The United States Bankruptcy Court for the District of Massachusetts has held that a third party claimant’s breach of contract claim could proceed against an insurance broker where the third party’s claims against the insured were known to the broker before the broker procured additional insurance that effectively reduced the amount of coverage available. In re GlassHouse Techs., 2019 WL 2477430 (Bankr. D. Mass. May 31, 2019).
In 2013, the insured IT consulting company entered into an engagement agreement with an insurance broker through which the broker agreed to help the company assess its risks and procure insurance. With help from its broker, the company obtained a directors and officers policy, which had a $15 million limit.
During the policy period, the company defaulted on a $14 million debt to an investment firm. As a result, the firm asserted claims against the company and its directors and officers during the policy period. Realizing that it would likely be sued and that it had insufficient funds to satisfy any judgment against it, the company sought advice from its broker regarding the sufficiency of its insurance coverage to pay its creditors, including the firm. Among other things, the broker recommended that the company purchase tail coverage to extend the reporting period at the end of the policy period. The broker negotiated the tail coverage, which extended the policy terms and discovery period for about three years. However, this had the effect of reducing the policy limit from $15 million to $5 million for all claims noticed before the expiration of the original policy period.
After the company filed for bankruptcy, the company’s Chapter 7 Trustee and the investment firm sued the broker based on its alleged acts and omissions in procuring the extended reporting period. The complaint asserted claims for breach of contract, negligence, and violations of state customer protection laws. The broker moved to dismiss all three counts.
The court denied the dismissal of the breach of contract and negligence claims as it related to the Trustee. As to the firm, however, the court concluded that it was a much closer call. The firm alleged that it was entitled to recovery for breach of contract as a third-party beneficiary, even though it was not named in the broker agreement or policy, because it was allegedly damaged by the unauthorized reduction in coverage. The court agreed, noting that the allegations in the complaint were “just enough” to state a third-party beneficiary claim. The court held that the firm “made allegations from which [it] might infer, in examining the surrounding circumstances, a specific intent by [the insured and its broker] to benefit [the firm] in connection with the services to be provided by [the broker] in obtaining [tail coverage].” The court said that it could “reasonably infer” that the company and broker intended the firm to be a beneficiary of the broker’s services to maximize coverage because the broker knew of the firm’s claims against the company, knew that the firm was likely going to sue the company, and knew that the company was looking for assurance that it could pay creditors (including the firm).
Unlike the claim for breach of contract, the court dismissed the firm’s negligence claim, holding that the firm “could not have foreseeably relied on any specific expectation regarding the existence of D&O coverage and the services to be provided by [the broker],” and it therefore owed no duty of care.