It is well known that an insurance broker owes a duty of care to its client, the insured. Conversely, the broker typically owes no such duty to third parties who contract with the insured. This is true even if the contract requires a party to obtain insurance. Recently, however, a California Court of Appeals held that a broker can create a duty to a third party when the broker communicates with the third party regarding the coverage obtained by the insured; i.e., even if the broker is not obligated to provide information to a third party. “Once [he] does so, he must disclose any related facts needed to ensure the information does not mislead.” Business to Business Markets, Inc. v. Hoyla Insurance Group, Inc., Case No. B182571, Calif. 2d App. Dist. *8 (February 13, 2007).
The insured, Tricon (“Insured”), needed $1 million in errors and omissions coverage to fulfill its obligations under a contract (the “Contract”) with Business to Business Markets, Inc. (the “Third Party”). Insured placed such insurance through its broker, Hoyla (“Broker”). Most of Insured’s work under the Contract with Third Party was to be performed in India. Accordingly, Broker found an errors and omissions policy which, for additional premium, covered Insured for work performed in India. Insured did not want to pay the additional premium and instructed Broker to bind a less expensive policy, which excluded coverage for work in India.
Approximately one week before inception of the Contract, the president of Third Party called the president of Broker to confirm the requisite coverage was in place. Broker confirmed that Insured was getting a policy with $1 million limits as required by the Contract. Subsequently, Third Party asked Broker for a copy of the policy. Because Broker did not yet have a copy of the actual policy, Broker sent Third Party a “specimen policy” used as a starting point to create the actual policy. The specimen policy declared “worldwide coverage” without an exclusion for work performed in India. When Insured received the actual policy, it removed the page containing the India exclusion before forwarding a copy to Third Party.
Insured failed to deliver a usable product under the Contract, and Third Party sued Insured for breach of the Contract. Because the policy excluded the work at issue, Insured was denied coverage. Insured could not afford a defense and failed to respond to the lawsuit. Third Party obtained an uncollectible judgment of approximately $1 million against Insured and then sued Broker for negligence and negligent misrepresentation.
The trial court found in favor of Broker but was reversed by the Court of Appeals which held that Broker misinformed Third Party about the degree to which the policy protected Third Party’s interests. The court found that Broker had a duty to disclose the India exclusion because “[Broker] knew (or should have known) about [Third Party’s] intimate connection to the insurance policy.” Id. at *9. Accordingly, even though Broker procured the coverage demanded by its client, Broker had an obligation to Third Party to disclose the probable lack of coverage to Third Party in response to Third Party’s inquiries.
This case raises whether brokers will be willing to put themselves in harm’s way by speaking to third parties regarding the coverage obtained by an insured or play it safe by refusing to disclose any information beyond a certificate of insurance or copy of an actual policy.
Jessica Pardi is a partner in the firm’s insurance group. She practices in the areas of insurance litigation, reinsurance dispute resolution, complex coverage disputes, and insurer insolvency. Jessica received her bachelor’s degree from Boston University and her law degree from University of Virginia.