Whose Job Is It To Notify Subcontractors That A CGL Carrier Has Gone Bust?

Line of Duty
Whose job is it to notify subcontractors that a CGL carrier has gone bust?
By Frank N. Darras

Best's Review columnist Frank N. Darras is the founding partner of DarrasLaw, in Ontario, Calif. He is a plaintiff's lawyer representing disabled insureds and can be reached at fndarras@yahoo.com.

In the construction industry, it is common practice for a subcontractor to be added as an additional insured to the general contractor's liability policy. But what happens if the insurer subsequently becomes insolvent? Does the insurance broker owe a duty to apprise the subcontractor that the insurer had become insolvent?

Recently, in Pacific Rim Mechanical Contractors v. Aon Risk Insurance Services West, the California Court of Appeal held that a broker did not have a duty to a subcontractor to inform it of the insurer's insolvency.

In Pacific Rim, a developer hired Aon as its insurance broker to obtain insurance for a construction project. Aon procured a general liability policy with Legion Indemnity Co., which provided coverage for every contractor and subcontractor on the project. Legion was solvent at the time it issued the policy.

In 2000, the developer hired PacRim as one of several subcontractors to work on the project. Aon provided PacRim with a certificate of liability insurance, identifying PacRim as an additional insured, and Legion as the primary insurer.
In 2002, during the construction project, the Illinois Department of Insurance obtained an order of conservation against Legion, and Aon informed the developer that Legion had been placed into rehabilitation. In 2003, after the project was completed, Legion was declared insolvent.
In 2009, the project's homeowners association sued the developer and its subcontractors, including PacRim, for construction defect. The developer filed a cross-complaint against PacRim (and its other subcontractors) seeking indemnity.

PacRim then filed a cross-complaint against Aon, asserting that it "owed a duty of reasonable care to procure and maintain [the insurance policy] in PacRim's favor," which Aon allegedly breached by negligently or intentionally failing to disclose "Legion's deteriorating financial condition and eventual insolvency." The trial court dismissed PacRim's cross-complaint against Aon, and PacRim appealed.

The Court of Appeal affirmed, finding that Aon did not have a duty to inform PacRim of Legion's post-issuance insolvency. The court explained that insurance brokers owe a limited duty to their clients only "to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured." An insurance broker does not breach this duty unless (a) the broker misrepresents the nature, extent or scope of the coverage being offered, (b) there is a request by the insured for a particular type of coverage, or (c) the broker assumes an additional duty by either express agreement or by holding itself out as having special expertise.

PacRim, however, was asking the court to impose upon brokers a new legal duty of notification, after the policy has been procured, of the insolvency of an insurer. The court refused, reasoning that California Insurance Code section 677.2 already imposed a duty on the insurer to notify insured of any intent to cancel the policy.

The court also looked at public policy, agreeing 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 policy is properly the function of the Legislature because it would fundamentally alter the duties of insurance brokers, which would increase the costs of procuring insurance. Moreover, if anyone had a duty to inform PacRim of Legion's insolvency, it was Legion.

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Plaintiff wanted the court to impose upon brokers a new legal duty of notification that an insurer has become insolvent.