What if Your Insurer Goes Bankrupt and No One Tells You?


“Does an insurance broker, after procuring an insurance policy for a developer on a construction project, owe a duty to apprise a subcontractor that was later added as an insured under that policy of the insurance company’s subsequent insolvency?”

In this issue of first impression in California, the Fourth District Court of Appeals said “no.”  Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Insurance Services West, Inc. — Cal.Rptr.3d —-, 2012 WL 621346 (Cal.App.4 Dist.).

A quick background: developer (Bosa) engaged insurance broker (Aon) to obtain insurance for a project in downtown San Diego.  Through Aon, BOSA created an OCIP from Legion.  Under the OCIP, Legion provided liability insurance to every contractor and subcontractor on the project.  Bosa later subcontracted with Pacific Rim (PacRim), who became an enrolled party on the OCIP.  After the project was complete, Legion became insolvent.  And apparently subcontractor PacRim was the last to find out. 

Six years after the project was completed, when the homeowner’s association filed a lawsuit for construction defects, a series of cross- and counterclaims followed.  At issue in this appeal were PacRim’s claims against Aon and Bosa begging the question:  who should have notified PacRim that the OCIP insurer became insolvent?

Insurance Broker’s Duty?

Turning first to the insurance broker, the court held that Aon had no duty to inform PacRim of Legion’s insolvency.  Under well-settled California law, insurance brokers owe a limited duty “to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.”  The court declined to create and impose on the insurance broker a new legal duty of notification after the policy is procured.  According to the court, PacRim’s claims against Aon failed as a matter of law because “PacRim’s claims are based entirely on the allegation that Aon failed to satisfy a duty that California law does not recognize.”

The court rejected PacRim’s argument that public policy considerations warranted imposing such a duty on Aon.  Noting that other states have enacted statutes imposing such a duty on brokers – and California has not – the court agreed with Aon that it should remain the province of the Legislature.

The court further observed that PacRim was not merely seeking to impose a “narrow duty” on insurance brokers to notify insureds when the broker has actual knowledge of insurer’s insolvency.  Instead, PacRim asked the brokers to notify an insured of “any adverse changes in its financial condition.”  This would necessarily include a duty of monitoring insurers and would present uncertainty as to when the broker’s duty arises.  This would fundamentally change the relationship between brokers and their insureds – a step the court refused to take.

The court cited to a California Insurance statute and noted that “if anyone had a duty to inform PacRim of Legion’s insolvency, it was Legion.”  For obvious reasons, pursuing Legion for violating this statute would have likely been a dead end for PacRim.  In a brief two paragraphs, the court agreed with the lower court that Bosa breached its contractual duty to inform PacRim of Legion’s insolvency. 

California Stands its Ground

In a lengthier portion of the opinion, the court rebuffed PacRim’s assertion that the court should “join with every other state to consider the issue by recognizing an insurance broker’s duty to share its actual knowledge of the insurer’s insolvency with the insured.”  First, the court cited examples of other states that have refused to impose such a duty on a broker after it procured the insurance policy.  Further, the court distinguished the cases that PacRim cited, because in almost all of those cases, the plaintiff insured was the broker’s client.  Here, Bosa was Aon’s client – PacRim was not.  Accordingly, the court declined to follow the out-of-state authority.

Why is This Important to You?

Back to our original question: where does that leave you if you find yourself in a position of needing to rely on your insurer, only to find out your insurer is insolvent?  At the risk of stating the obvious, you will be in the best position if you have advanced notice of your insurer’s pending insolvency.  That way, you can do like PacRim alleged it would have done – procure alternate insurance.  But since you may not always (or ever) have such advance notice, you need to find another way to protect yourself.  Because – at least in California – you cannot rely on your insurance broker to notify you of adverse changes in your insurer’s financial condition.