Broker Has No Duty To Inform Additional Insured Of Insurer’s Insolvency

Broker Has No Duty To Inform Additional Insured Of Insurer’s Insolvency

03.07.2012

In Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Insurance Services, 2012 WL 621346 (2/28/2012), the California Court of Appeal decided an issue of first impression: Does an insurance broker, after procuring an insurance policy for a developer on a construction project, owe a duty to notify an additional insured subcontractor of the insurer’s subsequent insolvency. The Court of Appeal held that unless the broker assumed a contractual duty to do so, the broker owes no such duty.

The underlying litigation arose out of a San Diego construction project. The project’s developer requested its broker to procure insurance for the project. The broker obtained a unified, blanket insurance policy known as an Owner Controlled Insurance Program (“OCIP”). The OCIP provided up to $25 million in liability coverage for every contractor and subcontractor on the project for ten years after the construction was completed – the duration of the ten-year construction defect statute of limitations. At the time the OCIP was issued, the insurer was solvent.

The developer hired Pacific Rim Mechanical Contractors (the subcontractor) as one of several subcontractors to work on the project and agreed to provide the subcontractor with insurance for its work on the project. A certificate of insurance was issued to the subcontractor as an additional insured. Before the construction was completed, the Illinois Department of Insurance placed the insurer in conservation. After the project was completed, the insurer became insolvent and was liquidated. Neither the developer nor the broker informed the subcontractor of the insurer’s financial condition.

Years later, the homeowner’s association filed a complaint alleging construction defects against the developer and its subcontractors at the project. The subcontractor cross-complained against the developer and the broker for failing to advise of the discontinuation of the required coverage. The broker demurred to the subcontractor’s cross-complaint, arguing that the subcontractor was not its client and it was not a party to the contract between the developer and its subcontractor. The broker further argued that it had no legal duty to advise the subcontractor of the insurer’s insolvency. The trial court sustained the broker’s demurrer, finding it unnecessary to impose a “duty to notify an insured of an insurer’s post-issuance insolvency.”

The Court agreed that the broker did not have a duty to provide notice of the discontinuation of coverage caused by the insolvency. “Insurance brokers owe a limited duty to their clients, which is only ‘to use reasonable care, diligence, and judgment in procuring the insurance requested by the insured.’” “California law is well settled as to this limited duty on the part of insurance brokers.” “[B]ecause Insurance Code section 677.2 ‘imposes a duty on the insurer to notify the named insureds of its intent to cancel the policy we see no purpose in judicially imposing such a duty on a broker.’” The Court also determined that the developer, as a contracting party, did have a duty to notify the subcontractor of the insolvency.

The Court declined to impose a new legal duty on brokers for public policy reasons. “We agree with [the broker] that imposition of a duty requiring insurance brokers to inform an insured of ‘any adverse change sin the carrier’s financial capability’ post-issuance of the insured’s policy is properly the function of the Legislature because it would (a) fundamentally alter the nature and corresponding duties of insurance brokers, which would (b) increase the costs of procuring insurance.” Because the California Legislature had not created this duty, the Court chose not to “legislate on the subject in their stead.”

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