Stop Loss Insurance Brokers, Inc. v. Brown & Toland Medical Group

Under the policy Stop Loss procured, the Regents were required to notify the insurer of any potential and actual claims exceeding 50 percent of the policy’s deductible. BTMG and Stop Loss worked together to provide this information to the insurer on a monthly basis. Every month, BTMG analyzed the Regents’ claims to identify the ones that required notice to the insurer. BTMG sent this information to Stop Loss, and Stop Loss prepared the necessary claims forms. Stop Loss then sent the forms to BTMG for approval, and, once approved, BTMG forwarded the forms to the insurer for payment.

In 2001, a new insurance policy Stop Loss had procured expressly precluded coverage for any preexisting claim not disclosed by the Regents. The Regents signed a binder that purported to disclose all reportable claims, but unbeknownst to them the binder did not include a disclosure of the claim made by a BTMG plan member who had been repeatedly hospitalized for renal failure. When this patient’s claim was submitted to the insurer for payment later in 2001, it was denied.

On October 6, 2003, the Regents filed a complaint against Stop Loss for breach of contract and negligence. The Regents alleged BTMG had submitted timely information to Stop Loss about the patient’s renal failure claim but Stop Loss failed to prepare the form for reporting it in a timely fashion. As a result, the complaint claimed Stop Loss breached its contractual agreement with the Regents and also breached its professional duty of care as the Regents’ insurance broker, causing the Regents to suffer a loss of over $1 million in unreimbursed expenses for the claim.

Stop Loss answered the complaint and filed a cross-complaint against BTMG. After the trial court sustained a demurrer to this pleading, Stop Loss filed a second amended cross-complaint against BTMG for comparative equitable indemnity and declaratory relief. In it, Stop Loss described the procedure it had established with BTMG to report claims to the Regents’ insurer, though it noted this system “was not established pursuant to a contract.”^[5] Because BTMG knew its failure to analyze claims properly and submit information to Stop Loss in a timely fashion could result in the denial

The cross-complaint here does not allege vicarious or strict liability, nor an implied contractual obligation for BTMG to indemnify Stop Loss. Rather, after describing the process by which BTMG and Stop Loss analyzed claims and gave notice to the insurer, and alleging BTMG understood the consequences that could result from the failure to disclose a qualifying claim to the insurer, the cross-complaint simply asserts, “BTMG owed a duty to Plaintiff [the Regents] to analyze claims properly, provide claims information to Stop Loss timely, and submit claims forms to the reinsurer timely.” Asserting this legal conclusion does not make it so, however. The question is whether, with respect to the claims analysis, BTMG owed the Regents a duty of care sounding in tort. While the cross-complaint alleges that “BTMG . . . assumed and understood its duties” under the parties’ system for disclosing claims, this obligation could only have arisen out of the business relationship between BTMG and the Regents. The law imposes no duty on strangers to promptly process another’s data that is comparable to the duty imposed on all persons to exercise due care to avoid injuring others. (See, e.g., Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26 , 59 [ 77 Cal.Rptr.2d 709 , 960 P.2d 513 ] [“With rare exceptions, a business entity has no duty to prevent financial loss to others with whom it deals directly”].) At most, if BTMG assumed a duty to process claims in a timely fashion, and the Regents relied on BTMG to do so, BTMG’s performance was undertaken pursuant to an implied contract.

“A person may not ordinarily recover in tort for the breach of duties that merely restate contractual obligations. Instead, 6 “[c]ourts will generally enforce the breach of a contractual promise through contract law, except when the actions that constitute the breach violate a social policy that merits the imposition of tort remedies.” ’ [Citation.]” (Aas v. Superior Court (2000) 24 Cal.4th 627 , 643 [ 101 Cal.Rptr.2d 718 , 12 P.3d 1125 ], superseded by statute on another ground as stated in Rosen v. State Farm General Ins. Co. (2003) 30 Cal.4th 1070 , 1079-1080 [ 135 Cal.Rptr.2d 361 , 70 P.3d 351 ].) Despite the cross-complaint’s use of negligence terminology, the alleged misconduct by BTMG describes, at most, a breach of contract, not a breach of a legal duty of care. In short, “This is an improper attempt to recast a breach of contract cause of action as a tort claim. Nor is there any social policy that would demand resort to tort remedies. Without any action

