Employers who belonged to a failed workers compensation self-insured group can't sue insurance broker Hub International Ltd. for marketing and selling the program to them, a California appellate court has ruled.

In 2006, Mark Tanner Construction Inc. and Mt. Lincoln Construction Inc., both based in Truckee, Calif., joined a self-insured program for construction firms called the Contractors Access Program of California, or CAP, court records show. They bought into the program through Diversified Risk Insurance Brokers Inc., which was acquired by Hub International in 2007.

CAP failed in 2009, court records show, and was placed into conservatorship by the California Department of Insurance with unfunded liabilities of more than $20 million. The program later defaulted on its payment of workers comp benefits.

The group's nearly 250 members were sent assessments by the state insurance department in 2010 for the unfunded workers comp exposures, records show. Mark Tanner was assessed $150,258, and Mt. Lincoln was assessed $42,784.

Mark Tanner and Mt. Lincoln sued Hub for professional negligence and constructive fraud, noting that Diversified was part of a joint venture with CAP's administrator and received a small percentage of member contributions to CAP, records show. The employers argued that Diversified, and therefore Hub, failed to inform them about its relationship with the administrator, as well as financial problems that CAP and its manager had in previous years.

Hub countered that it was the California Department of Insurance's responsibility, not Diversified's, to make sure CAP met all of the requirements to remain solvent, records show. It also argued that California insurance brokers have “no duty to investigate the financial condition of an insurer before placing insurance with it on the client's behalf.”

%%BREAK%%

A superior court in Nevada County, Calif., ruled in favor of Hub, finding in part that the broker did not have a duty to investigate the financial condition of CAP, records show.

A three-judge panel of the California 3rd District Court of Appeals unanimously upheld that ruling Monday. In its ruling, the appellate court said Hub's duty was “no greater than the duty to use reasonable care and diligence in procuring insurance” for its clients.

Insurance brokers have “no duty to ascertain the financial soundness of the insurer or to advise an insured of adverse changes in the insurer's financial capability,” the ruling reads. “Accordingly, there can be no fiduciary duty in these areas.”