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.