In a rather unusual case, the California Court of Appeal has held that a surplus lines broker who failed to obtain adequate coverage for an insured can owe a duty of care to a third party who was unable to collect a judgment against the insured. (Business to Business Markets, Inc. v. Zurich Specialties (2006)135 Cal.App.4th 165)
Facts
Business to Business Markets, Inc. (“B2B”) hired Tricon Infotech, an Indian software company, to write a custom-made computer program for B2B’s business. One term of the parties’ contract obligated Tricon to carry an errors and omissions insurance policy to compensate B2B if Tricon failed to deliver the promised software.
B2B contacted a broker, informed the broker of Tricon’s insurance needs, and informed the broker that Tricon was based in India. The broker arranged for Professional Liability Insurance Services, Inc. (“PLIS”), a surplus lines insurance broker, to obtain coverage and gave PLIS the information B2B had provided. PLIS then arranged for an insurer to issue a policy to Tricon. Although Tricon was an Indian company doing business in India, the policy excluded coverage for any claims arising from or related to work performed in India.
Tricon failed to deliver usable software to B2B, so B2B sued Tricon for breach of contract. Based on the insurance policy’s exclusion for work done in India, the insurer refused to defend or indemnify Tricon against B2B’s claim. Tricon did not appear in court to contest B2B’s complaint, and the trial court entered a default judgment against Tricon. However, without any insurance coverage, the judgment against Tricon was uncollectible. B2B thus sued PLIS for negligence in procuring a policy that did not cover work done in India. PLIS asserted that it did not owe any legal duty to B2B to obtain adequate coverage.
Holding
The California Court of Appeal held that, even though B2B did not have any contract or any direct dealings with PLIS (the surplus lines broker), and even though B2B was not named on the policy, B2B was similar to an “intended beneficiary.” As such, the Court of Appeal held that PLIS owed a duty to B2B to procure coverage that was sufficient to protect B2B’s interests.