‘Stranger Liability’ For California Wholesalers Settled, but Not Done

A few wholesalers groups are breathing a brief sigh of relief following a recent Los Angeles Superior Court decision in a lawsuit involving “stranger liability.”

The issue was brought to light in Hull & Co. v. Superior Court, a case involving duty of care to a third party and an appeal to the California Supreme Court of a ruling that imposed a tort duty on wholesale insurance brokers not only to their retail broker customers but also to the insured, an entity with whom the wholesale broker has no contact.

The case involved a shooting at a Dave and Busters bar and entertainment establishment in Southern California.

The wholesale broker, Hull & Co., was sued by a third party claimant for professional negligence. The plaintiff, Jason Gonzaga, was shot at the bar, and initially sued the bar and its security guard company, claiming they should have prevented the shooting.

After settling claims the plaintiff brought a suit against the security guard company’s insurer, claiming that the insurer had committed bad faith by denying coverage based on an assault and battery exclusion. The trial court ruled the exclusion was enforceable and granted summary judgment for the insurer.

The plaintiff then sued the wholesale broker arguing that the wholesale broker owed a duty of care to the security guard company to ensure the insurance policy covered the suit against the guard company. It was claimed the wholesale broker breached its duty of care to the security guard company and the plaintiff. The trial court held that there was a triable issue of fact as to duty of care.

A group of wholesalers sent an amicus brief to the court and watched the case closely. The included: the California Insurance Wholesalers Association, the Surplus Line Association of California, the National Association of Professional Surplus Lines Offices, the American Association of Managing General Agents and the Council of Insurance Agents & Brokers.

The amicus brief with the Supreme Court petitioned the court to review the matter, stating “wholesale insurance brokers now face potentially unlimited liability for doing business in California—not from the retail brokers they serve, but from third parties with whom they have no contact.”

Late last month the Los Angeles Superior Court granted summary judgment in favor of the insurer in the case, Burlington, on the primary ground that Burlington’s policy provided no coverage for assault and battery, and dismissed Gonzaga’s complaint with prejudice. Gonzaga, however, is appealing the summary judgment ruling.

The appeal to the Supreme Court was denied.

So beside the promised appeal from Gonzaga, the matter seemed to be wrapped up. However, Ben McKay, executive director of the Surplus Line Association of California, believes wholesalers are still exposed to similar suits in the future.

“A lifeguard has a liability to strangers, because there’s a special relationship created. It’s part of the lifeguard’s job. But a wholesaler’s responsibility is to the retailer,” McKay said. “In Hull it was some random person who happened to get shot in the bar. It was really stretching how far the wholesaler’s liability reached. Wholesalers have differing responsibilities depending on if they’re giving advice or just being a conduit for a market.”

McKay was glad the case was dismissed, but he said he plans to be progressive about “stranger liablity.”

“We don’t have any higher court ruling that affirmatively says wholesalers don’t have stranger liability,” McKay said. “There’s still no precedent that says wholesaler brokers don’t have stranger liability.”

The Hull case had a lot going in favor of the wholesaler. However, under different facts, McKay said, a wholesaler could end up being held liable.

“What we hope for is the liability would be very specifically defined so the wholesalers know the rules of the game,” he said.

Just one court ruling holding wholesalers liable to a non-related party could impact the market, he said.

The wholesaler groups have been working on ways to deal with the issue before it arises again.

“We’re exploring it,” McKay said, adding that it takes a great deal of effort to get a number of people to agree, or talk about, such a complex issue. “We’ve started talks.”

The talks went beyond that, and there was a shell bill introduced in state Legislature, Assembly Bill 1053. That bill is unlikely to go forward, as McKay believes more progress needs to be made before they could pass a law that defines or limits wholesalers’ liabilities.

“I don’t think we’re going to solve this issue this year, but it’s something that we have to keep our eye on,” he said. “We’re looking out for the wholesalers and more importantly we’re looking out for the marketplace.”

Topics Lawsuits California Legislation Agencies Insurance Wholesale