Insurance Broker Owes No Duty To Client To Investigate Financial Condition Of Insurer Before Placing Client’s Insurance With Insurer

An insurance broker owed no duty to its client to investigate the financial condition of an insurer before placing the client’s insurance with the insurer. ( Mark Tanner Construction, Inc. v. HUB International Insurance Services, Inc. (2014) 224 Cal.App.4th 574)

Facts

Compensation Risk Managers of California, LLC (CRM) administered the Contractors Access Program of California (CAP), a self-insured workers compensation program for contractors. CRM contracted with Diversified Risk Insurance Brokers (Diversified) to market CAP. Thereafter, Diversified served as insurance broker for Mark Tanner Construction, Inc. (Tanner) and Mt. Lincoln Construction, Inc. (Mt. Lincoln), who enrolled in and became members of CAP from 2006 to 2009.

Sometime later, state regulators declared CAP insolvent and CAP defaulted on payment of benefits for its workers’ compensation liabilities. As a result, Tanner and Mt. Lincoln were left exposed to significant liability for unpaid workers’ compensation claims.

Tanner and Mt. Lincoln subsequently sued Diversified’s successor, HUB International Insurance Services, Inc. (HUB), for professional negligence and constructive fraud. Tanner and Mt. Lincoln essentially alleged that Diversified had breached a duty to investigate, discover and inform Tanner and Mt. Lincoln of all information that might affect Tanner’s and Mt. Lincoln’s decision to enroll in CAP, including information about CAP’s financial condition. The trial court entered summary judgment in favor of HUB, finding that neither the professional negligence nor the constructive fraud cause of action had any merit. Tanner and Mt. Lincoln appealed.

Holding

The Court of Appeal affirmed.

With respect to the professional negligence claim, the appellate court held that insurance brokers generally owe a limited duty to their clients to use reasonable care, diligence and judgment in procuring the insurance requested by a client. Thus, an insurance broker owes no duty to a client to investigate the financial condition of an insurer before placing the client’s insurance with the insurer.

With respect to the constructive fraud claim, the appellate court held that constructive fraud is applicable only to a fiduciary or confidential relationship. While a broker does act as a fiduciary when receiving and holding premiums, there is no authority for extending a duty owed by an insurance broker beyond the recognized duty to use reasonable care and diligence in the procuring of insurance at the insured’s request. The appellate court reiterated 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.

Therefore, the Court of Appeal held the trial court had properly granted summary judgment in favor of HUB and against Tanner and Mt. Lincoln.

Comment

The Insurance Code prescribes the financial requirements for an insurer, and the Department of Insurance has a continuing duty to oversee an insurer’s financial condition. Similarly, the Department of Industrial Relations regulates self-funded workers compensation programs. Under the circumstances, the appellate court held that it would be “superfluous” and “would create a conflict with the regulatory scheme” to impose on a broker “a similar duty to ascertain the financial soundness of an insurer.”