In Pacific Rim Mechanical Contractors v. AON Risk Ins. Services (filed 2/28/12), the court of appeal found there is no duty owed by an insurance broker to advise insureds of an insurer’s insolvency occurring after an insurance policy is issued.
The developer of a condominium project engaged AON as its insurance broker to obtain insurance for the project. AON procured general liability insurance from Legion Indemnity Company via an Owner Controlled Insurance Program (OCIP). The developer agreed to provide its subcontractors with coverage under the Legion policy for work on the project, but AON was not party to those contracts, and the subcontractors were never the broker’s clients. During construction, Legion became insolvent, and AON notified the developer of this, but did not inform the subcontractors covered under the OCIP.
When the project’s HOA sued the developer and subcontractors for construction defects, one of the subcontractors also sued the developer alleging that it had breached the subcontract by failing to provide and maintain insurance as required and failing to give notice of discontinuation of the required coverage. The subcontractor also sued AON for professional negligence, alleging that the broker negligently or intentionally failed to disclose Legion’s deteriorating financial condition and eventual insolvency.
The trial court sustained a demurrer by AON, finding that the broker had no duty to advise the subcontractor of the insurer’s post-issuance insolvency. The court found that while the developer may have had a duty to advise the subcontractor by virtue of the subcontract, the broker owed no such duty. The broker’s duty was limited to finding and procuring the insurance requested. The appeals court agreed, noting that a broker has no general duty to investigate the financial condition of an insurer authorized to conduct business when a policy is issued. The appeals court saw no public policy grounds for imposing a duty on brokers to advise insureds of post-issuance insolvency. The court also said that such a declaration of public policy would be for the Legislature, noting that ten states have enacted laws requiring such disclosure, while California has not.
The court also pointed out that under the subcontract, the developer was supposed to give notice of any cancellation or termination of insurance, making any notification by the broker unnecessary. Finally, the court found that, in any case, the broker had no direct duty to the subcontractor, because the subcontractor was not a party to the developer’s contract with AON.
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