The suit was brought by Mark Tanner Construction and Mt. Lincoln Construction, former Hub clients who joined a self-insured captive for construction firms called the Contractors Access Program of California (CAP). The two companies bought into CAP in 2006 through Diversified Risk Insurance Brokers, a Hub subsidiary.
CAP failed in 2009, and later defaulted on its payments of workers comp benefits. Both Mark Tanner and Mt. Lincoln were awarded assessments by the California State Insurance Department, but felt Hub had demonstrated professional negligence and constructive fraud by not adequately looking into CAP’s financial solvency.
Judges with the California 3rd District Court of Appeals sided with Hub after the company argued brokers have “no duty to investigate the financial condition of an insurer before placing insurance with it on the client’s behalf.”
“[Insurance brokers] have no duty to ascertain the financial soundness of the insurer or to advise an insured of adverse changes in the insurer’s financial capability,” the judges said in their ruling. “Accordingly, there can be no fiduciary duty in these areas.”
Instead, the judges charged Hub and other insurance brokers with a duty “no greater…[than] to use reasonable care and diligence in procuring insurance” for clients.”
In general, the fiduciary duty of insurance agents and brokers is less stringent than that of other financial service professionals, noted Peter Kochenburger of the Insurance Law Center at the University of Connecticut.
"Insurance agents and brokers have a surprisingly low level of duty in terms of how it compares to other trained professionals," Kochenburger said. "The classic line in most states is that all an insurance agent has to do is listen and get the insurance a client asks for. They're not legally required to actually seaerch out what a client's needs might be."
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The legal responsibilities of a broker’s fiduciary duty were further illuminated this week after a California appellate court ruled that Hub International is not responsible for damages suffered by clients after marketing and selling an insurance program that later failed.