Action Against Referral Service Fails

On June 9, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in Vista Food Exchange, Inc. v. Benefitmall, 2014 NY Slip Op. 31491(U), dismissing an action against a referral/management service.

In Vista Food Exchange, the parties’ dispute began when the defendants allegedly referred the plaintiff, a small food wholesaler, to a third party for HR services. After the HR firm apparently collapsed, leaving the plaintiffs’ employees without health or workers’ compensation coverage, and the plaintiff’s tax obligations unpaid, the plaintiff sued the defendants under several legal theories.

The Court dismissed most of the plaintiff’s causes of action with prejudice. Negligent misrepresentation was dismissed because no special relationship existed that would create a duty independent of contract (the parties’ 20-year relationship was insufficient) and the economic loss rule also restricted the plaintiff to a contract remedy. Breach of fiduciary duty and professional malpractice claims were also dismissed because—absent facts not found here—a relationship with a management consultant is not of sufficient “trust and confidence” to elevate it beyond a “conventional business relationship.”

The breach of contract claim was more complicated. The defendants moved to dismiss for a number of different reasons, including: (1) that the plaintiff failed to specify which contract provisions were breached; (2) that to be enforceable, any contract to provide referrals must be in writing, pursuant to GBL § 5-701(a)(10); (3) the plaintiff’s allegation that the defendants’ duties extended beyond mere referral to due diligence and monitoring are purely conclusory; and (4) the plaintiff’s failure to allege actual damages—as opposed to possible future damages due to a double tax liability—makes their contract claim unripe. The contract claim was dismissed upon the court’s finding that the plaintiff had failed to allege the elements of a contract, including damages, but the plaintiff was given leave to replead that cause of action.

Court Recognizes Claim for Negligence/Insurer’s Errors and Omissions

On May 1, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in New Hampshire Insurance Co. v. Fresh Direct Holdings, Inc., 2014 NY Slip Op. 31192(U), allowing a policyholder to amend its complaint to add a claim for “Negligence/Insurer’s Errors and Omissions” against an insurer that allegedly failed to tell the policyholder about a regulatory decision that would cause its premium to go up before the policyholder renewed the policy.

In New Hampshire Insurance Co., the plaintiff insurer sued the defendant, its insured, to recover premiums due on workers’ compensation policies. The policies at issue

were issued upon a quoted estimated premium, with the final premium to be determined after the policy period, upon completion of an audit to determine if the assumptions upon which the estimated premium was based were borne out. Among the things that might vary from the assumptions on which the estimated premium was based, were the proper job codes assigned to [the defendant’s] workers. In 2002, the New York Compensation Insurance Rating Board (CIRB) assigned a particular job code to a certain class of [the defendant’s] employees.

The defendant gave this information to the plaintiff, which was told by the CIRB to change coverage accordingly–a change that would have increased the defendant’s premiums. The plaintiff did not change the coverage or inform the defendant of the increased premiums. Unaware of the CIRB-mandated coverage change, the defendant renewed its policies with the plaintiff. Only later did the plaintiff tell the defendant that it owed additional premiums because of the coverage change.

After discovery disclosed facts showing why the plaintiff failed to tell the defendant about the coverage change, the defendant moved to amend its counterclaims to add a claim for “Negligence/Insurer’s Errors and Omissions.” The trial court granted the motion over the plaintiff’s objection that the claim was duplicative of the defendant’s breach of contract counterclaim, explaining:

The Court of Appeals has explained the difference between tort and contractual obligations as follows:

A tort obligation is a duty imposed by law to avoid causing injury to others. It is apart from and independent of promises made and therefore apart from the manifested intention of the parties to a contract. Thus, defendant may be liable in tort when it has breached a duty of reasonable care distinct from its contractual obligations, or when it has engaged in tortious conduct separate and apart from its failure to fulfill its contractual obligations. The very nature of a contractual obligation, and the public interest in seeing it performed with reasonable care, may give rise to a duty of reasonable care in performance of the contract obligations, and the breach of that independent duty will give rise to a tort claim.

A legal duty independent of contractual obligations may be imposed by law as an incident to the parties’ relationship. Where a party is essentially seeking enforcement of the bargain, the action should proceed under a contract theory.

Fresh Direct argues that this is not simply an instance of negligent performance of a contract, but a course of negligence flowing from a total abdication by Chartis of compliance with its regulatory and statutory duties to Fresh Qirect and other insureds. Notably, Fresh Direct is not seeking the benefit of its contractual bargain, i.e.,insurance coverage for workers’
compensation claims. Rather, it is seeking to avoid having to pay an increased premium for such insurance due to the alleged negligence of Chartis in failing to comply with specific directives of the CIRB, and the CIRB Manual in general, to timely issue an endorsement to the policies to change the job code for Fresh Direct’s employees. That this was also an alleged breach of provisions of the policies does not necessarily render the claim nonactionable under a negligence theory. Accordingly, since the counterclaim is not palpably insufficient and there is no claim of prejudice or surprise to Chartis, the motion is granted.

(Internal quotations and citations omitted) (emphasis added).

This decision shows that hidden in a contract-based claim can be claims based on tort.