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holding that defendant's claim for fraud based on a misrepresentation by the insurance company's agent regarding the extent of coverage failed, because the extent of the defendant's coverage was defined by the insurance policy and no special relationship existed between the defendant and either the insurance company or its agent
Summary of this case from REGENCE GROUP v. TIG SPECIALTY INSURANCE COMPANYOpinion
CV-01-1362-ST
November 4, 2002
OPINION AND ORDER
INTRODUCTION
Plaintiff, Prudential Property Casualty Insurance Company ("Prudential"), an Arizona corporation, filed this declaratory judgment action to obtain a ruling that its homeowner's insurance policy issued to defendant, Susan Lillard-Roberts ("Lillard-Roberts"), does not cover the insured's claims for water and mold damage because:
(1) there was no direct physical loss (First Claim);
(2) the insurance policy excludes property damage resulting from water and sewage backup (Second Claim);
(3) the insurance policy excludes property damage resulting from faulty workmanship (Third Claim);
(4) the damage to the personal property was not caused by any named peril (Fourth Claim);
(5) the insurance policy excludes damage to personal property caused by rain (Fifth Claim); and
(6) a proof of loss was not timely submitted (Sixth Claim).
The Sixth Claim is mistakenly labeled as the Fifth Claim in the Complaint.
In her Amended Answer, Lillard-Roberts contends that she is entitled to insurance coverage under the policy and alleges 10 affirmative defenses, including the invalidity of certain exclusions under ORS 742.246, coverage through promissory estoppel, violation of the implied covenant of good faith and fair dealing, breach of the standard practices of the insurance industry, and unclean hands and/or unconscionability. She also alleges the following counterclaims:
First Counterclaim: Fraud and Misrepresentation
Count One: Post-Claim Misrepresentations as to lack of coverage
Count Two: Misrepresentations to Induce Purchase of the Policy
Second Counterclaim: Outrageous Conduct
Third Counterclaim: Breach of Contract
Fourth Counterclaim: Negligence
Fifth Counterclaim: Declaratory Relief
Sixth Counterclaim: Reformation
In addition, Lillard-Roberts filed a Third Party Complaint against Stan Primozich ("Primozich"), Prudential's insurance agent, alleging fraud (both for post-claim misrepresentations and misrepresentations to induce purchase of the policy) and negligence.
This court previously granted in part and denied in part the following motions: Prudential's Motion for Summary Judgment (docket #10); Lillard-Roberts' Motion to Stay Consideration of Prudential's Summary Judgment Motion and for Leave to Conduct Destructive Testing on Defendant[s'] Residence at Prudential's Expense (docket #23); and Lillard-Roberts' Motion for Partial Summary Judgment (docket #50).
After an unsuccessful mediation, Lillard-Roberts filed a Motion for Reconsideration — Motion to Modify Order Under FRCP 60 (docket #76), seeking reconsideration of various rulings on the prior motions. As a result, this court issued an Amended Opinion and Order (docket #90) granting summary judgment to Prudential against Counts One and Two of the First Counterclaim (pre- and post-claim fraud), Second Counterclaim (outrageous conduct), Fourth Counterclaim (negligence), Third Affirmative Defense (coverage by estoppel) and granting summary judgment to Lillard-Roberts on the Sixth Claim for Relief (untimely proof of loss).
Now pending are two additional motions: (1) Third-Party Defendant Primozich's Motion for Summary Judgment (docket #91); and (2) Defendant's Cross-Motion to Modify or Vacate Order Under FRCP 60 (docket #97). For the reasons set forth below, these motions are granted in part and denied in part.
DISCUSSION I. Primozich's Motion for Summary Judgment
Lillard-Roberts alleges two claims against Primozich. The fraud claim (First Claim) alleges two counts. