California Wholesalers Fret Over Upcoming Legal Decision

A pending legal battle that could expose wholesalers in California to more lawsuits was the centerpiece of talk at the California Insurance Wholesalers Association conference in San Diego in mid-January.

During the three-day conference, “2013 California Wholesaler Industry Days,” a group of panelists tackled issues of regulatory concern for wholesale brokers in California, and at the center of that talk was Hull & Co. v. Superior Court, an ongoing case involving duty of care to a third party and an appeal to the California Supreme Court, a ruling that imposes a tort duty on wholesale insurance brokers not only to their retail broker customers but also to the insured, an entity with whom the wholesale broker has no contact.

Other groups involved in the appeal include the Surplus Line Association of California, the National Association of Professional Surplus Lines Offices, the American Association of Managing General Agents and the Council of Insurance Agents & Brokers.

A hearing is set for March. In November an attorney for the groups filed an amicus brief with the Supreme Court petitioning the court to review the matter, stating “wholesale insurance brokers now face potentially unlimited liability for doing business in California – not from the retail brokers they serve, but from third parties with whom they have no contact.”

The wholesale broker, Hull & Co., is being sued by a third party claimant for professional negligence. The plaintiff was shot at a bar, and initially sued the bar and its security guard company, claiming they should have prevented the shooting.

After settling claims the plaintiff brought a suit against the security guard company’s insurer, claiming that the insurer had committed bad faith by denying coverage based on an assault and battery exclusion. The trial court ruled the exclusion was enforceable and granted summary judgment for the insurer.

The plaintiff then sued the wholesale broker claiming to argue that the wholesale broker owed a duty of care to the security guard company to ensure the insurance policy covered the suit against the guard company.

It was claimed the wholesale broker breached its duty of care to the security guard company and the plaintiff. The trial court held that there was a triable issue of fact as to duty of care.

The duty of care issue, thought to be settled several years ago, has reemerged and wholesalers need to pay attention to it, said Hank Haldeman, with Los Angeles-based The Sullivan Group.

“It has reemerged this year in a way that shows we need to be paying attention and do something about it,” he said.

Richard Brown, an attorney involved with filing the brief, put it bluntly: “Basically it’s a gun to the head of the wholesaler.”

Ben McKay, executive director of the Surplus Lines Association of California, said he believes a negative outcome of the hearing could be that it changes the nature of the relationship between wholesalers in insureds – a relationship that doesn’t exist to begin with.

“This case seeks to change that, where you as a wholesale broker will have a duty of care somebody you never met,” he said.

Also on the panel was Brady Kelley, executive director of the National Association of Professional Surplus Lines Offices.

“It demonstrates a very broad range of liability here for the wholesale broker,” he said, noting that it could open up wholesalers to a whole slew of new litigation anytime a claim isn’t paid and it could create new laws that conflict with laws in other states.

McKay agreed.

“Every time a policy doesn’t pay, a wholesaler is exposed, that’s what this means,” he said.

Even if the court rules in favor of the wholesaler, there will remain an ambiguity in the law, said McKay, who is considering creating a legislative fix.

“We actually have some language we’re looking at right now,” he added.

John Norwood of Norwood & Associates, who was the keynote speaker during the group’s luncheon, said he doesn’t put a lot of faith in legislative fixes.

The well-known industry lobbyist pointed out that what goes in legislation is often now what comes out at the other end.

He also spoke about the new super majority in California Legislature, where Democrats control both houses and can control every facet of the legislative process almost unimpeded, including raising taxes, and creating constitutional amendments.

“This is a huge challenge when you’re trying to play defense,” said Norwood, who often finds himself trying to halt legislation that can hurt the insurance industry.