Inside this Issue

A1 - Prime Designers in California Held to Owe Duty to Future Purchasers
A2 - Guide to Architecture and Engineering Pre-Construction Meetings
A3 - A/E Subject to Liability for Code Compliance Pursuant to Contract Language Setting Obligation Exceeding Generally Accepted Standard of Care
A4 - Differing Site Conditions: Trial Necessary to Determine if Federal Contractor Entitled to Relief
A5 - Insurance Broker not Liable to its Client When Insurance Program Failed and was Put into State Receivership

Article 1

Prime Designers in California Held to Owe Duty to Future Purchasers

See similar articles: Duty of Care | Third Party Beneficiaries

Dion N. Cominos, Esq.
Gordon & Rees LLP

The Supreme Court of California has now published its decision in Beacon v. Skidmore, Owings & Merrill (211 Cal.App.4th 1301 (2014)). In short, the Court concluded that prime architects designing residential buildings owe a duty of care to future homeowners even though they do not actually build the projects themselves or exercise ultimate control over their construction.

Procedural/Factual Background

Of importance, Beacon involved a demurrer at the trial court level meaning that, on appeal, the Supreme Court was required to accept the facts pled in Plaintiff’s amended complaint as being true. This included the allegation that the Beacon project’s designers provided their services “knowing that the finished construction would be sold as condominiums.” It was also claimed that the Defendants played an active role throughout the construction process, including coordinating efforts of the design and construction teams, conducting weekly site visits and inspections, recommending design revisions as needed, and monitoring compliance with design plans. For their various services, the designers were reportedly paid $5 million. Plaintiff alleged that negligent design work resulted in several defects, including extensive water infiltration, inadequate fire separations, excessive solar heat gain, structural cracks, and other safety hazards.

Explanation of Court’s Decision

In reaching its decision that architects owe a duty of care to future homeowners, the Court distinguished its earlier holding in Bily (limiting the duty of care owed by auditing firms to non-client third parties) by pointing out that the Beacon case involved: (1) a much closer connection between the Defendants’ conduct and Plaintiff’s injury; (2) a far more limited class of potentially-affected persons/transactions; and (3) an absence of “private ordering” options that could efficiently protect homeowners from design defects and their resulting harms.

The Supreme Court also distinguished the Court of Appeal’s earlier decision in Weseloh, noting that the Defendants in that case played a materially different role in their construction project in that they had no direct contractual relationships with either the owner or general contractor, were paid a limited fee, and did not supervise construction of the subject retaining walls. In the Court’s words, “Weseloh merely suggests that an architect’s role in a project can be so minor and so subordinate to the role or judgment of other design professionals as to foreclose the architect’s liability in negligence to third parties.” Also noteworthy is the fact that Weseloh was decided on summary judgment (as opposed to demurrer), thus allowing the trial court to actually test the viability of plaintiff’s claims against an established body admissible evidence rather than assuming all of the factual allegations to be true.

The Beacon Court concluded its analysis by applying the so-called Biakanjafactors in reaching its ultimate determination that a duty of care was owed, noting that: (1) Defendants’ work was intended to benefit the Plaintiff homeowners; (2) it was foreseeable that these homeowners would be among the limited class of persons harmed by negligently-designed units; (3) Plaintiffs have suffered injury in that the design defects made their homes unsafe/uninhabitable; (4) because Defendants were the sole architects on the project, there is a close connection between their conduct and the injury suffered; (5) significant moral blame attached to Defendants’ conduct given their role coupled with the awareness that future homeowners would rely on their specialized expertise in designing safe/habitable homes; and (6) the policy of preventing future harm to homeowners relying on an architect’s specialized skills supports establishing a duty of care.

Unlike the Court of Appeal, the Supreme Court in Beacon chose not to rely on California’s “Right to Repair” Act to support its analysis, observing that even if the Act did not impose an independent statutory duty of care, such a duty would nonetheless still exist under common law.

Takeaways

Although not a total loss for the design community, Beacon will certainly have the effect of expanding A&E liability to a broader spectrum of claimants and generally keep A&E defendants in lawsuits for longer periods of time. In sum, among the issues clarified by the opinion are the following:

Extricating designers at the initial pleading stage will prove more difficult so long as plaintiff can plead nominal facts establishing the existence of a duty of care;
Designers in prime contractual positions (as opposed to sub-consultants) are unlikely to successfully prevail on legal defenses based on a lack of duty; and
The specifics of a designer’s contractual arrangements, fee structure, scope of services, and interplay with other project participants will act as major determinants in the question of whether a duty of care exists.

