Are claims against an insurance broker or agent by a non-client third-party viable?

Are claims against an insurance broker or agent by a non-client third-party viable?

A recent court decision out of California once again brings to the forefront the question of whether claims against an insurance broker or agent by a non-client third-party are viable.  One  thing to always look at is what state is the non-client third-party claim being made.  For example, in New York, a third-party negligence claim against an insurance broker is not allowable where the same claim in New Jersey or Connecticut might be legally cognizable.  However, even in a jurisdiction that does not recognize a third-party non-client claim against an insurance broker or agent, there could still be liability if the third-party advances a client’s claim through an assignment.

This assignment scenario was recently reaffirmed by a California intermediate appellate court in AMCO Insurance v. All Solutions Insurance Agency.  In a nutshell, All Solutions was the insurance broker for the neighbor of a restaurant and other adjoining properties.  A fire started on the neighbor’s premises causing damage to the restaurant and an adjoining property.  The neighbor lacked insurance to respond to the claims for property and business damage resulting from the fire leading to a default judgment against him by among others AMCO, the insurer for the adjoining property owner who paid its insured for their property losses.  The neighbor contended that All Solutions failed to obtain insurance for him, and assigned his failure to obtain insurance claims against All Solutions to AMCO.

The California Court of Appeal reversed the decision of a lower court that dismissed AMCO’s claims on the basis that AMCO’s losses were based on the fire, not All Solutions alleged failure to procure, and AMCO could not establish a superior position to those of All Solutions to support an equitable subrogation claim.  Specifically, the California appellate court found that AMCO was an equitable subrogee as to the negligence claims against the neighbor for causing the fire but that did not extend to the contractual assignment of the neighbor’s claims against All Solutions.  The assignment claim was therefore upheld against the insurance broker.

A couple of points are noteworthy.  First, the AMCO v. All Solutions case is consistent with other jurisdictions allowing insurance agent and broker negligence claims to be assignable and brought by a non-client third-party (i.e., Arizona – Webb v. Gittlen; Florida – Wachovia v. Toomey).  Second, the California Court of Appeal properly distinguished the case before it from the general exception not allowing for the assignment of legal malpractice cases focusing on the personal nature of an attorney’s duty to the client and attorney-client confidentiality.

Finally, while an assignment gives a party the opportunity to avoid the financial pitfall of a judgment with no insurance to respond to, it does create the all too often situation where the assignment is accompanied by a confession of judgment that is almost always inflated.  The insurance broker or agent is then forced to defend not only the breach of duty claims, but whether the measure of damage against it is the actual damages sustained arising out of the failure to obtain insurance or the inflated confession of judgment amount, and the latter is a topic I will discuss in future blogs.

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