Friday, March 2, 2012
It’s a Wrap! Insurance Brokers Have No Duty to Warn Contractors When Their Wrap Policy Insurers Go Insolvent After Placing Policy
By John Armstrong
A “wrap” or Owner Controlled Insurance Programs (OCIP) are a relatively new and popular form of insurance for construction projects. To simplify, imagine an insurer selling a monster insurance policy covering all liability risks that the developer, general contractor, and subcontractor might have for a construction project. The idea is strength in numbers, as all parties may contribute to the purchase of such insurance policy or program and also waive subrogation/indemnity rights against each other. Think economies of scale, like the power of all the States of the United States or the economic power of the Economic Union versus any one individual state or country.
A constant problem in construction related claims is what happens when a liability insurer goes insolvent. Often, there is a complex claims process akin to a bankruptcy. California’s Insurance Guarantee Association may provide some help when the insurer goes insolvent but CIGA’s liability is capped regardless of policy limits and usually cannot be recovered against if there is any other insurance available for a loss. (This can have the added event of barring liability claims against a negligent subcontractor if the subcontractor’s only available policy for a loss is a loss covered by CIGA. Recovery must be had against CIGA or not at all.)
Recently, California’s Fourth District Court of Appeal in San Diego held that an insurance broker, Aon, who placed an OCIP covering a construction project had no legal duty to warn a subcontractor covered under the OCIP issued by Legion, which insurer became insolvent—even though the insurance broker learned that Legion was insolvent before the subcontractor work was completed. The sub argued that had the broker warned the sub that Legion (the OCIP insurer) was insolvent, the sub could have obtained other liability insurance for the eventual third party claim against the sub.
First, the court recognize that insurance brokers do have a legal duty to place insurance initially but do not have, in the absence of a contract, a continuing obligation to report on the insurance placed by the broker.
Second, the court rejected public policy arguments imposing an expanded legal duty on insurance brokers to warn their clients regarding changes in an insurer’s financial condition—especially since the Legislature and California’s Department of Insurance heavily regulated insurers brokers already and because most E&O policies covering brokers would exclude coverage for such claims (in California, courts look at whether insurance is available before expanding one’s common law liability).
Third, the court found that imposing such a legal duty to monitor insurance companies placed by brokers after issuance of a policy created practical difficulty for brokers.
The moral? If you’re insurance broker or if you adjust insurance broker D&O claims, this is a great case for your defense. If you’re a contractor or developer, self-monitor the wrap liability insurer so you can decide if you need additional insurance. Or see if your insurance broker will contractually agree to monitor for you and place other coverage if the wrap insurer goes belly up before construction is completed.