Conclusion

The lingering crucial questions following Beacon are a) whether prime designers will always be held to owe a duty of care to future purchasers as a matter of law, and b) whether sub-consulting designers will always be relieved of owing such a duty on account of their lower tier contractual status. Unfortunately, it appears that no hard and fast bright line rule can be discerned from the opinion, and each case will be decided on its particular facts pursuant to a factually-driven Biakanja analysis. This being the case, the probability of designers’ succeeding on dispositive motions is likely to be lower in the future.

DION N. COMINOS, ESQ. | Firmwide Managing Partner
GORDON & REES LLP

275 Battery Street, Suite 2000
San Francisco, CA 94111
P: 415-986-5900 | F: 415-262-3714

dcominos@gordonrees.com

This article is published in ConstructionRisk.com Report, Vol. 16, No. 7 (July 2014).

Article 2

Guide to Architecture and Engineering Pre-Construction Meetings

See similar articles: Pre-construction meeting

By R. Burns Logan, Esq.

A few weeks ago I wrote an article on construction pre-construction meetings. See article here. That article was intended to benefit contractors who are beginning work on a new project. However, pre-construction meetings are also extremely important for architects and engineers on construction projects. While the general idea of the pre-construction meeting is the same for architects and engineers as it is for contractors, there are some differences.

The most important thing to remember when considering whether to do a pre-construction meeting is that every single construction lawsuit I have been a part of related to architecture and engineering work included claims that the architect or engineer failed to properly perform its “construction administration” activities on site. Not just some lawsuits, every single lawsuit. It is extremely important that you manage your client’s expectations and perform the construction administration work which you have contracted to perform.

Who Should Be Involved in the Pre-Construction Meeting?

An architect’s or engineer’s pre-construction meeting should include the project architect, project executive, shop drawing reviewers, RFI reviewers, and any other stakeholders in your company involved in the project. You should probably also involve your legal counsel to perform a basic review of your contractual requirements to determine exactly what your construction administration duties include.

Each of the people involved should determine the top issues which they believe will affect their scope of responsibilities on this particular project. For example, the RFI review personnel will have different priorities than the person performing onsite inspections. The idea is that everyone gets a chance to think through the best ways to make projects successful.

Legal Issues to Discuss at Pre-Construction Meeting

There are eight (8) things I routinely discuss at architecture and engineering pre-construction meetings. The point of the discussion is to focus the day-to-day project management team on the relevant legal issues they may face in a construction administration scope of work and what they can do to resolve legal issues before they spin out of control.

1) Change order provisions. Be sure you understand what your contract says about how, when, and what a change order request can include. Architects and Engineers are often responsible for processing contractor change order requests. This could mean everything from the proper procedure for documenting design changes to managing changes for unknown conditions. You need to ensure you have a system in place to ensure you are managing the expectations of the owner and contractor regarding change orders.

2) Damages for delay issues. Almost every construction project runs into schedule challenges which must be overcome. Many of these challenges are faced successfully simply because the parties knew beforehand how to comply with their contract. If there are weather delays or design delays, the project team needs to know exactly what needs to be documented and in what time frame.

3) Liquidated damages clause. Everyone on the project needs to know what the liquidated damages clause includes. This will guide business decisions regarding whether to request change orders or possibly to accelerate the schedule of the work when needed.

4) Time and money for concealed conditions. The parties need to understand, especially at the pre-construction stage, what the contractor’s rights are related to concealed conditions. Often when sub-grade work is being performed, quick decisions need to be made about how to address unforeseen issues. If the parties understand what their obligations are when these issues arise, the process can move much more quickly.

5) Who is responsible for informing of design defects and other issues. As and architect or engineer you are ultimately responsible for any design defects. If your project team recognizes a design defect, it needs to know what should be done immediately to remedy this issue. Design defects which are ignored by the project team create huge problems down the road when systems do not work or the building does not meet the owner’s expectations.

6) Notice requirements. All project personnel need to know what, when, and how to provide notice on a project. This is by far the best way to avoid construction lawsuits on your project. The notice provision is intended to give all parties reasonable facts surrounding potential claims and issues so that the parties can come together and attempt to create a resolution which is acceptable to everyone. If you do not provide proper notice, this cannot happen.

