire to be protected in a particular manner against a specific kind of obligation. It is the insured's responsibility to advise the agent of the insurance he wants. . . . Ordinarily, the person seeking liability insurance knows better than the insurance agent the extent of his personal assets and the premium he can afford or is willing to pay."
The Third Eye Blind decision appears to create a conflict in the law regarding an insurance broker's duty of care. In light of this conflict the facts of any particular case should be carefully considered. We will monitor this case and related developments as well.