It’s a Wrap! Insurance Brokers Have No Duty to Warn Contractors When Their Wrap Policy Insurers Go Insolvent After Placing Policy

By John Armstrong

A “wrap” policy or Owner Controlled Insurance Program (OCIP) is a relatively new and popular form of insurance for construction projects. To simplify, imagine an insurer selling a monster insurance policy covering all liability risks that the developer, general contractor, and subcontractor might have for a construction project. The idea is strength in numbers, as all parties may contribute to the purchase of such insurance policy or program and also waive subrogation/indemnity rights against each other. Think economies of scale, like the power of all the States of the United States or the economic power of the Economic Union versus any one individual state or country.

A constant problem in construction related claims is what happens when a liability insurer goes insolvent. Often, there is a complex claims process akin to a bankruptcy. California’s Insurance Guarantee Association may provide some help when the insurer goes insolvent but CIGA’s liability is capped regardless of policy limits and usually cannot be recovered against if there is any other insurance available for a loss. (This can have the added event of barring liability claims against a negligent subcontractor if the subcontractor’s only available policy for a loss is a loss covered by CIGA. Recovery must be had against CIGA or not at all.)

Recently, California’s Fourth District Court of Appeal in San Diego held that an insurance broker, Aon, who placed an OCIP covering a construction project had no legal duty to warn a subcontractor covered under the OCIP issued by Legion, which insurer became insolvent—even though the insurance broker learned that Legion was insolvent before the subcontractor work was completed. The sub argued that had the broker warned the sub that Legion (the OCIP insurer) was insolvent, the sub could have obtained other liability insurance for the eventual third party claim against the sub.

First, the court recognize that insurance brokers do have a legal duty to place insurance initially but do not have, in the absence of a contract, a continuing obligation to report on the insurance placed by the broker.

Second, the court rejected public policy arguments imposing an expanded legal duty on insurance brokers to warn their clients regarding changes in an insurer’s financial condition—especially since the Legislature and California’s Department of Insurance heavily regulated insurers brokers already and because most E&O policies covering brokers would exclude coverage for such claims (in California, courts look at whether insurance is available before expanding one’s common law liability).

Third, the court found that imposing such a legal duty to monitor insurance companies placed by brokers after issuance of a policy created practical difficulty for brokers.

The moral? If you’re insurance broker or if you adjust insurance broker D&O claims, this is a great case for your defense. If you’re a contractor or developer, self-monitor the wrap liability insurer so you can decide if you need additional insurance. Or see if your insurance broker will contractually agree to monitor for you and place other coverage if the wrap insurer goes belly up before construction is completed. 



Hotel Liability For Not Supplying Bath Mats—Lack of Similarity of Past Accidents Supports Summary Judgment


By John Armstrong

A recent case out of California’s Fourth District Court of Appeal involving Omni Hotels shows that a good investigation helps support summary judgment—even in California where such summary disposition  of cases are hard to come by.

For adjustors involved in hotel claims, however, it is the last two pages of the opinion that are of interest. The trial court granted summary judgment for defendants that a hotel was not liable for premises liability or under any of the products liability theories advanced for failing to supply bath mats. The trial court however granted plaintiff a motion for new trial on whether the hotel was negligent in either not investigating further or not communicating more widely within the hotel chain the reports of bathtub accidents at Omni hotels. 

The appellate court affirmed the summary judgments, but reversed the trial court’s grant of a new trial to plaintiff based on plaintiff’s evidence of past accidents. The appellate court looked at the hotel incident reports and determined that these did not show the required “substantially similar accidents” and lacked detail about the conditions of or in the bathtubs, and lacked details about the medical conditions of the guests who were reported to have fallen in the hotel’s bathtubs. The court found the reports only provided “speculative or conjectural evidence” that Omni knew or had reason to know of a dangerous condition surrounding its hotel bathtubs.

The court also rejected the argument that hotel’s past reports of bathtub accidents necessarily put on the hotel on a “heightened duty of inquiry” to find out from the bathtub manufacturer, Kohler, if Kohler was aware of similar incidents with its bathtubs. Though the plaintiff alleged he could bring “ample” evidence that Omni had both actual and constructive knowledge that tubs in its hotels were dangerously slippery, he failed to support these claims with anything but his anecdotal witness testimony and opinions. The appellate court found this evidence insufficient to create triable issues of fact.

The lesson? Courts are looking at the foundation of expert declarations mare carefully to see if the evidence relied on is legally sufficient to support having a trial. The appellate court recognized that bathtubs are inherently slippery, meaning that for a plaintiff to impose liability against the hotel, he’d have to prove that either the hotel made dangerously more slippery or was on notice that its tubs were more slippery than other tubs—a very difficult burden. Usually, if there is a clash of expert declarations, most courts will hold a trial and let the jury decide, which is probably why the trial court granted the motion for new trial. The appellate court reversed however because it carefully examined plaintiff’s evidence and found that it was not legally or logically compelling to prove the claim that Omni knew its Kohler tubs were more slippery than other tubs—“even if” the hotel had other reported tub accidents. Implicit in the court’s decision was that it would be likely for any large hotel chain to have tub accidents since they are slippery and since the general public, including persons with a variety of medical conditions, could cause or contribute to causing tub accidents.

The moral? You can get summary judgment granted in California when the plaintiff’s expert’s opinions are based on anecdotal evidence, educated guesses, or are otherwise lacking foundation.