7) Timetable for responding to RFIs and Submittals. Oftentimes, the construction schedule is impacted by delays related to Requests for Information and Submittals. The project team needs to have a solid system in place which takes into account the particular contract specifics to deal with these issues.

8) Inspection and Observation Duties. As an architect or engineer you need to know exactly what the owner and contractors expect from you regarding inspections or observations. You should note what your contract says about the elements you are required to inspect, the detail of those inspections, and how often you are required to inspect. If you think you are supposed to go to the site once a month and the contract says once a week, there will be major problems.

Along with this article, I have provided an “Architecture and Engineering Pre-Construction Legal Worksheet” you can quickly go through with your project team to discuss these particular issues.

Architecture and Engineering Pre-Construction Legal Worksheet

Conclusion

Pre-construction meetings are one of the most effective ways you can manage risks on your project. Enrolling the help of your project teams at the beginning of the project will help identify issues and sidestep traps that are inherent in every construction project.

R. Burns Logan, Attorney At Law

LLOYD, GRAY, WHITEHEAD & MONROE, P.C.

p: 205.967.8822 f: 205.967.2380 e: blogan@lgwmlaw.com

a: 2501 Twentieth Place South / Suite 300 / Birmingham, AL 35223

Southeast Construction Law Blog

Article 3

A/E Subject to Liability for Code Compliance Pursuant to Contract Language Setting Obligation Exceeding Generally Accepted Standard of Care

Architect is subject to potential liability for failure of design to comply with fire code requirements regardless of whether the generally accepted standard of care was satisfied. This is due to breach of contract language requiring absolute code compliance. The Broward County, Florida School Board contracted an architect to perform design services for a high school renovation. After the design was completed and construction began, the School Board concluded that the design was not code-complaint regarding fire safety – specifically that the code required a third floor balcony to have an emergency exit in case of fire. While the project was being designed, a peer reviewer contended that an emergency exit was required. The architect “disagreed and suggested an alternative solution to meet the fire code standards.” The peer reviewer “repeatedly disagreed with the architect’s alternative solution." But ultimately the design was finalized as the architect proposed, with what the architect thought was approval by the building code official “based on oral statements made by the official during a meeting.” After construction commenced, the official concluded that the design plans were not code-compliant. This resulted in paying more for the renovation because the contractor’s bid did not contemplate the construction of a staircase, and the initial construction had to be reworked. School Board of Broward County v. Pierce Goodwin Alexander & Linville, 2014 WL 1031461 (Fla. App., 4th Dist, 2014).

Language in the Contract Addressing Standard of Care and Code Compliance

In litigation against the architect to recover its increased construction costs, the school board alleged that the designer breached its contractual obligation to provide a design consistent with code. The architect’s defense that it met the standard of care in its interpretation of what was required by code was rejected by the court, which found that the contract held the architect to both a generally accepted standard of care, plus a separate duty to design to code. It was the specific language of the contract that caused this result. This demonstrates the importance of exercising great caution in drafting language in the contract addressing standard of care, code compliance and indemnification – all which came into play here.

Because the standard of care paragraph stated the architect would comply with the “customary professional standards currently practiced by firms in Florida AND in compliance with any and all applicable codes, laws, ordinances, etc.,” the appellate court held that compliance with code was separate and apart from the normal standard of care requirements. It reversed the lower court decision that had required the county to prove the architect was negligent. Please read the commentary below for drafting tips to avoid this outcome.

The appellate court concluded they erroneously interpreted the contract and applied an incorrect standard of care. It accepted the position of the school board, which argued that the standard of care usually applicable to architects was heightened by three provisions of the contract:

“2.1.3 As to all services provided to this Agreement, the Project Consultant [the architect] shall furnish services by experienced personnel and under the supervision of experienced professionals licensed in Florida and shall exercise a degree of care and diligence in the performance of these services in accordance with the customary professional standards currently practiced by firms in Florida and in compliance with any and all applicable codes, laws, ordinances, etc....

2.1.4 As to any drawings, plans, specifications or other documents or materials provided or prepared by Project Consultant or its Sub–Consultants, the Project Consultant agrees same: … Comply with all applicable laws, statutes, rules and regulations, building codes and Owner's [the school board] guidelines and regulations, which apply to or govern the Project ...

2.1.5 All professional design services and associated products or instruments of those services provided by the Project Consultant shall:

.1 Be in accordance with all applicable codes, laws, and regulations of any governmental entity, including, but not limited to, [list of regulatory entities] with the Owner serving as the interpreter of the intent and meaning of ... any other applicable code[.]"

