General Fire & Cas. Co. v. Guy Carpenter & Co., Inc.

Issue Discussed: Broker Issues

Submitted by Jennifer R Devery, Lori T. Hildebrand

Date Promulgated: November 7, 2006

Issue Decided: Did an insurer’s parent company present enough evidence demonstrating that a “special relationship” existed between it and a reinsurance intermediary to create a genuine issue of material fact that would withstand a motion for summary judgment motion?

In General Fire & Cas. Co. and GF & C Holding Co. v. Guy Carpenter & Co., Inc., the United States District Court for the District of Idaho denied Guy Carpenter’s motion for summary judgment with respect to the claims of GF & C Holding Company (“GF & C”). In doing so, the Court held that genuine issues of material fact remained as to whether Guy Carpenter and GF & C had a relationship and whether Guy Carpenter owed any duties to GF & C as a result.

General Fire & Casualty Company (“General Fire”), wholly owned by GF & C, used Guy Carpenter as its reinsurance intermediary from 1999 until 2005. GF & C alleged that Guy Carpenter provided services for it as well. From 1999 to 2003, Guy Carpenter created excess of loss (“XOL”) reinsurance programs for General Fire’s property/casualty business, each of which contained a reinstatement clause providing for reinstatement of excess coverage in return for payment of additional premium. General Fire allegedly understood that, based on loss scenarios from and discussions with Guy Carpenter, General Fire could elect to reinstate the XOL coverage in return for additional premium if and when General Fire decided it wanted additional coverage.

General Fire contacted Guy Carpenter for advice in late 2003 regarding possibly exercising its right to additional coverage under the reinstatement clause. In response, Guy Carpenter explained how reinstatement really worked:

    “Reinstatement is not optional-it is automatic and there is an accompanying charge for it. The reinstatement premium is due when the loss is paid and is usually netted against the paid loss amount . . . . One way to illustrate reinstatement is you start the year with a bucket filled with water. You dip into it (pay a loss), and the reinsurer immediately fills it back up so you still have a full bucket to deal with the next loss (simultaneously you pay him additional premium for the extra water he topped you off with).”

At this time, Guy Carpenter also provided—allegedly for the first time—numerical examples explaining how for every dollar of loss experienced on the program, General Fire’s reinsurers would charge a corresponding premium to reinstate coverage in the same amount and offset that premium against the coverage provided. Although concluding that this alleged automatic reinstatement provision was ambiguous, General Fire’s auditors required General Fire to accrue for reinstatement premiums in the company’s year-end financial statements, allegedly reducing the company’s earnings by approximately $1.8 million.

General Fire and GF & C then filed suit against Guy Carpenter for (i) negligence, (ii) negligent misrepresentation, (iii) breach of fiduciary duty, (iv) breach of contract, (v) misrepresentation, (vi) constructive fraud, and (vii) forfeiture, disgorgement and/or constructive trust. Guy Carpenter moved for summary judgment against GF & C, arguing that Idaho’s economic-loss rule bars GF & C’s recovery for its negligence claims because it sought purely economic damages and because neither of the two limited exceptions to the rule applied. Guy Carpenter also argued that GF & C’s other claims must fail because Guy Carpenter never agreed to perform any services or assume any duties with regard to the holding company.

In Idaho, the economic-loss rule bars recovery of purely economic damages on negligence claims because there is no duty to prevent economic loss to another. There are two exceptions to this rule: (i) the existence of a special relationship between the parties, or (ii) the existence of unique circumstances that requires a reallocation of the risk.

The special-relationship exception applies to two situations where the parties’ relationship is such that it would be equitable to impose a duty on one party to prevent economic loss to the other: (1) a party holds itself out to the public as having expertise in a specialized area and knowingly induces reliance on its performance of that expertise, or (2) a professional or quasi-professional performs personal services. The Court determined that a genuine issue of material fact existed as to both of these situations, and accordingly summary judgment was inappropriate.

In the first instance, Guy Carpenter argued that its only relationship was with General Fire, not GF & C, as a reinsurance intermediary. Guy Carpenter insisted that there was no evidence that it “knowingly induced” the holding company to rely on any action or representation of Guy Carpenter, and thus there could be no special relationship between the two. But the Court held that a reasonable jury could find that Guy Carpenter’s marketing material, aimed at adding value to companies’ insurance enterprise, could have induced reliance by GF & C.

The Court also determined, after reviewing the conflicting evidence presented by each side, that a reasonable jury could find that the economic-loss rule did not apply to bar GF & C’s claims because Guy Carpenter provided professional services to GF & C. Guy Carpenter presented evidence from former General Fire and GF & C employees indicating there was no relationship with Guy Carpenter. In contrast, GF & C submitted a “substantial amount of evidence” indicating Guy Carpenter performed services on GF & C’s behalf, including, among other things, affidavits that evidenced (i) discussions between GF & C and Guy Carpenter regarding the design and placement of General Fire’s reinsurance, and (ii) the fact that Guy Carpenter required GF & C’s financial statements in order to place reinsurance for General Fire.

Because the Court found that there was a genuine issue of material fact as to whether there was a special relationship between GF & C and Guy Carpenter, the Court did not analyze whether the second exception to the economic-loss rule applied – i.e., whether there existed unique circumstances that would require a different allocation of risk between the parties.

The Court also determined that its ruling that a genuine issue of material fact existed as to whether a special relationship existed between GF & C and Guy Carpenter applied to those non-negligence counts where Guy Carpenter argued that the lack of any relationship between GF & C and Guy Carpenter precluded the holding company’s claims against the intermediary.

* Jennifer R. Devery and Lori T. Hildebrand are counsel and associate, respectively, in the insurance/reinsurance group of Crowell & Moring LLP. They each represent cedents and reinsurers in disputes involving a broad spectrum of issues.