Mark Tanner Construction, Inc. v. HUB International Insurance Services, Inc.

(Insurance Broker Did Not Breach Its Duty of Care When It Failed to Advise Clients of the Financial Condition of Workers Compensation Self-Insured Program Which Became Insolvent)

In Mark Tanner Construction, Inc. v. HUB International Insurance Services, Inc. 224 Cal.App.4th 574 (March 10, 2014), the California Third District Court of Appeal affirmed the trial court’s entry of summary judgment in favor of HUB International Services, Inc. (“HUB”) relative to a lawsuit alleging professional negligence and constructive fraud arising out of the insolvency of the self-insured workers compensation program referred as the “Contractors Access Program of California (“CAP”). Compensation Risk Managers of California, LLC (“CRM”) administered CAP. Diversified Risk Insurance Brokers (“Diversified”), later acquired by HUB, marketed and sold CAP to plaintiffs’ Mark Tanner Construction, Inc. (“Mark Tanner”) and Mt. Lincoln Construction, Inc. (“Mt. Lincoln”).

Under the program, California contractors were able to fulfill their obligation to obtain workers compensation insurance by joining CAP. Membership in CAP required an agreement to be jointly and severely liable for the workers compensation liability of all other members for that year of membership. Approximately 250 employers became members of CAP. Tanner became a member of CAP on January 1, 2006 and was a member from that date until December 31, 2008 and again from August through December of 2009. Diversified was the broker of record for Tanner from January 1, 2006 until about August 2007. Mt. Lincoln became a member of CAP on October 1, 2006 and was a member for approximately two years. Diversified was the broker for Mt. Lincoln. HUB purchased Diversified on November 1, 2007.

On December 31, 2009, CAP was terminated. The Director of the Department of Insurance revoked CAP’s certificate to self-insure, and CAP was placed into conservatorship. CAP’s estimated exposure for unfunded liabilities was over $20 million. In the spring of 2010, members were sent assessments for the anticipated exposure. Tanner was assessed $150,258.00 and Mt. Lincoln was assessed $42,784. Later that year, CAP defaulted on payment of benefits for its workers compensation liabilities.

Subsequently, in August 2010, Tanner, Mt. Lincoln and two other companies sued HUB and others for professional negligence and constructive fraud. The first amended complaint filed in the lawsuit alleged that CAP was marketed through insurance brokers including Diversified, as a less expensive and more effective means of handling workers compensation insurance claims. The first amended complaint alleged that Diversified did not disclose to Tanner or Mt. Lincoln its exclusive broker relationship with CRM.Diversified also failed to advise Tanner and Mt. Lincoln of significant losses incurred by CAP in California as well as in New York with similar self-insured insurance programs.

The first cause of action in the first amended complaint was for professional negligence. Such cause of action alleged that Diversified had a duty to use reasonable care as a professional and required Diversified to investigate, engage in a reasonable inquiry, discover and inform plaintiffs of all information that might affect their decision to enroll in the CRM administered CAP.

The second cause of action in the first amended complaint was for constructive fraud. It alleged that Diversified was in a fiduciary relationship with plaintiffs and acted as an agent for CRM, but did not disclose a contractual relationship. As a result of this relationship, Diversified had an obligation to refrain from providing information which it knew, or should have known, and/or was innocently transferred but was false, to the plaintiffs, if that information was or may have been material to the plaintiffs’ decision to enroll in CAP.

HUB filed a motion for summary judgment in response to plaintiffs’ first amended complaint. Essentially, the motion argued that HUBB (Diversified) did not owe plaintiffs a duty of care relative to investigating the financial condition of an insurer before placing insurance with it on the client’s behalf. Hence it was entitled to judgment in connection with plaintiffs’ claim for professional negligence. Further, HUB argued that because Diversified did not owe a fiduciary duty to plaintiffs, judgment should be entered in connection with plaintiffs’ second cause of action for constructive fraud. The trial court agreed with HUB and entered summary judgment in its favor.

Plaintiffs attempted to delay the court’s consideration of HUB’s motion for summary judgment by arguing that newly discovered evidence, i.e., an agreement between Diversified and CRM regarding the marketing of CAP afforded a motion for leave to file a second amended complaint and to delay HUB’s motion for summary judgment so as to allow plaintiffs to engage in further discovery in connection with the newly discovered agreement. The trial court rejected plaintiffs’ arguments, and found that plaintiffs’ motion for leave to file a second amended complaint prejudiced HUB’s defense. Further, the agreement did not support any contentions advanced by plaintiffs relative to an undisclosed joint venture between Diversified and CRM to market CAP.

In affirming the trial court’s entry of summary judgment and denial of plaintiffs’ motion for leave to file a second amended complaint, the Court of Appeal found that HUB (Diversified) did not owe a professional duty of care to advise plaintiffs of the financial condition of CAP at the time it placed plaintiffs in CAP. In addition, the Court of Appeal held that because HUB did not owe a fiduciary duty to plaintiffs, plaintiffs could not maintain a cause of action for constructive fraud. The Court of Appeal commented on the law applicable to insurance brokers and their duties as follows:

An insurance broker is "a person who, for compensation and on behalf of another person, transacts insurance other than life . . . with, but not on behalf of, an insurer." (Ins. Code, §§ 33, 1623.) Generally, an insurance agent acts only as the agent for the insured in procuring a policy of insurance. (Carlton v. St Paul Mercury Ins. Co. (1994) 30 Cal.App.4th 1450, 1457. An insurance broker may, however, act in a dual capacity, in which he serves as the insured’s broker in procuring insurance but also acts as the insurer’s agent by collecting the premium and delivering the policy to the insured. (Ins. Code § 1732; Maloney v. Rhode Island Ins. Co. (1953) 115 Cal.App.2d 238, 244.)

