Prior Work Exclusion Can Be Devastating

In the placement of one of my contractor clients, I was amazed to discover that one of our new promising liability markets requires a “prior work” exclusion on all of their California contractor new business.  This is not a fly by night carrier taking this position – it is an A XV international carrier.  Our agency as a matter of  business practice will not accept heinous exclusions such as “prior work”, “action over” or “earth movement” exclusions for any of our clients under almost any scenario.

One would think it a serious breach of duty for an agent to place such limitations on a clients balance sheet. Sadly the California appellate courts think otherwise.  See excerpts below from a recent case absolving a flaky agent from liability:

     Duty… Broker contends Assemblers cannot establish Broker owed a duty to Assemblers to procure liability insurance with prior completed work coverage. We agree with this contention as well.

         As we recently explained, under well-settled law, “[i]nsurance brokers owe a limited duty to their clients, which is only ‘to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.’ [Citations.] Accordingly, an insurance broker does not breach its duty to clients to procure the requested insurance policy unless ‘(a) the [broker] misrepresents the nature, extent or scope of the coverage being offered or provided…, (b) there is a request or inquiry by the insured for a particular type or extent of coverage…, or (c) the [broker] assumes an additional duty by either express agreement or by “holding himself out” as having expertise in a given field of insurance being sought by the insured.‘ ” (Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Ins. Services West, Inc. (2012) 203 Cal.App.4th 1278, 1283 [138 Cal.Rptr.3d 294] (Pacific Rim).)

         Here, Assemblers does not assert and has not produced evidence Broker breached its limited duty to Assemblers in any of the above respects. Rather, Assemblers seeks to hold Broker accountable for breaching a previously unrecognized implied contractual duty to investigate Assemblers’s coverage needs and procure the requisite coverage to meet those needs, even if Assemblers did not request the coverage and, as appears from the record, probably could not have afforded it.

         Assemblers touts many policy reasons for recognizing this implied contractual duty. These reasons revolve around Assemblers’s assertion that recognizing the implied contractual duty would ensure fairness and equity by holding insurance brokers to the same standards as other professionals. Whatever the merits of these policy arguments, it is not difficult to conceive of countervailing policy considerations, including the likelihood such an implied contractual duty might cause brokers to oversell insurance to their clients in an effort to avoid the prospect of later professional liability.

         We are also mindful that a decision to imply a duty here would effectively mandate prior completed work coverage in all contractor general liability policies, which could appreciably increase the cost of the policies without directly benefitting the insureds. ……………………………..

         As we explained in Pacific Rim, balancing these types of considerations is properly the function of the Legislature, not the courts. (Pacific Rim, supra, 203 Cal.App.4th at p. 1285.) If imposing a broad duty on brokers to affirmatively determine and procure insurance to meet an insured’s coverage needs, or mandating prior completed work coverage in all contractor general liability policies, ” ‘is in the interest of the public…, the people of California, by initiative or through the Legislature, can create that duty….’ [Citation.] ‘We may not legislate on the subject in their stead.’ ” (Id. at p.

The lesson here is, unless you have the resources to engage a qualified risk manager, ensure you trust the placement of  your coverage only to those with the skills and professional designations required to protect your interests.  I am a member of the CA bar and frequently advise my fellow AGC lawyers on insurance issues.  Our key staff members are CRIS certified by IRMI.  Call or email with technical questions anytime

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Robert G. Mahan personally arranges and manages coverage for commercial property and casualty accounts. Click here for more about Robert's background...

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