By Marc Zimet, Esq. of Jampol Zimet LLC
Under current California law, brokers are not liable to third parties. However, courts in other states are one by one ruling to the contrary, and it may not be too long before California courts follow suit.
The U.S. District Court for the District of Connecticut ruled on this issue in a recent case involving an insurance broker who entered into a services agreement with a developer to procure insurance under a contractor controlled insurance program (CCIP). The broker was to provide a commercial general liability coverage, as well as umbrella/excess liability coverage that included defense cost coverage in excess of the primary CCIP policy. However, the broker failed to obtain defense cost coverage for the excess policies.
Unfortunately, there was an explosion at the project site resulting in multiple deaths and injuries, and several lawsuits followed. Due to the absence of defense cost coverage under the excess policies, the contractors involved were forced to defend themselves in court and incurred substantial costs in doing so. As a result, the developer, contractor, and two subcontractors sued the broker in federal court for, among other things, negligence and professional malpractice and misrepresentation.
The district court found that the contractor and subcontractors had standing to sue the broker as third-party beneficiaries of the CCIP agreement. The court held that the fact that the agreement provided that the broker was to receive a list of subcontractors who were to receive a contractual addendum stating the coverage was sufficient to prove the broker intended to assume an obligation to the contractor and subcontractors, creating third-party beneficiary standing. Furthermore, the court ruled that despite language within the agreement that “there are no third party [sic] beneficiaries to this agreement,” these third-party beneficiaries were not precluded from bringing suit.
The broker’s argument that the plaintiff’s failure to review the policies and ensure their insurance needs were met was a superseding cause and therefore the broker could not be liable was rejected outright by the court. Citing a New York Court of Appeals decision, the district court found that while this may give rise to the defense of comparative negligence, it was not an outright bar to an action against the broker.
While California courts have yet to rule that brokers may be liable to third-party beneficiaries of a policy, there does appear to be a change in recent court decisions in other states that demonstrate a shift in that direction. It remains a possibility that California courts, if faced with circumstances similar to those here, could make a change in its rulings to this area of broker liability.
For additional information, contact Marc at email@example.com or visit Jampol Zimet LLP