A project developer engaged an insurance broker to obtain insurance for a new construction project, and the broker placed an Owner Controlled Insurance Program (OCIP) with $25 million of liability coverage for 10 years after completion of the project that later became insolvent.  One of the subcontractors on the project contacted the broker and provided all necessary paper to become an insured under the policy and received a “Certificate of Liability Insurance”, identifying the subcontractor as an insured and the Legion Indemnity Company as the insurer.   Before the construction was completed, the state insurance department obtained an order of conservation against Legion.  The broker immediately advised the primary insured developer of the carrier’s financial condition but did not inform the subcontractor.  Shortly after the project was completed, an order of liquidation was entered against the carrier.

Almost seven years later, the project’s homeowner association filed a complaint for construction defects against the developer and all subcontractors.  The subcontractor then sued the broker alleging that the broker owed it a duty of reasonable care to procure and maintain the insurance policy in the subcontractor’s favor and negligently breached that duty.   In holding that a broker’s duty is only to use reasonable care in procuring the insurance requested by its client, the court found the broker owed no legal duty to notify a certificate holder that a carrier has become insolvent after the policy has been procured.  Pacific Rim Mechanical Contractors v. Aon Risk Insurance Services, 203 Cal.App.4h 1278, 138 Cal. Rptr.3d 294 (2012).

In this case, the subcontractor also sued the developer/general contractor with whom it had contracted – alleging breach of contract by failing to provide and maintain insurance as required by the contract. The sub further asserted that the developer breached the contract by “failing to provide the required written notice of a modification or discontinuation of the required coverage.”   The trial court found the developer was indeed contractually obligated to notify the subcontractor about the insurance carrier’s insolvency.  This was one reason the court gave for why it was unnecessary to impose on the broker a duty to notify the insured subcontractor of the insurance carrier’s post-issuance insolvency.

The appellate court affirmed the trial court decision and explained:

“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 an insured.” Accordingly, an insurance broker does not breach its duty to clients to procure the requested insurance policy unless “(a) the [broker] misrepresents the nature, extent or scope of the coverage being offered or provided …, (b) there is a request or inquiry by the insured for a particular type or extent of coverage …, or (c) the [broker] assumes an additional duty by either express agreement or by ‘holding himself out’ as having expertise in a given field of insurance being sought by the insured.”

The court further stated:

[Subcontractor] does not allege that [Broker] failed to use reasonable care in procuring the insurance policy from Legion. Moreover, [Subcontractor] does not allege that [Broker] assumed any additional contractual duties beyond procuring the insurance. Rather, [Subcontractor] is asking this court to create a new legal duty of notification of “Legion’s conservation order and insolvency” after the policy is procured, and to apply that retroactively upon [Broker]. As we shall explain, we decline to impose such a new duty.

 In finding that there was nothing in public policy to support a conclusion that a broker owes a duty to notify an insured of a carrier’s insolvency, the court explained:

We are further disinclined to retroactively impose on [Broker] (and all other insurance brokers) the duty [Subcontractor] asks us to impose because of considerations of public policy. We agree with [Broker] that imposition of a duty requiring insurance brokers to inform an insured of “any adverse changes in 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.

For these reasons, the court held in favor of the insurance broker.

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 14, No. 8 (Aug 2012).

Copyright 2012, ConstructionRisk.com, LLC