Nevertheless, Stop Loss argues a duty of care on the part of BTMG can be inferred from the factors outlined in Biakanja v. Irving (1958) 49 Cal.2d 647 , 650 [ 320 P.2d 16 ] (Biakanja), and applied in J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799 , 804 [ 157 Cal.Rptr. 407 , 598 P.2d 60 ] (J’Aire). These cases are distinguishable, however, and they do not support extending a tort duty to business parties’ arms-length dealings. In Biakanja, the defendant was a notary who owed a professional and a contractual duty to the client for whom he drafted a will (see Biakanja, supra, 49 Cal.2d at p. 648); in J’Aire, the defendant was a general contractor who owed a contractual duty to the owner of premises it was working to improve. (See J’Aire, supra, 24 Cal.3d at p. 802.) In both cases, the question was whether the defendant’s duty of care could be extended to a third party who was not in privity—i.e., the intended beneficiary of a will (Biakanja, supra, 49 Cal.2d at pp. 648-649) or the lessee of premises that were being improved (J’Aire, supra, 24 Cal.3d at p. 802). The Supreme Court held that whether a defendant owes a duty of care to third parties in such a situation depends upon a balancing of six factors: “(1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant’s conduct and the injury suffered, (5) the moral blame attached to the defendant’s conduct and (6) the policy of preventing future harm. [Citation.]” (J’Aire, supra, 24 Cal.3d at p. 804; see Biakanja, supra, 49 Cal.2d at p. 650.)

Contrary to Stop Loss’s assumption, courts have not applied the Biakanja factors to create broad tort duties in arms-length business dealings whenever it is convenient to resort to the law of negligence. Biakanja and J’Aire address the specific situation that arises when (1) the defendant was acting pursuant to a contract, and (2) the defendant’s negligent performance of the contract injures a third party. Neither of these prerequisites is met in this case. First, the cross-complaint alleges BTMG’s handling of the Regents’ claims was not undertaken pursuant to a contract. Second, and more importantly, even if one concludes BTMG was acting pursuant to an implied contract with the Regents, the cross-complaint does not allege BTMG injured any third party. Rather, Stop Loss claims BTMG’s negligent claims-handling injured the Regents by causing it to lose insurance coverage.^[7] As noted, the Regents

DISPOSITION

The judgment is affirmed. Respondent shall recover its costs on appeal.

Parrilli, J., concurred.

Although I concur in the judgment for the limited reason explained in part H.3., post, I believe that the issues presented by the pleadings in this case present an opportunity for reconsideration of some basic principles concerning the law of equitable indemnity. If two parties breach separate contracts with a third party, jointly causing indivisible damage to the third party, and the injured party seeks recovery from only one of the two defaulting parties, is there any good reason for which that party should not be entitled to equitable indemnity from the second defaulting party? If two parties jointly cause harm to a third party, one by an act of negligence and the other by negligently breaching a contractual obligation,

Stop Loss filed an answer denying the allegations and also a cross-complaint against BTMG for comparative equitable indemnity and declaratory relief. The cross-complaint was amended twice in response to demurrers filed by BTMG. As amended, Stop Loss’s cause of action for comparative indemnity alleges that any damage sustained by the Regents as a result of the failure to timely notify the insurer of the potential claim was caused entirely or partially by BTMG and that, as a result, BTMG is obligated to partially or fully indemnify Stop Loss for any sums that Stop Loss may be compelled to pay the Regents as damages. The cross-complaint alleges that “[i]n order to provide the requisite notice of such claims to the reinsurer, [the Regents], BTMG, and Stop Loss established a system under which information was exchanged among them (the ‘System’). Although the System was not established pursuant to a contract, [the Regents], BTMG and Stop Loss each assumed and understood its duties under the System, [f] Within the System, [the Regents] provided claims information to BTMG. BTMG used that information to determine whether a claim required notice to the reinsurer. BTMG then notified Stop Loss of its determinations and provided claims information to Stop Loss. [The Regents] relied on BTMG to properly analyze the patients’ claims and to report timely claims of which notice to the reinsurer was required. [][] After it received the information from BTMG, Stop Loss input the information into certain forms. After it prepared the forms, Stop Loss sent the forms to BTMG for approval. Once BTMG approved the forms prepared by Stop Loss, BTMG sent the forms to the reinsurer. Receipt of the forms by the reinsurer constituted notice to the reinsurer of potential or actual patient claims reflected in the forms which exceed or might exceed 50% of [the Regents’] deductible. ...[!]... BTMG knew that if it did not analyze claims properly, provide claims information to Stop Loss timely, and submit claims forms to the reinsurer timely, a required claim might not be disclosed to the reinsurer within the time permitted. . . . BTMG owed a duty to [the Regents] to analyze claims properly, provide claims information to Stop Loss timely and submit claims forms to the reinsurer timely.” (Fn. omitted.)

