Daily Blast February 28, 2012

On February 28, 2012, Division One of the Fourth Appellate District Court of Appeal (San Diego) addressed an issue of first impression in California, namely whether an insurance broker owes a duty to inform an insured about an insurer’s subsequent insolvency. In Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Insurance Services West, Inc. (Feb. 28, 2012, D05831) ___ Cal.App.4th ___, the Court of Appeal held that a broker does not have a duty to notify an insured of an insurer’s post-issuance insolvency. (Slip opn. pp. 1-2.)

The developer, Bosa Development California, Inc. (“Bosa”) engaged Aon as its insurance broker to obtain insurance for a construction project in downtown San Diego.  (Slip opn., p. 2.) Aon procured a general liability insurance policy for the project with Legion Indemnity Co. (“Legion”). (Ibid.) Bosa later hired Pacific Rim Mechanical Contractors, Inc. (“PacRim”) as a subcontractor to work on the project. (Ibid.) The parties entered into a contract in which Bosa agreed to provide PacRim with liability insurance through the policy for its work on the project. (Id. at pp. 2-3.) Aon was not a party to the contract and PacRim was never its client. (Id. at p. 3.) After the project was complete, the Circuit Court of Cook County, Illinois, entered an order of liquidation with a finding of insolvency against Legion. (Ibid.) Several years later, PacRim filed a cross-complaint against Aon and Bosa in an underlying construction defect lawsuit, alleging that neither Bosa nor Aon notified PacRim of Legion’s financial conditions. (Ibid.) According to PacRim, Aon owed a duty of reasonable care to procure and maintain the insurance policy in PacRim’s favor, which Aon breached by failing to disclose Legion’s deteriorating financing condition and eventual insolvency. (Id. at p. 4.) The trial court sustained Aon’s demurrer and entered a judgment of dismissal of PacRim’s cross-complaint against Aon. (Id. at p. 5.)

The Court of Appeal affirmed, concluding that Aon did not have a duty to inform PacRim of Legion’s post-issuance insolvency. (Slip opn., p. 6.) According to the court, 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 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. (Id. at pp. 1-2.) The court explained that requiring insurance brokers to inform an insured of adverse changes in the carrier’s financial capability post-issuance of the insured’s policy would increase the costs of procuring insurance and would fundamentally alter the nature and corresponding duties of insurance brokers. (Id. at p. 9.)

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