(emphasis added).

In opposition, the architect argued that the applicable standard of care was governed by the indemnification article of the contract at section 8.1.1., which provides:

To the fullest permitted by law, the Project Consultant shall indemnify and hold harmless the Owner ... from and against any and all liability, claims, causes of action (by whomever brought or alleged and regardless of the legal theories upon which the liability, claims or causes of action are based), losses, damage, costs, expenses and fees ... which are or may be imposed upon, incurred by or asserted against Owner ... to the extent said liability, claims, causes of action, losses, damages, costs, expenses and/or fees are caused by the Project Consultant's negligent, reckless or intentional wrongful acts or omission, error, misconduct, or commission.

(emphasis added).

The appellate court concluded that although Article 2.1.3 described a generally accepted standard of care as being the applicable standard by which the designer would be judged, Article 2.1.4 added another requirement over and above that. Specifically, Article 2.1.4 mandated compliance with all applicable laws and codes and did not make such compliance subject to the standard of care provision. In other words, code compliance was a separate requirement that the designer agreed to without any limitation.

In addition, the court concluded that even within the Article 2.1.3 standard of care clause, there were two separate requirements, one being to meet the standard of care but the other being “AND in compliance with any and all applicable codes, laws, ordinances, etc…” If the designer intended that compliance with code be subject to reasonable efforts pursuant to the generally accepted standard of care, it needed to more accurately write the clause to state that intent. By the placement of the word “and,” the court concluded compliance with code was a requirement additional to what was required by meeting the standard of care.

In another effort to demonstrate that the standard of care was limited to the generally accepted standard (i.e., non-negligent), the designer argued that the indemnity clause at article 8.1.1. showed that intent. The court rejected that argument for several reasons, including (1) the indemnification article was only for third party claims and not for first party claims such as the one brought by the designer’s client, the school board; (2) the placement of the word “or” in the relevant language had the grammatical result of causing the designer to be obligated to indemnify against claims caused by its negligence “OR omission, error, misconduct, or commission.”

The court explained, “If ‘negligent, reckless or intentional wrongful’ were intended to modify ‘omission, error, misconduct, or commission,’ the disjunctive ‘or’ would not have been used, and the last portion of section 8.1.1 would have been written as follows: ‘… to the extent said liability, claims, causes of action, losses, damages, costs, expenses and/or fees are caused by the Project Consultant's negligent, reckless or intentional wrongful acts, omissions, errors, misconduct, or commissions.’ ”

The court stated that with regard to indemnification, “the rights and remedies for indemnity regarding negligence pursuant to article 8 were in addition to, and not a limitation upon, the rights, and remedies for breach of performance required by article 2.” In conclusion, the court stated, “The fact that all three sections specifically state that all design plans were to be in compliance with all applicable codes, and only once makes reference to ‘customary professional standards,’ persuades us that the architect committed itself to a higher standard.”

Comment on the Importance of Grammar.

This decision demonstrates how important the placement in a sentence of the words “and” and “or” can be. If the intent is to limit the design professional’s indemnification duty to only negligent acts, errors and omissions, the word “negligent” needs to be in a position such as just shown in order that it applies to and modifies each of the words “acts,” “errors,” and “omissions.” It is not uncommon to see contract language that instead reads something like this: “Consultant will indemnify … for damages … from acts, errors or negligence.” Note that the placement of “negligence” after the “or” means that it does not modify the “acts, errors.” In other words, the designer must indemnify for all acts and errors even if not negligent.

Another example of such a result is “negligence, acts, errors, or omissions.” By putting a comma between “negligence” and “acts” this results in the words “acts, errors, or omissions” standing on their own, separate from “negligence.”

From a contract drafting perspective, when it comes to committing to code compliance, it is prudent and appropriate to limit the obligation by stating that the designer will exercise the standard of care to comply with code. Another possibility is to state the designer will exercise the standard of care so that the project will comply with code.

The key is that the language be written in such a way that rather than being an absolute obligation to attain code compliance, it is only a commitment to exercise the standard of care in an effort to attain code compliance. The problem is that reasonable people can disagree on whether a design is code compliant. An absolute commitment to code compliance constitutes an uninsurable warranty or guarantee.

Consider using a clause such as “Design Professional will use reasonable care to comply with applicable laws and codes in effect at the time the services are performed hereunder.” Or if the “standard of care” has been properly defined in the contract, consider writing: “Design Professional will exercise the Standard of Care to produce plans and specifications that comply with applicable laws and codes….”

