BNCCORP, Inc. v. HUB Int’l Ltd. – 7/11/2017

July 13, 2017

Arizona Court of Appeals Division One holds that a parent may bind its subsidiary to a jury trial waiver and an insurance broker does not breach the duty of care by failing to perform independent risk evaluation in the absence of a specific request from the insured.

A bank entered into mortgage-loans-in-transit (MLT) agreements with loan originators, under which the bank would retain a participation interest in each of the loans and be paid upon sale of the loan in the secondary market.  The bank used an affiliate as its insurance broker.  The bank’s parent sold the affiliate to a brokerage under a purchase and sale agreement, and the brokerage continued to act as the bank’s broker.  The bank learned that one of the originators under the MLT program had engaged in fraudulent conduct and filed an insurance claim with its carriers.  The carriers settled after a dispute over coverage, and the bank commenced a negligence suit against the brokerage for failing to select proper insurance to cover the risk of fraud for the MLT agreements.  The brokerage prevailed after a bench trial.

The bank appealed, focusing on whether it had waived its right to a jury trial and whether the brokerage breached the applicable standard of care.  The Court of Appeals affirmed.  First, the Court held that the negligence action fell under a jury waiver in the purchase and sale agreement, because the bank was an affiliate of the signatory and could reasonably expect to be bound to the terms of the agreement.  Turning to the issue of breach, the Court held that the brokerage did not breach its duty of care by failing to recommend a type of insurance specifically tailored to the risks of the MLT program or by failing to undertake an independent risk evaluation for that program.  The bank failed to identify or foresee its own risks, made only a general request for coverage recommendations, and did not provide the brokerage with adequate information of the MLT risks.  Moreover, in trial, the bank took the position that the insurance the brokerage obtained did cover for risk of fraud in the MLT program.

Judge Thompson authored the opinion; Judges Howe and Winthrop concurred.