Eastern District of Pennsylvania Rejects Purported “Agency” Theory Against Insurance Broker
In Wilson, et al. v. Hartford Casualty Co. and USI Insurance Services, LLC, 2020 WL 5820800 (E.D. Pa. Sept. 30, 2020), the U.S. District Court for the Eastern District of Pennsylvania dismissed the plaintiff attorney’s and her law firm’s allegations against both her business owner policy insurer, Hartford Casualty Co., and its purported broker-agent, USI, for failure to state a claim.
In the complaint, the plaintiffs asserted claims pursuant to the Declaratory Judgment Act and for breach of contract and injunctive relief against both defendants. The plaintiffs’ claims arose from Hartford’s denial of their business interruption/business loss claim resulting from government-mandated closures due to the COVID-19 pandemic. There were no tort claims pled against USI alleging breach of any purported duty owed to the plaintiffs.
In September 2020, the court granted Hartford’s Motion to Dismiss based on the application of a virus exclusion in the plaintiffs’ policy, determining that the exclusion barred coverage and there was no basis for injunctive relief. The court also granted USI’s motion on the aforementioned bases, as well as concluding: (1) “While USI may have been involved in the procurement of the Policy, it is not a party to the Policy” and (2) the plaintiffs failed to plead any facts “that would allow the court to reasonably infer that USI had co-responsibility with Hartford in making coverage determinations.” Thus, the court rejected the plaintiffs’ alleged agency or alter-ego theory asserted against USI in the absence of liability against Hartford and factual support for the purported “co-responsibility.”
The plaintiffs’ contract-based theories against USI are not novel. We have seen an increase in allegations asserted against insurance brokers arising out of their identification on the policy declarations, including declaratory judgment, breach of contract and bad faith for alleged failure to honor the policy obligations; failure to conduct reasonable claim handling, investigation or evaluation; and/or wrongful denial of coverage. While claim handling and coverage determinations are generally the responsibility of the insurer, not the broker, the plaintiffs (or their counsel) often conflate these roles—potentially in a bid to secure an additional source of recovery.
While the Wilson case arose out of COVID-19 business interruption coverage, its applicability is not limited to pandemic-related litigation. Indeed, this decision has wider implications—both procedural and substantive—in light of the continuing trend of suing insurance brokers on a breach of contract or agency theory of liability.
Procedurally, eliminating a potential breach of contract action significantly impacts the applicable statute of limitations. In Pennsylvania, the statute of limitations for a contract claim is four years and for a tort (e.g. negligence) claim, two years. Thus, the timeframe in which suit must be initiated is halved when the breach of contract claim is eliminated. Failure to file a lawsuit within the applicable statute of limitations procedurally bars the action, regardless of the merits.
Substantively, dismissing claims sounding in contract enables a broker to assert the affirmative defense of contributory negligence, applicable to tort (e.g., negligence or negligent misrepresentation) but not contract claims in Pennsylvania. That is, where a plaintiff seeks purely economic/monetary damages—insurance premium refund or defense and indemnity payment for an underlying loss—the doctrine of contributory negligence bars recovery if the plaintiff’s own negligence contributed to its purported loss. Thus, if a plaintiff brings an action for both breach of contract and negligence, and the contract claim is dismissed pursuant to the Wilson ruling, the doctrine of contributory negligence could bar the plaintiff’s recovery entirely.
Further, parsing out potential “agency” theories alleged between insurers and insurance brokers could lead to quicker extrication of brokers from declaratory judgment and breach of contract actions, the prevalence of which has increased as a result of COVID-19-related litigation.
The Wilson opinion provides valuable ammunition for dispositive motion practice where the claims against the insurance broker stem from identification as “agent” on the policy declarations. In light of this recent decision, any such “agency” theory should fail in the absence of facts pled to support a true agency relationship between the parties or a broker’s purported “co-responsibility” for coverage determinations, as should a breach of contract claim premised solely on the insurance policy, to which the broker is not a party. Nonetheless, brokers should continue to be clear with their insurance customers about their role in the insurance procurement and claim handling process and their relationship to the insurer to try to preempt these contract-based allegations.
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