Comment on Indemnification Clause

In arguing that the indemnity clause should be interpreted to limit the standard of care owed to its client, the architect stretched the clause beyond its normal intent. The court concluded that the indemnification clause was not intended to establish standards or obligations applicable to the services of the architect to its client or applicable to first party claims brought by the county against the architect. Instead, the indemnity clause was solely to establish an obligation to indemnity the county against “third party claims.”

This “third party claim” aspect of indemnification clauses has been the historical norm. Many clauses will describe the indemnity as applying to damages the client sustains due to claims for bodily injury or property damage, i.e., claims by others against the indemnitee. More recently, however, we have been seeing more indemnification clauses that fail to reference bodily injury and property damage. Instead, they are stating all claims, damages, breach of contract, etc. Some courts have interpreted such clauses to apply to first party claims by the indemnitee (client) against the indemnitor for the client’s own damages, economic losses, etc.

Even change order costs that are paid to a construction contractor are being claimed by owner/Indemnitees as indemnification claims against design firms. To clarify that only third party claims are indemnified, consider a clause such as the following:

“Indemnification. Notwithstanding any clause or provision in this Agreement or any other applicable Agreement to the contrary, Consultant’s only obligation with regard to indemnification shall be to indemnify and hold harmless (but not defend) the Client, its officer, directors, employees and agents from and against those damages and costs (including reasonable attorneys fees and cost of defense) that Client is legally obligated to pay as a result of a third party claim concerning the death or bodily injury to any person or the destruction or damage to any property, to the extent caused by the negligent act, error or omission of the Consultant or anyone for whom the Consultant is legally responsible, subject to any limitations of liability contained in this Agreement.”

Comment on Betterment

The court decision also addressed a defense by the architect that alleged the county was not entitled to the full amount of damages awarded by the jury because part of those damages were actually “betterment” to which the county was not legally entitled. The court agreed in part, and explained the principles of betterment, or what it called “first cost.” The court concluded that “damages collected by the school board for the [change orders] should not include costs for construction that the school board would have incurred if the initial design plans matched the final design plans.” Or as further stated by the court, “the purpose of damages is to restore an injured party to the same position that he would have been in had the other party not breached the contract.” “In restoring the injured party to the ‘same position,’ he is not entitled to be placed because of that breach, in a position better than that which he would have occupied had the contract been performed.”

Using the term “first cost,” the court found that the amount the county would have incurred if the omitted change order item had been originally included in the design plans must be removed from the damages calculation. This is because if, for example, something like a staircase is left out of the plans, then the contractor never included any cost for that staircase in its bid. If the original plans had included the stairs, the contractor logically would have included costs in its bid for those stairs and that will be the “first cost” that the county would have had to pay if the original design had included the stairs as it should have.

When the change order is later granted to a contractor to install the missing stairs, the measure of damages will be the difference between what it costs to rip out work, make changes, and install the stairs now versus what it would have cost to have obtained the stairs if they had been designed and bid at the correct time. The county should not be entitled to a free set of stairs. That would be “betterment.” Or as analyzed by this court, it would be improperly removing the county’s “first cost.”

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 16, No. 7 (July 2014).

Article 4

Differing Site Conditions: Trial Necessary to Determine if Federal Contractor Entitled to Relief

See similar articles: Differing Site Conditions | Federal contract

A contractor on a U.S. Army Corps of Engineers project filed a complaint with the U.S. Claims Court, claiming it was entitled to equitable adjustment to its contract for additional costs and time due to encountering differing site conditions while dredging the Miami River and disposing of contaminated sediments. The court denied counter-motions for summary judgment, concluding that issues of material fact are in dispute and that the contractor needs to present evidence to meet its burden of proof that the conditions actually encountered were materially different from those indicated in the contract documents and unforeseeable on the basis of the information available to the contractor at the time of bidding. The decision explains the “six indispensible elements” that the contractor will be required to prove at trial for a differing site condition claim. Weston/Bean Joint Venture v. United States, 115 Fed. Cl. 215 (2014).

Details on Differing Site Conditions

In its complaint, the contractor alleged that the subsurface conditions it found were materially different from those indicated in the contracting documents. Specifically, it alleged that the contract indicated that the sediments the contractor would be required to dredge and process would consist of fine or course particle less than one to two inches in size, but the actual sediments contained significant amounts of large gravel, as well as cobbles and boulders. Based on what the court called “voluminous briefs and exhibits in support of the cross motions, and based on oral arguments, the court decided “the proper resolution of the plaintiff’s claims would benefit from full development of the record at trial.”

