A Review of Insurance Broker Duties Under California Law

Recently the California Court of Appeals provided an excellent summary of the duties of insurance agents and brokers under California law. See Mark Tanner Const., Inc. v. HUB Int’l. Ins. Services, Inc., 224 Cal.App.4th, 574, 169 Cal.Rptr.3d 39 (3rd Dist. 2014).

The following general principles of duty were identified by the Court:

1.Insurance agents and brokers usually only act as the agent for the insured in procuring a policy of insurance under California law. HUB Int’l., 224 Cal.App.4th at 584, 169 Cal.Rptr.3d at 47 (citing Carlton v. St. Paul Mercury Ins. Co. (1994) 30 Cal.App.4th 1450, 1457, 36 Cal.Rptr.2d 229).

However, an insurance broker can act in a dual capacity when the broker serves as the insured’s broker in procuring insurance but also acts as the insurance company’s agent by collecting the premium and delivering the policy to the insured. HUB Int’l., Id. (citing Cal. Ins. Code § 1732; Maloney v. Rhode Island Ins. Co. (1953) 115 Cal.App.2d 238, 244, 251 P.2d 1027).

2.Insurance brokers owe a limited duty to their clients. Insurance brokers are only required to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured. HUB Int’l., 224 Cal.App.4th at 584. Generally brokers do not breach this duty to clients to procure requested insurance policies unless (a) the broker misrepresents the nature, extent or scope of the coverage being offered or provided; (b) there is a request or inquiry by the insured for a particular type or extent of coverage; or (c) the insurance broker assumes an additional duty by either express agreement or by holding himself/itself out as having expertise in a given field of insurance being sought by the insured. HUB Int’l., Id. (citing Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Ins. Services West, Inc. (2012) 203 Cal.App.4th 1278, 1283, 138 Cal.Rptr.3d 294).

3.Insurance brokers owe no duty to their clients to investigate the financial condition of an insurance company before placing insurance with that insurance company on their client’s behalf. HUB Int’l., 224 Cal.App.4th at 584 (citing Wilson v. All Service Ins. Corp. (1979) 91 Cal.App.3d 793, 798, 153 Cal.Rptr. 121).

The California Court reasoned that the insurance code prescribes the financial requirements for insurance companies and the insurance commissioner is the one that has the continuing duty to oversee that financial condition. Therefore the courts have found that it would be superfluous and would create a conflict with the regulatory scheme to impose on insurance brokers a similar duty to ascertain the financial soundness of the insurance company.

4.An insurance broker has no duty to give a named insured notice of the insurer’s intent to cancel the policy because that duty rests with the insurance company. HUB Int’l., 224 Cal.App.4th at 585 (citing Kotlar v. Hartford Fire Ins. Co. (2000) 83 Cal.App.4th 1116, 1123, 100 Cal.Rptr.2d 246).

Additionally, insurance brokers do not have a duty to inform insureds of any adverse changes in the insurance company’s financial capability after the insurance policy has been issued. HUB Int’l., Id. (citing Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Ins. Services West, Inc. (2012) 203 Cal.App.4th at 1284). In rejecting such a duty, the California Courts reason that imposition of such a duty should be done by the California Legislature and not the courts because it would fundamentally alter the nature and corresponding duties of insurance brokers, which would increase the costs of procuring insurance. (Pacific Rim, 203 Cal.App.4th at 1285.)

5.It is unclear under California law whether a fiduciary relationship exists between an insurance broker and the insured. HUB Int’l., 224 Cal.App.4th at 585 (citing Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Associates, Inc. (2004) 115 Cal.App.4th 1145, 1156, 10 Cal.Rptr.3d 582).

However, an insurance broker does act in a fiduciary capacity in those situations where the broker receives and holds premiums or premium refunds for the insured. HUB Int’l., Id. (citing Cal. Ins. Code § 1733.)

Other than when the agent or broker is handling the insured’s money, the California courts have noted that an agent’s/broker’s duty — whether or not phrased as a fiduciary duty — is no greater than the duty to use reasonable care and diligence in procuring insurance. One California Practice Guide has reported California law in this context as follows:

It is not clear in what respect the “fiduciary duty” owed by an independent insurance agent [broker] differs from the duty of due (reasonable) care. As used in respect to an independent agent, “fiduciary duty” may refer merely to avoidance of conflict of interest, self-dealing, excessive compensation, etc. HUB Int’l., 224 Cal.App.4th at 586 (citing Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2012) ¶ 11:166, p. 11-40.)

The law regarding insurance agent or broker duties is similar to the fundamental legal duties of agents and brokers in California to use reasonable care, diligence, and judgment in procuring the insurance requested by the insured.

They duty can change based on nuanced facts regarding the specific interactions between the agent/broker and the client/insured.

To determine the agent’s duty in a particular state jurisdiction, the agent should consult an attorney in that jurisdiction.