In a case of first impression a California Court of Appeals declined to impose a duty upon a broker to advise an insured that its liability carrier had been placed in conservatorship. The plaintiff was a sub-contractor that was added as insured under an Owner Controlled Insurance Program (OICP) liability policy. The policy provided ten years of continuous coverage for liabilities arising out of a specific high-rise condominium project. Before the project was completed the carrier, Legion Indemnity Company, was placed in conservatorship by the Illinois Department of Insurance. Legion was not formally declared insolvent until after the project was completed.
The broker, AON Reed Stenhouse, procured the policy at the request of the general contractor, not the sub-contractor, Pacific Rim Mechanical Contractors, Inc. However AON acted as the intermediary that provided Legion with the additional insured enrollment identifying Pacific Rim.
Pacific Rim argued that it was a known insured under the OICP and thus a foreseeable victim of injury if it was not advised of the Legion conservatorship.
The Court’s Decision
The Court of Appeal ruled that the absence of an actual broker-client relationship was fatal to the claim against the broker. The general contractor alone had engaged AON to purchase the policy. The court found that there would be serious public policy problems if California were to adopt a “new legal duty of notification of Legion’s conservation order and insolvency.” The court noted that, even as to actual brokerage customers, liability is generally limited to errors in the policy procurement process. A duty to monitor a carrier’s financial condition to a non-customer additional insureds over an extended period of time would place an unreasonable burden on the brokerage profession. The court noted that, although many jurisdictions legally require brokers to provide such post-sale notices of insolvency, that obligation is typically imposed by statute. The court held that only the California legislature had the power to impose such a sweeping change in state law. Such a duty conflicted with California common law on the scope of a broker’s duty.
What the Court’s Decision Means for Practitioners
Practitioners need to closely examine the state law that will control a dispute such as this. Whereas California courts have made an effort to clearly define a broker’s duties after procurement of a policy, the law is less favorable in other states. As the Court observed, ten states and Puerto Rico, including Florida and Michigan, have statutes requiring that insureds be notified of insurer insolvencies. In other states, such as Illinois and Texas, courts have ruled that a broker has a duty to advise an actual brokerage customer of a post-sale insolvency when it comes to the broker’s attention. Thus, the question of whether private rights of action will be recognized in favor of non-customer additional insureds remains open in many jurisdictions. This potential lack of uniformity is problematical for firms that service a national clientele.
Edward F. Donohue. email@example.com or 415-362-6000