The cross-complaint alleges that BTMG was wholly or partially responsible for the Regents’ financial loss, but the sufficiency of this pleading is significant only if partial responsibility is assumed. If the evidence proves that BTMG was wholly responsible for the Regents’ loss, then Stop Loss bears no liability and the sufficiency of its cross-complaint is academic. The issues are framed only by assuming to be true, as we must, that the actions or failures to act of both Stop Loss and BTMG jointly gave rise to a single economic loss to the Regents, namely, the loss of $1 million of insurance coverage.

The Regents’ complaint against Stop Loss alleges both breach of the Regents/Stop Loss contract, and negligent breach of Stop Loss’s professional duties as an insurance broker.^[6] The cross-complaint alleges that BTMG’s liability arises from its failure to perform under the “system” established by the three parties for the processing of information. “Although the System was not established pursuant to a contract,” the cross-complaint reads, “[the Regents], BTMG, and Stop Loss each assumed and understood its duties under the System.” This allegation is essentially self-contradictory, undoubtedly made in an attempt to avoid the rule that equitable indemnity may not be obtained from one who contributed to a loss only by breaching a contractual obligation. As the majority opinion points out (maj. opn., ante, at p. 1042), the law imposes no duty on strangers to promptly process another’s commercial data comparable to the duty imposed on all persons to exercise due care to avoid injuring others. If, as Stop Loss’s cross-complaint alleges, BTMG “assumed and understood” an obligation to the Regents to timely process and forward insurance data, that obligation necessarily was based on an implied agreement arising out of the business relationship between those two parties.^[7] The Regents’ complaint confirms the existence of a business relationship between the Regents and BTMG. While the precise terms of the arrangement are not specified, the Regents allege that “BTMG managed premium payments and recoveries for the [Regents].” The duties that BTMG assumed pursuant to that arrangement are necessarily the source of any obligations that BTMG owed to the Regents.

“Originally applied to defendants whose negligence caused the plaintiff’s loss (see, e.g., American Motorcycle Assn. v. Superior Court, supra, 20 Cal.3d 578 ), the Supreme Court later expanded the doctrine [of comparative equitable indemnity] to allow apportionment of loss between a negligent plaintiff and a strictly liable defendant [citation], and between a defendant liable in strict liability and negligence and a defendant strictly liable.” (GEM Developers v. Hallcraft Homes of San Diego, Inc. (1989) 213 Cal.App.3d 419 , 427 [ 261 Cal.Rptr. 626 ].) Comparative indemnity has been made available to apportion liability between two parties who are strictly liable. (Gentry Construction Co. v. Superior Court (1989) 212 Cal.App.3d 177 [ 260 Cal.Rptr. 421 ].) Yet, for largely historical reasons, equitable indemnity has been limited to cases in which the indemnitor’s liability is based on tort principles. “Although the body of law defining and applying principles of equitable indemnity has not fully gelled but is still evolving, one thing is clear: The doctrine applies only among defendants who are jointly and severally liable to the plaintiff. [Citation.] As plaintiff maintains, joint and several liability in the context of equitable indemnity is fairly expansive. We agree it is not limited to ‘the old common term “joint tortfeasor” . . . .’ It can apply to acts that are concurrent or successive, joint or several, as long as they create a detriment caused by several actors. [Citation.] [f] One factor is necessary, however. With limited exception, there must be some basis for tort liability against the proposed indemnitor. [Citation.] Generally, it is based on a duty owed to the underlying plaintiff . . . .” (BFGC Architects Planners, Inc. v. Forcum/Mackey Construction, Inc. (2004) 119 Cal.App.4th 848 , 852 [ 14 Cal.Rptr.3d 721 ] (BFGC)^[8] ; see also Leko v. Cornerstone Bldg. Inspection Service (2001) 86 Cal.App.4th 1109 , 1115 [ 103 Cal.Rptr.2d 858 ]; GEM Developers v. Hallcraft Homes of San Diego, Inc., supra, at pp. 430-431; Cicone v. URS Corp. (1986) 183 Cal.App.3d 194 , 212 [ 227 Cal.Rptr. 887 ] [“The concept of joint tortfeasors for the purpose of indemnity is explained in

