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Where an insurance broker marketed and sold a self-insured workers compensation program for contractors (the Contractors Access Program of California (CAP)) that subsequently became financially insolvent and failed, leaving the contractors exposed to considerable liability, the contractors sued the broker for negligence and constructive fraud.   A California appellate court affirmed summary judgment for the broker, concluding that the broker had no duty under its standard of care obligations to investigate the condition of the insurer, and that it likewise owed no fiduciary duty.  Mark Tanner Construction v. HUB International Insurance Services, 224 Cal. App. 4th, 574 (2014).

The program was administered by a company named Compensation Risk Managers of California, LLC (CRM).  Plaintiffs alleged the broker breached its duty to use reasonable care by failing “to investigate, engage in reasonable inquiry, discover and inform Plaintiffs of information, including the failures of CRM-managed self-insured workers compensation programs in New York and California, CAP’s deficit … and [the broker’s] relationship as an exclusive broker for CAP.”  The plaintiffs also claimed constructive fraud by the broker based on allegations that the broker was in a fiduciary relationship with the plaintiffs and had an obligation to refrain from providing false factual representations and also failed to disclose its exclusive broker arrangement with CRM which plaintiffs alleged made the firm a broker for CRM instead of for the plaintiffs.

Summary judgment for the broker was sustained on appeal, with the court finding that (1) with regard to the negligence count, the broker was the broker for the plaintiffs and was entitled to rely on the State to vet the condition of CAP and owed no additional duty to investigate the financial condition of the insurer, and (2) with regard to constructive fraud count, the only potential fiduciary duty for the broker was to handle the insured’s money, and no fiduciary duty extends “to areas beyond the recognized duty to use reasonable care and diligence in the procuring of insurance at the insured’s request.” The court concluded that an insurance broker has no duty to ascertain the financial soundness of the insurer or to advise an insured of adverse changes in the insurer’s financial capability.  “Accordingly, there can be no fiduciary duty in these areas.”

 

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. 16, No. 7 (July 2014).

Copyright 2014, ConstructionRisk, LLC