Calif. Court Says Broker Owes Duty of Care to Third Party

January 16, 2006

California’s Second District Court of Appeals has decided that an insurance broker owed a legal duty of care to a third-party after an insurer refused to pay claims under an express policy exclusion.

The case, Business to Business Markets Inc. v. Zurich Specialties, et. al., has been appealed to the California Supreme Court.

In July 2000, Business to Business Markets Inc. (B2B) hired Tricon Infotech, an Indian software company, to write a computer program. Their contract obligated Tricon to carry an errors and omissions insurance policy to compensate B2B if Tricon failed to deliver the promised software.

B2B contacted Hoyla, a retail insurance broker, indicating Tricon’s insurance needs. B2B told Hoyla that Tricon was based in India. Hoyla contacted respondent Professional Liability Insurance Services Inc. (PLIS), a surplus lines broker, to place the insurance policy and gave PLIS the information it had received from B2B. PLIS contacted Zurich Specialties London Ltd., which issued a policy to Tricon. The policy excluded coverage for any claims arising from or related to work performed in India.

When Tricon failed to deliver usable software to B2B, B2B sued for breach of contract. Based on the insurance policy’s exclusion for work done in India, Zurich Specialties refused to pay for Tricon’s defense or to indemnify Tricon against B2B’s claim. B2B won a default judgment against Tricon, and then PLIS for negligence in procuring a policy that did not cover work done in India.

Pointing to the absence of any direct dealings or contact with B2B, a Los Angeles County Superior Court ruled in favor of PLIS, holding that no duty of care was owed to B2B. The Court of Appeals overturned the trial court decision.

IBA West now is considering joining the appeal. “This is a horrible decision,” said IBA West General Counsel Steve Young. “The appellate decision is flatly inconsistent with California law on third-party liability, and one which, if upheld, could impose absolutely ruinous liabilities on agents and brokers. It would transform every agent and broker in this state into an ‘insurer of last resort.'”

For a copy of the appellate opinion, visit http://www.courtinfo.ca.gov/opinions/documents/B175388.pdf.

Topics California Agencies

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