While this reasoning may apply to the apportionment of damages as between contracting parties, it has little application to the fairness of denying apportionment as between parties who have contributed to causing another’s loss but who have no contractual relationship between themselves. Nonetheless, there are conceptual problems in imposing equitable indemnity on a party whose liability is based on breach of contract that do not exist in applying equitable indemnity between two tortfeasors. The measure of damages in most tort cases is all loss proximately caused by the wrongdoing, whether anticipated or not. However, the measure of contract damages remains very much the same as articulated in Hadley v. Baxendale (1884 Ex.) 156 Eng.Rep. 145—those damages that the parties could reasonably have anticipated when they entered the contract. (Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503 , 514-516 [ 28 Cal.Rptr.2d 475 , 869 P.2d 454 ].) Thus, apportionment between parties who have breached different contracts entered at different times would in theory require the use of different measures of damages, as would apportionment as between a party liable in tort and a party liable for breach of contract. (See Bussel, supra, 73 Wash.U. L.Q. at pp. 124-125.) This would, at a minimum, complicate the apportionment formula.

BTMG argues that the decision of the Supreme Court in Aas v. Superior Court (2000) 24 Cal.4th 627 [ 101 Cal.Rptr.2d 718 , 12 P.3d 1125 ] (Aas), superseded by statute on another ground as set out in Rosen v. State Farm General Ins. Co. (2003) 30 Cal.4th 1070 , 1079-1080 [ 135 Cal.Rptr.2d 361 , 70 P.3d 351 ], precludes the recognition of a “broad general duty of care” that would support tort liability here. In holding that homeowners cannot recover for construction defects that have not caused personal injury or property damage, the court in Aas stated that “[a] person may not ordinarily recover in tort for the breach of duties that merely restate contractual obligations. Instead, 1 “[cjourts will generally enforce the breach of contractual promise through contract law, except when the actions that constitute the breach violate a social policy that merits the imposition of tort remedies.” ’ ” (Aas, supra, at p. 643; see Erlich v. Menezes (1999) 21 Cal.4th 543 , 552 [ 87 Cal.Rptr.2d 886 , 981 P.2d 978 ] (Erlich).) Relying on Aas, the court in BFGC, supra, 119 Cal.App.4th at page 853, rejected an architect’s claim for equitable indemnity against the contractors on the job in question, reasoning that “[t]he only allegations of [the contractors’] misconduct are based on their alleged breach of contract, despite [the architect’s] gloss that in doing so they breached their duties. This is an improper attempt to recast a breach of

These reasons for adhering to the distinction between damages recoverable in contract and in tort have no bearing on the present claim for equitable indemnity. Stop Loss is not attempting to recover expanded tort damages or any element of damages not customarily available for breach of contract. The Regents’ claim against Stop Loss seeks only economic damages—a remedy available for a breach of the Regents/Stop Loss agreement—and Stop Loss seeks only to compel BTMG to pay for its proportionate contribution to the Regents’ loss—damages that would also be available for breach of agreement between the Regents and BTMG. By recognizing that BTMG’s alleged breach of a commitment to the Regents may also violate a duty imposed by law and thus support a claim for equitable indemnity, BTMG is not exposed to liability beyond that which was foreseeable when it made a commitment to the Regents. Requiring BTMG to pay for the share of the Regents’ loss for which it is responsible will not interfere with the reasonable expectations of BTMG, expand the scope of damages for breach of contract, or expose BTMG to unlimited liability.^[12] In simply reiterating the principle that a party

Nor will permitting equitable indemnity in this situation violate the so-called economic loss rule. The indemnitor cannot be liable for negligent breach of contract unless it has in fact breached the contract. Holding the

Moreover, in Aas, the Supreme Court reaffirmed that in some circumstances economic damages may be recoverable for the negligent performance of a contractual obligation damaging the economic interests of a third party. Liability to one not in privity may be imposed if a balancing of the factors identified in Biakanja v. Irving, supra, 49 Cal.2d at page 650, and reaffirmed in J’Aire, supra, 24 Cal.3d at page 804, warrant the imposition of a duty to protect those interests. (Aas, supra, 24 Cal.4th at pp. 643-644.) In J’Aire, the court held that “[wjhere a special relationship exists between the parties, a plaintiff may recover for loss of expected economic advantage through the negligent performance of a contract although the parties were not in contractual privity.” (J’Aire, supra, 24 Cal.3d at p. 804.)^[14] In determining the existence of a special relationship giving rise to a duty of care, the following factors should be weighed: “(1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant’s conduct and the injury suffered, (5) the moral blame attached to the defendant’s conduct and (6) the policy of preventing future harm.” (J’Aire, at p. 804.)

