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May 2011

Workmen's Auto Insurance Company v. Guy Carpenter & Company, Inc. ? Reinsurance Broker Owes No Fiduciary Duty to its Client-Insurer

Even If an Insurance Broker Has Certain Fiduciary-like Duties, It Cannot Be Sued for Breach of Fiduciary Duty

(May 4, 2011) 2011 Cal.App.LEXIS 533; 11 C.D.O.S. 5303

The California Court of Appeal, Second Appellate District, affirmed a Los Angeles County Superior Court order granting defendant insurance broker's summary adjudication and subsequent demurrer as to plaintiff insurer's breach of fiduciary duty cause of action.  The plaintiff insurer alleged that defendant, as a reinsurance intermediary, had breached its fiduciary duty by failing to secure timely payments from the reinsurer, failing to obtain the best terms for reinsurance, and acting with the intent to injure the insurer by incurring inflated commissions.  The appellate court affirmed both the summary adjudication and demurrer holding that an insurance broker cannot be sued for breach of fiduciary duty.

Workmen's Auto Insurance Company ("Workmen") entered into a brokerage agreement with Guy Carpenter & Company, Inc. ("Carpenter") which appointed Carpenter as Workmen's reinsurance agent and intermediary.  Workmen alleged that Carpenter was given authority to (1) act as reinsurance intermediary for all reinsurance and limits regarding insurance programs; (2) place various reinsurance agreements covering classes of risks authorized by Workmen; (3) negotiate terms and conditions of reinsurance for the benefit of Workmen; (4) complete and document agreements that accurately reflected Workmen's understanding of the agreement's benefits; (5) prepare and complete the written documentation and wording the reinsurance agreements; and (6) perform all other brokerage functions customary in the reinsurance industry.

Carpenter negotiated with PMA Capital Insurance Company of Philadelphia, Pennsylvania and secured a finite quota share reinsurance agreement for certain risks covered by Workmen.  According to Workmen, Carpenter breached its fiduciary duties to Workmen resulting in over $35 million in damages. 

Workmen sued Carpenter for negligence, breach of fiduciary duty, and breach of contract.  Although procedurally flawed, the trial court first granted Carpenter's summary adjudication regarding Workmen's allegation that Carpenter did not secure the best available terms.  The trial court later sustained Carpenter's demurrer to Workmen's fiduciary duty cause of action without leave to amend.  The case proceeded to trial on Workmen's causes of action for negligence and breach of contract.  A jury found in favor of Carpenter and Workmen timely appealed.

On review, the appellate court established that Carpenter was a reinsurance intermediary-broker and was, therefore, an agent.  The appellate court upheld the trial court's ruling that an insurance broker cannot be sued for breach of fiduciary duty.  The Court noted that while agents sometimes perform fiduciary like duties, there is not a single California precedent permitting a client to sue an insurance broker for breach of fiduciary duty. 

The appellate court first acknowledged the holding in Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Associates, Inc. (2004) 115 Cal.App.4th 1145 that a broker acts in a fiduciary capacity when he receives and holds premium or return premium.  The appellate court reasoned that, in a technical sense, a broker is charged with certain fiduciary duties whether or not the broker-insured relationship is fiduciary.  However, the court in Hydro-Mill found that the broker's failure to obtain the requested insurance coverage without disclosing that failure amounted to professional negligence and nothing more.

The appellate court then examined Kotlar v. Hartford Fire Ins. Co. (2000) 83 Cal.App.4th 1116 where an insurance broker was sued for breaching the fiduciary duty to provide the insured with notice of the insurer's intent to cancel a policy.  The court in Kotlar found no such duty existed in case law, and declined to create one.  The appellate court concluded that Kotlar stood for the proposition that a broker's duties are defined by negligence law, not fiduciary law.

The appellate court then rejected Workmen's agency arguments by finding that agency of an insurance broker must be viewed only through the lens of insurance law because it is a constellation of rules and policies all its own. 

The appellate court explained that agency law requires an agent to disclose to his principal every fact known to him bearing upon the subject matter of the agency, the concealment of which would lead to the injury of the principal.  Further, an agent has an obligation of diligent and faithful service like that of a trustee.  If applied in the insurance context, the appellate court reasoned, agency law holdings would require insurance brokers to disclose all material knowledge and advise clients on specific insurance matters even if the broker is not required to do so by the less stringent duty of care.

In holding that insurance law takes precedence over agency law, the court applied the doctrine of stare decisis to achieve certainty, predictability, stability, and convenience in the insurance industry.  To hold otherwise, the appellate court rationalized, would impose new duties on brokers in conflict with decades of case law.  The appellate court stated that years of litigation and costs associated with errors and omissions insurance for brokers would likely increase the cost of insurance for others.

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This opinion is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority.

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David L. Jones