Safety National Casualty Corporation (“Safety National”) engaged Austin Resolutions, Inc. (“Austin”) to negotiate savings on bills from a hospital. The bills were Safety National’s responsibility by virtue of a claim against an excess workers’ compensation policy Safety National had issued. Under the oral agreement between Safety National and Austin, Austin was to be paid 25% of any savings it negotiated.
The claim under Safety National’s excess liability policy arose out of serious injuries sustained by an employee of Safety National’s insured in a car accident while on the job. When Austin contacted the hospital to negotiate a discount on the medical bills incurred by the employee, it learned that the bill had almost entirely been paid already. Austin obtained a release from the hospital and submitted an invoice to Safety National for the difference between the original amount of medical bills and the small remaining balance. Safety National initially refused to pay the invoice on the grounds that Austin had not obtained a negotiated discount, but eventually paid the fee claimed by Austin less a set-off for amounts Safety National had been ordered by a court to reimburse the insurer of the car involved in the accident.
When Safety National was later ordered by a court to reimburse the employee’s private medical provider for amounts it had paid to the hospital for the employee’s medical bills, Safety National demanded a corresponding refund of fees it had paid to Austin. Austin refused and Safety National sued. The jury found for Safety National and awarded a return of all fees paid to Austin by Safety National.
On appeal Austin argued that Safety National’s payment of its invoice was sufficient proof of its acceptance of Austin’s performance under their agreement. The performance which Austin asserted was not negotiation of a discount, however, but rather obtaining a release from the hospital.
According to the Eighth Circuit, “Austin’s theory presupposed that the parties had modified their original contract or created a secondary contract to substitute a duty to obtain a [release] for Austin’s original duty to negotiate a discount.” The appeals court held that there was no evidence that the fee paid by Safety National was for anything but negotiating a discount. After summarizing evidence characterizing the nature of the fee, the court stated, “This hardly comports with the theory that the fee was charged for the discrete, separate service of obtaining the [release] in the first place.” For this reason, among others, the Eighth Circuit affirmed the lower court’s judgment.
GeoVera Specialty Insurance Co. (“GeoVera”) entered into a surplus lines broker agreement with Graham Rogers, Inc. (“Graham”) under which Graham was to sell GeoVera’s insurance policies through retail producers appointed by Graham. The broker agreement provided that the sale of policies was to be subject to GeoVera’s underwriting guidelines.
GeoVera sued Graham in the United States District Court for the Eastern District of Arkansas alleging several causes of action including breach of contract and negligence. The suit involved a residential policy that had been submitted directly to GeoVera via GeoVera’s computer system by a retail producer appointed by Graham. During its investigation of a claim under the policy for residential fire damage, GeoVera discovered that the insured would not have qualified for coverage under GeoVera’s underwriting guidelines.
The federal district court granted Graham’s motion to dismiss with respect to most of GeoVera’s causes of action, but it denied Graham’s motion with respect to GeoVera’s breach of contract and negligence claims. The district court granted Graham’s motion for summary judgment, denying GeoVera’s breach of contract and negligence claims, and GeoVera appealed to the Eighth Circuit.
Breach of Contract
The issue on appeal was whether the surplus lines broker agreement placed a duty on Graham to ensure that applications for insurance submitted by retailers that were appointed by Graham complied with GeoVera’s underwriting guidelines. The Eighth Circuit held that the broker agreement did impose such a duty on Graham.
The broker agreement required Graham to follow GeoVera’s underwriting guidelines “and to deliver policies, provided the risk falls within the acceptable underwriting criteria.” Graham argued that the agreement only applied to applications submitted directly by Graham, but the Eighth Circuit disagreed, relying on the fact that there was no language in the agreement that would limit Graham’s obligations only to applications submitted directly by Graham.
The court also considered language in the broker agreement which provided that Graham would appoint retail producers to “aid in the underwriting of the business.” Focusing on the dictionary definition of aid, the Eighth Circuit concluded that while the retailers could help or assist Graham in applying the underwriting guidelines, Graham retained the ultimate responsibility. Graham’s appointment of retail producers to aid Graham in following the guidelines did not relieve Graham of its responsibility to ensure that GeoVera’s underwriting guidelines were followed.
Graham also argued that, reading the broker agreement as a whole, Graham had no duty to apply GeoVera’s underwriting guidelines to applications for insurance submitted by the retailers because the agreement allowed retail producers to conduct business directly with GeoVera through GeoVera’s electronic system. The appeals court disagreed with Graham that allowing retail producers access to GeoVera’s computer system was inconsistent with Graham’s duty to ensure that policy applications complied with GeoVera’s underwriting guidelines.
GeoVera also argued on appeal that Graham was negligent because it failed to use reasonable care in submitting to GeoVera the insurance application at issue. The Eighth Circuit stated, “GeoVera cites no Arkansas law, and we have found none, that recognizes an implied duty of reasonable care in the performance of a contract that gives rise to a negligence claim.” Further, GeoVera’s negligence claim was one of nonfeasance—that Graham had not followed the underwriting guidelines—rather than of misfeasance—that Graham had followed the guidelines improperly. Under Arkansas law, allegations of contractual nonfeasance do not give rise to claims for negligence in tort.
The Eighth Circuit thus affirmed the district court’s grant of summary judgment on GeoVera’s negligence claim, but it reversed the district court’s grant of summary judgment to Graham on GeoVera’s breach of contract claim and remanded the case.