Low, Ball & Lynch’s

WEEKLY LAW RESUME

December 23, 2004 Issue   By: Ray Coates

Indemnity - Broker Liability to Insurer

Century Surety Company v. Crosby Insurance, Inc.

Court of Appeal, Fourth District

(November 17, 2025)

Broker liability to an insurer for problems in the application process are more frequently being asserted.  This case explores the parameters of such liability.

Baroco West, Inc., and others were sued for construction defects arising out of their work as a general contractor of single family residences.  Baroco tendered to Century Surety Company.  Century undertook the defense under a reservation of rights.  During its evaluation of coverage, Century determined the insurance application contained a false loss history.  Century withdrew its defense.

Baroco sued Century and Crosby Insurance, Inc., its broker.  Crosby filed a motion for summary judgment as to the Baroco complaint, which was granted.  Thereafter, Century filed a cross-complaint against Crosby alleging that Crosby submitted an application that contained information that was incorrect and which Crosby knew was incorrect.  Indemnity was sought from Crosby.  Crosby demurred to the complaint, and the trial court sustained the demurrer with leave to amend.  A second amended complaint alleged fraud, negligence and negligent misrepresentation by Crosby.  A second demurrer was sustained without leave to amend, and a judgment of dismissal of the cross-complaint was entered.  Century appealed.

The Court of Appeal affirmed with respect to the negligent misrepresentation cause of action, but reversed as to the other causes of action.  The Court stated the fraud cause of action alleged that the application contained a false written statement regarding the loss history of the insured.  It further alleged that Crosby was aware of the falsity of this statement.  Crosby argued that the insured was responsible for any misrepresentation in the application, not the broker.  This Court rejected that argument and stated an insurance broker is liable for losses incurred by an insurer as a result of the broker's fraud.  The Court concluded there was no basis in California law for exempting an insurance broker from the consequences of their own fraud.

The Court further rejected the argument that rescission was the only remedy.  The Court concluded that an action for damages could be brought against a broker for misrepresentation.

The Court further concluded that the broker could be sued for negligence.  The Court stated that while there had not been any previous California rulings on the issue, public policy reasons supported imposing a duty on insurance brokers to exercise reasonable care in preparing insurance applications.  While a broker was not a guarantor of information in the insurance application and did not necessarily have a duty to investigate information provided by the insured, where a broker knows of actual misstatements, the broker may be liable for transmitting those misrepresentations in the application, knowing the insurer will rely upon then.

As to the claim for negligent misrepresentation, Century failed to plead that Crosby made a false statement of a material fact honestly believing it to be true, but without a reasonable ground for such belief.  This was an essential element of a cause of action for negligent misrepresentation.  Thus, while the Court did not rule out such a cause of action in another case, in this case, the lack of such an allegation warranted the trial court in sustaining the demurrer as to the claim for negligent misrepresentation.

The judgment was affirmed as to the negligent misrepresentation cause of action, but reversed in other respects.

COMMENT

This case allows insurers to sue brokers for mistakes made in the application if they can establish the necessary elements of a cause of action for negligence or fraud.  This is one of the first cases to recognize such a right by insurers.

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