“Insurance brokers owe a limited duty to their clients, which is only ‘to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.’ assumes an additional duty by either express agreement or by “holding himself out” as having expertise in a given field of insurance being sought by the insured.’ [Citation.]” (Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Ins. Services West, Inc. (2012) 203 Cal.App.4th 1278, 1283 (Pacific Rim).) “California law is well settled as to this limited duty on the part of insurance brokers. [Citations.]” (Ibid.)

insurance broker . . . owes no duty to its clients to investigate the financial condition of an insurer before placing insurance with it on their behalf.” (Wilson v. All Service Ins. Corp. (1979) 91 Cal.app.3d 793, 798 (Wilson).) The Wilson court reasoned that the Insurance Code prescribes the financial requirements for an insurer and the Insurance Commissioner has the continuing duty to oversee that financial condition, thus it would be “superfluous” and “would create a conflict with the regulatory scheme” to impose on the broker “a similar duty to ascertain the financial soundness of an insurer.” (Id. At pp. 797-798.) In the case of self-funded workers compensation programs, regulation is by the Department. (Lab. Code, §3700, subd. (b); see Cal.Code Regs., tit. 8, §§ 15470 et seq.)

In Kotlar v. Hartford Fire Ins. Co. (2000) 83 Cal.App.4th 1116 at page 1123 (Kotlar) the court held an insurance broker has no duty to give a named insured notice of the insurer’s intent to cancel the policy; that duty rests with the insurer. Relying on Kotlar, the court in Pacific Rim, supra, 203 Cal.App.4th 1278 at page 1284, held that an insurance broker had no duty to inform an additional insured (a subcontractor) of the insurer’s insolvency. In declining to find a new duty on the part of insurance brokers, the Pacific Rim court concluded “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.” (Pacific Rim, supra, 203 Cal.App.4th at p. 1285.)

“is unclear whether a fiduciary relationship exists between an insurance broker and an insured.” (Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Associates, Inc. (2004) 115 Cal.app.4th 1145, 1156 (Hydro-Mill).) An insurance broker does act in a fiduciary capacity when he receives and holds premiums or premium refunds. (Ins. Code, § 1733.) In Eddy v. Sharp (1988) 199 Cal.App.3d 858 (Eddy), this court reversed a summary judgment in favor of a broker on claims of negligent misrepresentation and breach of contract. The broker prepared a proposal for insurance that stated coverage was "All Risk," but failed to disclose that it provided no coverage for sewer backups. (Id. at p. 866.) We found there was a triable issue of fact as to whether the broker breached his duty by misrepresenting the terms of the policy. (Ibid.) We commented in dicta that under agency principles, the broker had "not only a fiduciary duty but an obligation to use due care." (Id. at p. 865; see also Westrec Marina Management, Inc. v. Jardine Ins. Brokers Orange County, Inc. (2000) 85 Cal.App.4th 1042, 1045, [defendant brokers were found liable for breach of fiduciary duty and breach of their professional duty in their placement of insurance].) In Hydro-Mill, the court found allegations of the broker's breach of fiduciary duty amounted to a claim of professional negligence. Accordingly, the court applied the shorter two-year statute of limitations, rather than the longer one for breach of a fiduciary duty (Hydro-Mill, supra, 115 Cal.App.4th at pp. 1158-1159.) The court reasoned that since it was established that "an insurer is not a fiduciary, then arguably, neither is a broker." (Id. at p. 1158.)

In affirming the trial court’s decision regarding plaintiff’s claim for constructive fraud, the Court of Appeal stated as follows:

"Constructive fraud depends on the existence of a fiduciary relationship of some kind. . . ." (5 Witkin, Cal. Procedure (5th ed. 2008) Pleading, § 717, p. 133.) As our discussion ante shows, there is some dispute as to whether an insurance broker has a fiduciary duty, other than in handling the insured's money. There is no authority, however, that any fiduciary duty owed by an insurance broker would extend to areas beyond the recognized duty to use reasonable care and diligence in the procuring of insurance at the insured's request. In Eddy, the sole case upon which plaintiffs rely for a fiduciary duty, the act at issue was the failure to disclose an exclusion in an "All Risk" policy (Eddy. supra, 199 Cal.App.3d at p. 866.) A broker may be liable for misrepresenting the nature, scope, or extent of coverage. (Free v. Republic Ins. Co. (1992) 8 Cal.App.4th 1726, 1730.) By contrast, an insurance broker has no duty to ascertain the financial soundness of the insurer (Wilson, supra, 91 Cal.App.3d at p. 798), or to advise an insured of adverse changes in the insurer's financial capability. (Pacific Rim, supra, 203 Cal.App.4th at p. 1284.) Accordingly, there can be no fiduciary duty in these areas.