A California “Double-Check” On “Discount” Insurance Brokers

AMCO Insurance Company, et al. v. All Solutions Insurance Agency:
A California “Double-Check” On “Discount” Insurance Brokers

On February 8, 2016 the Fifth Appellate District Court of California clarified that an insurance broker is not subject to the protection of the rules of equitable subrogation, save in one specific context.  This highlights the importance and dangers of coverage lapses and potential for harm due to negligence by insurance brokers.  This decision may also influence a third party or its insurer harmed by a negligent broker’s action to settle with an assignment of rights.

In a matter arising out of the Superior Court of Tuolumne County, AMCO Ins. Co. v. All Solutions Ins. Agency, Docket No. F070038, the California Court of Appeal’s Fifth District held that (1) claims against an insurance broker for failure to procure requested coverage are assignable, and (2) that express contractual assignments of claims against a broker are not subject to the rule of superior equities that otherwise limits an insurer’s rights under the equitable subrogation doctrine.

If the second part of the Court’s decision left you scratching your head, do not despair!  In a tongue in cheek manner, referring to the same portion of its ruling, the Court admitted by footnote, “[i]n phrasing the issue, we have succumbed to the temptation of using traditional, nearly impenetrable legalese and, perhaps, have avoided the pitfall, identified by Groucho and Chico Marx, of trying something new and having people wonder if we know what we are doing.”

The underlying facts of this matter are all too familiar:  an insurance broker allegedly failed to obtain specific insurance requested by its client.  The client, Singh — a restaurant owner, was consequently left uninsured. Singh sustained liability while uninsured when his restaurant negligently caused a fire that spread to neighboring buildings and restaurants.  Singh settled that uninsured liability by assigning to the other business and property owners his causes of action against the insurance broker.  The ultimate plaintiffs to the AMCO litigation consisted of the neighboring business owners, the “restaurateurs” and AMCO, an insurance company that paid for damages to a neighboring building.  Plaintiffs sought to recover their damages through the assigned causes of action by filing a lawsuit against the insurance broker.  The trial court ultimately granted summary judgment for the insurance broker.

The trial court’s order granting summary judgment against AMCO stated that (1) as an insurer, AMCO’s “rights are ultimately proscribed by equitable principles rather than the basics of assignment”; (2) AMCO, even as an assignee of an individual, was required to first establish an equitable right to subrogation that was superior in position to that of the party to be charged —namely, Broker; and (3) AMCO could not prove it was entitled to equitable subrogation because its loss was not caused by Broker’s failure to maintain the policy, but by the fire, the fire being the very risk that AMCO assumed.  Similarly, in granting summary judgment against the other plaintiff restauranteur business owners, the trial court concluded the restauranteur plaintiffs, as assignees of Singh, had to establish an equitable right to subrogation that was superior in position to the position of Broker.  The trial court concluded the restauranteur plaintiffs could not establish the required superior position because “it is undisputed that the [loss of the restauranteur plaintiffs’] building was caused not by [Broker], but by a fire for which the assignor (Singh) was responsible.”

The Fifth District Appellate Court reversed and remanded the decision. The Appellate Court concluded that California, like the majority of jurisdictions in the United States, recognizes the assignability of a client’s causes of action against an insurance broker or agent for failing to obtain insurance.  The court also effectively limited California’s equitable subrogation doctrine as applying to a contractual assignment only if the assignee is an insurance company and the assignor was that insurance company’s policyholder.  In this case, the assignees (i.e., Plaintiffs – Restaurateurs/AMCO) did not issue an insurance policy to the assignor (i.e., Singh – the insurance broker’s client) and thus were never potential equitable subrogees of the assignor.  Therefore, the Appellate Court concluded that their contractual assignments are not subject to the rule of superior equities.  The Court further concluded there was a triable issue of material fact about whether the client requested the insurance broker to obtain insurance coverage before the fire.  Accordingly, the Court reversed the judgment.


Blog by: Alex Tramontano, Associate, San Diego