Owner’s Insurance Broker Had No Duty to Inform Insured Subcontractor of Insolvency of Insurance Company

Construction projects can be fraught with risk whether it be design or construction defects, injuries to laborers or third parties or even damage to or destruction of the project itself.  Having appropriate insurance in place with adequate coverage is one of the best ways to shift the risk inherent in construction projects.

In a case of first impression, the California Court of Appeals for the Fourth District addressed whether an insurance broker, after procuring a policy of insurance on behalf of a developer, owes a duty to an insured subcontractor of an insurance company’s subsequent insolvency.  The Court concluded that absent a contractual duty to do so a broker owes no such duty.

In Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Insurance Services West, Inc., 203 Cal. App. 4th 1278 (February 28, 2012), Pacific Rim Mechanical Contractors, Inc. (“Pacific”), a subcontractor on a construction project in San Diego, was an insured under an Owner Controlled Insurance Program (“OCIP”) obtained by Bosa Development California, Inc. (“Bosa”) the developer of the project.  Bosa obtained the OCIP policy from Aon Risk Insurance Services West, Inc. (“Aon”) who in turn the secured the policy from Legion Indemnity Company (“Legion”).

At the time that Aon secured the OCIP policy from Legion, which provided up to $25 million in liability coverage for ten years after the construction was completed, Legion was solvent.  However, following completion of the project, and within the ten year term of the policy, Legion became insolvent.  Although Aon had informed Bosa of Legion’s insolvency, according to Pacific, Aon did not inform it of Legion’s insolvency.

Thereafter, the project’s homeowners association sued Bosa and its subcontractors including Pacific for construction defects.  Pacific in turn filed a cross-complaint against Bosa and Aon, alleging that Bosa had breached its contract by failing to provide and maintain insurance as required by the contract, and alleging that Aon had breached its “duty of reasonable care to procure and maintain [the insurance policy] in PacRim’s favor” by negligently or intentionally failed to disclose “Legion’s deteriorating financial condition and eventual insolvency.”

Aon successfully filed a motion challenging Pacific’s cross-complaint contending that it owed no duty to Pacific to disclose Legion’s insolvency.  The Court Appeals agreed.  Stating that California law is “well settled” with respect to the duty of insurance brokers, the Court explained that under California law insurance brokers owe only a limited duty to their clients, “to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.”  And, here, explained the Court, Pacific did “not allege that Aon failed to use reasonable care in procuring the policy in question.”

This is one of those cases where I agree with the outcome but not necessarily the rationale, which, to me, signals a more restrictive interpretation of the duties of insurance brokers.  As the Court explained, California law requires that brokers use “reasonable care, diligence, and judgment in procuring the insurance requested by an insured.”  Although the Court framed the issue as one involving the duty of a broker to give notice, wasn’t the essence of Pacific’s claim simply that Aon breached its “duty of reasonable care” by procuring an insurance policy from Legion in spite of “Legion’s deteriorating financial condition and eventual insolvency”?  And, framed as such, didn’t Pacific’s claim fall within the rule?

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