Subsurface or Latent Physical Conditions

This is a type 1 differing site condition claim. That means it is based on the alleged existence of “subsurface or latent physical conditions” at the site that differ materially from those indicated in the contract. The court explains that, “To determine whether [contractor] has met this burden, the court must ‘place itself into the shoes of a “reasonable and prudent” contractor, and ascertain whether the conditions actually encountered were reasonably unforeseeable on the basis of all the information available to the contractor at the time of bidding.”

As stated by the court, “There are 'six indispensable elements' to a differing site condition claim, incluidng: (1) that the contract affirmatively indicated subsurface conditions upon which the contractor's claims are based; (2) that the plaintiff acted as a reasonably prudent contractor in interpreting the contract documents; (3) that the contractor reasonably relied on the indications of subsurface conditions in the contract; (4) that the subsurface conditions actually encountered differed materially from subsurface conditions indicated in the contract; (5) that the subsurface conditions encountered were reasonably unforeseeable; and (6) that the contractor's claimed excess costs were solely attributable to the materially different subsurface conditions." Citing Weeks Dredging & Contracting, Inc. v. United States.

In support of its differing site condition claim, the contractor here asserted that the contract documents, including boring logs and wash probe tests, and a “character of materials clause,” as well as the contractual characterization of the project as one involving “maintenance” rather than “new work” dredging, would be read by a reasonably prudent contractor as indicating that the sediments to be dredged would consist largely of fine or course particles less than one to two inches in size. The contractor provided a report and deposition testimony of an expert. In response, the government argued that the contract documents made no representation as to the quantity of oversized material in the sediment.

In denying summary judgment motions, the court found there to be several significant areas of material fact in dispute that would need to be resolved at trial. These include what subsurface conditions were “indicated” by the contract documents, and also the extent to which the conditions encountered differed from what was “indicated.”

Other issues to be resolved are whether the conditions were reasonably foreseeable, whether the contractor actually relied upon the conditions indicated in the documents when preparing its bid, and the extent to which the contractor’s increased performance costs were caused by differing site conditions.

Article 5

Insurance Broker not Liable to its Client When Insurance Program Failed and was Put into State Receivership

See similar articles: Broker Responsibility | Fiduciary Duty | Insurance Broker

Where an insurance broker marketed and sold a self-insured workers compensation program for contractors (the Contractors Access Program of California (CAP)) that subsequently became financially insolvent and failed, leaving the contractors exposed to considerable liability, the contractors sued the broker for negligence and constructive fraud. A California appellate court affirmed summary judgment for the broker, concluding that the broker had no duty under its standard of care obligations to investigate the condition of the insurer, and that it likewise owed no fiduciary duty. Mark Tanner Construction v. HUB International Insurance Services, 224 Cal. App. 4^th, 574 (2014).

The program was administered by a company named Compensation Risk Managers of California, LLC (CRM). Plaintiffs alleged the broker breached its duty to use reasonable care by failing “to investigate, engage in reasonable inquiry, discover and inform Plaintiffs of information, including the failures of CRM-managed self-insured workers compensation programs in New York and California, CAP’s deficit … and [the broker’s] relationship as an exclusive broker for CAP.” The plaintiffs also claimed constructive fraud by the broker based on allegations that the broker was in a fiduciary relationship with the plaintiffs and had an obligation to refrain from providing false factual representations and also failed to disclose its exclusive broker arrangement with CRM which plaintiffs alleged made the firm a broker for CRM instead of for the plaintiffs.

Summary judgment for the broker was sustained on appeal, with the court finding that (1) with regard to the negligence count, the broker was the broker for the plaintiffs and was entitled to rely on the State to vet the condition of CAP and owed no additional duty to investigate the financial condition of the insurer, and (2) with regard to constructive fraud count, the only potential fiduciary duty for the broker was to handle the insured’s money, and no fiduciary duty extends “to areas beyond the recognized duty to use reasonable care and diligence in the procuring of insurance at the insured's request.” The court concluded that an insurance broker has no duty to ascertain the financial soundness of the insurer or to advise an insured of adverse changes in the insurer's financial capability. “Accordingly, there can be no fiduciary duty in these areas.”

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