Here, the allegations of Stop Loss’s cross-complaint satisfy most of the J’Aire factors. The understanding allegedly reached between the Regents, BTMG and Stop Loss was intended to affect the Regents’ ability to obtain insurance coverage and Stop Loss’s ability to perform its responsibilities under that arrangement. The harm allegedly caused by BTMG’s failure to timely process the claim data was entirely foreseeable. BTMG’s alleged failure to perform is closely connected to the denial of the insurance coverage and the harm suffered by the Regents, and in turn to the loss sustained by Stop Loss in incurring liability for the loss of that coverage. While there is not necessarily any moral blame attached to BTMG’s conduct, recognizing a duty owed to Stop Loss for this purpose may well decrease the likelihood of similar harm in the future. The preponderance of the J’Aire factors thus supports finding a special relationship in this case which justifies the recognition of a duty on the part of BTMG owed to Stop Loss to perform its

Treating the negligent breach of a contractual obligation as sufficient to support a claim for equitable indemnity does not render nugatory the conclusion that such indemnity is available only between joint tortfeasors. Every breach of contract will not support a claim for indemnity but only those that result from a failure “to perform with care, skill, reasonable expedience, and faithfulness.” {North American Chemical v. Superior Court, supra, 59 Cal.App.4th at p. 774.) This differs from the strict liability that is imposed for any unexcused failure to perform the terms of a contract. (Bruckman v. Parliament Escrow Corp., supra, 190 Cal.App.3d at p. 1063.)^[16]

I thus reach the same conclusion as did the Supreme Court of New Mexico in Amrep, supra, 893 P.2d at page 447: “Although a person cannot be held liable for economic-loss damages in tort because of the economic-loss rule, when that person is held liable for economic-loss damages in contract, and that person’s liability is attributable to the fault of another, it would be unjust not to allow indemnification. We therefore hold that the economic-loss rule does not bar a claim for indemnification. If a party is held liable for damages that are the fault of another, the former may seek indemnification from the latter regardless of the basis for the former’s liability. This does not abrogate the economic-loss rule because parties are still bound by their contractual

3. Reversal is not required because of subsequent developments in this case.

Despite my conclusion that Stop Loss sufficiently alleged a cause of action for equitable indemnity, so that the demurrer to the cross-complaint should not have been sustained, for reasons arising subsequent to the trial court’s ruling it is not necessary to reverse the dismissal of the cross-complaint. BTMG states in its brief, “Any alleged negligence on the part of BTMG may be imputed to the Regents.” At oral argument counsel for BTMG reiterated that BTMG was at all times acting as an “agent,” “middleman” or “manager” for the Regents and thus that any conduct on BTMG’s part that contributed to the Regents’ loss would be attributed to the Regents. The pleadings out of which this appeal arises provide no basis to assume that the Regents would agree or would be compelled to accept responsibility for deficiencies in the performance of BTMG. Nonetheless, the Regents’ claim against Stop Loss has already been tried and, as BTMG has represented, Stop Loss was held liable only for that portion of the Regents’ loss which the jury attributed directly to Stop Loss.

While this appeal was pending, the Regents’ action against Stop Loss was tried before a jury.^[17] The jury rejected the Regents’ breach of contract claim, finding that the Regents did not “do all, or substantially all, of the significant things that the contract required them to do.” However, the jury did find Stop Loss liable for “professional negligence in connection with the placement of Provide Excess insurance.” The jury was instructed to apportion fault between the Regents and Stop Loss if it determined that any negligence on the part of the Regents contributed to the Regents’ harm, and the jury awarded the Regents only $569,400 in damages, significantly less than the amount of the insurance recovery the Regents claimed was lost as a result of the late claim submission. Since there has been no suggestion that there was any fault on the part of the Regents other than that for which BTMG was responsible, it appears that the underlying action was tried consistent with BTMG’s representation that Stop Loss would be liable for only that portion of the loss attributable to its own fault, and that the Regents’ recovery was reduced by the portion of fault the jury attributed to BTMG. Since Stop Loss was not