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California Court Holds Broker Has No Duty to Advise Additional OCIP Insured of Carrier’s Insolvency

March 5, 2012

In Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Insurance Services West, Inc., 12 C.D.O.S. 2471 (February 28, 2012), a case of first impression, the California Court of Appeal, Fourth District, held that an insurance broker, after procuring a policy of insurance for a developer on a construction project, does not owe a duty to apprise a subcontractor that was later added as an insured under that policy of the insurance company’s subsequent insolvency, absent the assumption of a contractual duty to do so.

Wrap-up policies, contractor controlled insurance policies (CCIPs) and owner controlled insurance policies (OCIPs) have become very popular, especially in publicly funded and large-scale construction projects. Insurance brokers play key roles in the procurement of these policies and in administering these programs.

The litigation relates to the construction of a high-rise in downtown San Diego, CA. In 1999, the developer retained Aon as its insurance broker for the project; Aon procured an OCIP with Legion Indemnity Company that provided liability insurance for the developer and its subcontractors on the project. The OCIP policy provided $25 million in limits for a period of ten years following the completion of construction. California’s statute of repose, Code of Civil Procedure section 337.15, bars any action for construction defects after ten years from the date of substantial completion.

Pacific Rim was hired as a subcontractor on the project and received a certificate of insurance evidencing that it was an additional insured under the OCIP policy. Construction was completed in 2002, but before the work was completed the Illinois Department of Insurance issued an order of conservation against Legion. After completion of the project, Legion became insolvent and was liquidated.

Pacific Rim claimed that neither the developer nor Aon told it of the conservatorship or the pending insolvency.

Seven years later, the homeowners’ association filed a complaint alleging construction defects against the developer and its subcontractors. Pacific Rim cross-complained against the developer and Aon for failing to advise of the discontinuation of the required coverage.

Aon demurred to the cross-complaint, arguing that it was not a party to the contract and Pacific Rim was not its client. Aon argued that it had no duty to advise Pacific Rim of Legion’s insolvency. The trial court agreed, stating that the developer had a duty to advise the subcontractor as a party to the contract with Pacific Rim. The court found that the broker’s duty did not to extend to Pacific Rim.

The Court of Appeals agreed, stating “California law is well settled as to this limited duty on the part of insurance brokers.” The court, relying upon Kotlar v. Hartford Fire Ins. Co., 83 Cal.App.4th 1116 (2000), held that “because Insurance Code section 677.2 ‘imposes a duty on the insurer to notify the named insureds of its intent to cancel the policy we see no purpose in judicially imposing such a duty on a broker.’” The court found that the duty also rested with the developer.

The court refused to extend that duty to a broker for public policy reasons. “We are further disinclined to retroactively impose on Aon (and all other insurance brokers) the duty PacRim asks us to impose because of considerations of public policy. We agree with Aon 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.”

Further, when would such a duty arise? At what point in the deteriorating financial condition of an insurer would such a duty attach? According to the court, determining when such a duty would be triggered is “exceedingly ambiguous.” Such a duty would create “practical difficulties” extending, as here, as long as ten years.

The court also noted that Pacific Rim was not Aon’s client, the developer was. “Although PacRim was an insured, and was given a certificate of insurance, it was not Aon’s client. [The developer] was. An insurance broker’s client is the person or entity that contracts with the broker, communicates to the broker its insurance needs, reviews the quotes provided by the broker and decides what policy to purchase. The minimal contact between Aon and PacRim, that occurred over a year after Aon procured the policy on behalf of [the developer], also supports a finding of no duty on the part of Aon to notify the subcontractor insureds.”

Accordingly, the court was unwilling to extend a duty to a broker to advise an additional insured of the insolvency of the carrier.

For more information, contact:

Edward Garson
Partner – San Francisco
415.625.9330
edward.garson@wilsonelser.com

John Clifford
Partner – San Diego
619.881.3320
john.clifford@wilsonelser.com

Ian Stewart
Partner – Los Angeles
213.330.8830
ian.stewart@wilsonelser.com

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