- Insurance Broker Is on the Hook Despite Lack of Privity
- October 1, 2013 | Author: Collin J. Hite
- Law Firm: Hirschler Fleischer A Professional Corporation - Richmond Office
It is easy for an insurance broker to view its liability to only its known clients. That view makes sense from a business perspective. However, in the world of insurance litigation where a plaintiff is always looking for a source of compensation, brokers remain a likely target when things go awry. Taking a detour from our usual alerts on insurer liability, this alert addresses an area of insurance broker liability to strangers to the policyholder - broker relationship.
The case of Business to Business Markets, Inc. v. Zurich Specialties, 135 Cal.App.4th 165 (2006), provides a stark example of how an insurance broker can be left on the hook when an insurer denies coverage. In this matter Business to Business Markets (“B2B”) contracted with an Indian company, Tricon Infotech, to create custom software for it. Part of the agreement required Tricon to obtain errors and omissions coverage to compensate B2B if Tricon failed to deliver. In order to help Tricon meet this requirement, B2B contacted a retail broker to obtain coverage for Tricon. The retail broker went to the surplus market using Professional Liability Insurance Services, Inc., which placed coverage with Zurich Specialties London Ltd. We all know what occurred next, Tricon failed to deliver the software. B2B sued the surplus lines broker for negligence in procuring the policy. The problem was that the surplus policy Professional Liability Insurance Services placed with Zurich contained an exclusion of coverage for claims arising from or related to work performed in India.
The trial court agreed that Professional Liability Insurance Services was not liable due to the lack of privity (a contractual relationship) with B2B. That makes sense from a business perspective; B2B was a complete stranger to the surplus broker and the insurer. The appellate court disagreed. Relying on a California Supreme Court case, the appellate court ruled that a defendant may have a duty to exercise due care to protect a third-party although they are not in privity of contract. Relying on an analysis of various legal factors, the Court determined that B2B did not need to be in privity with the broker and that B2B was basically an intended beneficiary of the transaction in placing the coverage. Thus, the broker owed duties to B2B, even though B2B was not its customer or a named insured.
This type of situation can also arise in other instances. For example, use of certificates of insurance can expose brokers to liability when the certificate contains incorrect information or the broker fails to add the certificate holder as an additional insured. Regardless of how many disclaimers the certificate of insurance may contain, those usually only benefit the insurer not the broker who issues the certificate. A very common argument is that the certificate holder is a third-party beneficiary of the actions undertaken by the broker for its client. These failures can lead to third-parties asserting claims for negligence, negligent misrepresentation, and fraud.
When coverage fails, the injured party is looking for compensation. While the party’s insurer and broker are likely targets in the coverage litigation, the other party’s broker may also prove a viable target as highlighted by the Business to Business case. Policyholders must be vigilant in understanding the nature of causation for the loss of coverage in order to seek out the responsible party. Just because an insurance broker is not your broker does not mean it is not the party responsible for the loss of coverage and owed you some level of care.