Agents, Brokers Encourage Calif. Supreme Court to De-Publish Opinion

March 9, 2006

Insurance Agents and Brokers of the West (IBA West) has urged the California Supreme Court to “depublish” an unprecedented appellate court opinion suggesting that insurance broker-agents owe a legal duty of care to third parties injured when a policyholder failed to purchase insurance coverage that could have protected the third party.

In an amicus, or “friend of the court,” letter filed Feb. 27 in Business to Business Markets Inc. v. Zurich Specialties, et al., IBA West told the Court that the decision should be “depublished” because it wrongly “inaugurates a new type of tort claim that [would] turn insurance brokers into the deep-pocket litigation target of choice” and flood the courts with new litigation “whenever an insured fails to purchase the precise coverage that-in hindsight-would have benefited some third party that the insured happened to injure.”

If the Court grants the “depublication” order, the appellate court’s decision would govern the specific case before it, but could not be cited as precedent in any other cases. IBA West is the only organization representing retail producers to intervene in the case, according to the association.

Depublication is appropriate, in part, because of the highly unique facts of the case, IBA West argued. Business to Business Markets, Inc. hired Tricon, an Indian software company, to write software for B2B’s business. The software contract required Tricon to carry errors and omissions insurance to compensate B2B if Tricon failed to deliver the software.

B2B contacted a retail insurance broker, Hoyla, and told Hoyla that Tricon was in India. Hoyla in turn contacted PLIS, a surplus-lines broker, and gave it the information that it had received from B2B. PLIS contacted Zurich Specialties, which issued a policy to Tricon. Unfortunately, the policy excluded coverage for any claims arising from or related to work performed in India.

After Tricon failed to deliver usable software, B2B sued Tricon and won nearly a million dollars by default judgment; but the judgment was uncollectible due to Tricon’s lack of insurance coverage. B2B then sued PLIS for negligence in procuring the policy, but the trial court dismissed the case on the ground that PLIS owed B2B no duty of care.

In a published decision, the Court of Appeal reversed, applying cases involving named third-party beneficiaries to find that that, although B2B was “not quite an intended beneficiary” of the insurance policy, it nevertheless came “close enough to being one” that imposing a negligence duty on PLIS was consistent with prior law.

IBA West argued that B2B could easily have protected itself by requiring proof of insurance coverage in its contract with Tricon, that similar provisions are routinely written into many other types of contracts, and that the impact of this decision could be disastrous for producers and consumers alike.

“Any extension of the B2B duty to other cases would prove disastrous for brokers and insureds alike,” Steve Hirsch, a partner at the San Francisco law firm of Keker & VanNest, wrote for IBA West. “[T]he new duty creates a conflict of interest between the insured, which typically wants to satisfy its insurance needs at the lowest possible cost-and the broker or agent, who now will have an incentive to protect itself against potential B2B claims by selling expanded liability coverage that the insured does not want or does not believe it needs.

“Moreover, this new theory of broker/agent liability will drive up the demand for, reduce the supply of, and thus increase the price of the errors and omissions policies that licensed brokers and agents must carry. Thus, the B2B duty will force brokers and agents to acquire large amounts of additional insurance coverage for themselves-either directly, through increased E&O coverage, or indirectly, by “overselling” insurance products to their clients.”

Hirsch argued that the appellate court’s opinion proceeded from an unspoken but highly erroneous assumption-that broker-agents have a legal duty to recommend coverages to their customers. In fact, California law imposes no such duty as a general rule.

“[T]here is no “general duty of care to advise regarding the sufficiency of liability limits or the replacement value of” the insured’s property,” Hirsch wrote. Under the general duty of care, “[i]t is the insured’s responsibility to advise the agent of the insurance he wants, including the limits of the policy to be issued. [T]he onus is thus squarely on the insured to inform the agent of the insurance he requires.”

The amicus letter also argued that none of the reasons justifying publication by the appellate court of its opinion were present in this case. IBA West has posted the letter on its Web site at

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