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Three Rivers Hydroponics, LLC v. Florists’ Mut. Ins. Co.

Issue Discussed: Policyholder Direct Action Claims Against a Reinsurer

Submitted by Robert DiUbaldo

Date Promulgated: February 8, 2018

Three Rivers Hydroponics, LLC v. Florists’ Mut. Ins. Co., et al., No. 2:15-cv-00809 (W.D. Pa. 2018)

Court: U.S. District Court for the Western District of Pennsylvania

Issues Decided:  Does a policyholder have a direct right of action against a reinsurer for breach of contract, bad faith and other claims where there is no privity of contract between the policyholder and reinsurer, but the operative reinsurance contract provides the reinsurer with claims investigation rights as it pertains to the underlying loss?

Submitted by: Robert W. DiUbaldo, Shareholder, Carlton Fields Jorden Burt, P.A.

Three Rivers Hydroponics, LLC (“Three Rivers”) operated a commercial greenhouse that produced hydroponic produce and herbs.  It alleged that a component of its hydroponic ozone system exploded and caught fire, damaging Three Rivers’ crops.  Three Rivers filed a lawsuit seeking coverage for the damage under a Business Package Policy issued by Florists’ Mutual Insurance Company (“Florists”), and asserted claims of breach of contract and bad faith.  Thereafter, Three Rivers amended its Complaint to include claims for breach of contract and bad faith against The Hartford Steam Boiler Inspection and Insurance Company (“HSB”), which reinsured the Florists policy, as well as a claim for civil conspiracy against both HSB and Florists.  HSB moved pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss the Complaint as against it for failure to state a claim upon which relief can be granted.

The U.S. District Court for the Western District of Pennsylvania granted HSB’s motion to dismiss in its entirety.  On the  breach of contract claim, the Court found that there was no contractual privity between Three Rivers and HSB with respect to either the Florists policy or the operative reinsurance agreement.  Therefore, Three Rivers did not have an actionable breach of contract claim against HSB under Pennsylvania law.  While the reinsurance agreement provided HSB with the right to investigate claims under the Florists policy that implicated the reinsurance coverage, the Court held that this did not mean HSB had directly assumed any of Florists’ obligations to Three Rivers under the policy, nor did it provide a basis for Three Rivers to hold HSB liable for any breach of the policy or the reinsurance agreement.  Moreover, although Pennsylvania law recognizes a limited exception to the “contractual privity” rule which enables an insured to bring a direct action against a reinsurer as a third-party beneficiary of a reinsurance agreement, the Court found that the exception was not satisfied because the agreement did not “express an intention to benefit” Three Rivers or contain any provision that created an obligation on the part of HSB to Florists’ insureds.  Nor did the Court find any evidence indicating that Three Rivers would be unable to collect a judgment from Florists pertaining to the claim at issue, the lone basis recognized by prior Pennsylvania decisions as providing a “compelling” reason to grant an insured third-party beneficiary status with respect to a reinsurance contract in which it was not a party.  Last, the Court rejected Three Rivers’ argument that HSB’s claims investigation rights under the reinsurance agreement provided justification to confer third-party beneficiary status on Three Rivers under the circumstances, or that Florists was essentially a “fronting” company on the risk for HSB, given that Florists operated as a garden-variety direct insurer of Three Rivers and retained obligations to pay claims covered under the policy for an amount that was greater than HSB’s liability to Florists under the reinsurance contract.

With respect to Three Rivers’ bad faith claim, the Court held that HSB was not “an insurer” within the meaning of the Pennsylvania statute (42 Pa. C.S. § 8371) under which the claim was brought.  Although § 8371 does not define the term “insurer”, Pennsylvania law considers two factors when determining whether an entity falls within the scope of the statute:  (1) the extent to which the company was identified as the insurer on the policy documents; and (2) the extent to which the company acted as the insurer.  For the reasons outlined above, the Court found that neither factor applied with respect to the operative reinsurance agreement and the various contractual obligations as between Three Rivers, Florists (as direct insurer) and HSB (as reinsurer).  Moreover, the Court rejected the argument that HSB’s claims investigation rights warranted it being deemed an “insurer” for purposes of a § 8371 bad faith claim.

Finally, the Court held that Three Rivers’ civil conspiracy claim against HSB failed as a matter of law because the Amended Complaint failed to demonstrate facially the required “malice” to support a cause of action of this kind under Pennsylvania law.  While the Amended Complaint alleged that Florists and HSB conspired to minimize their losses and maximize their profits with respect to the underlying claim, the Court found that mere allegations that an insurer or reinsurer acted in a manner to advance their business interests and increase profits precluded any cognizable civil conspiracy cause action, as those allegations demonstrated that harming Three Rivers was not the sole purpose of the purported conspiracy.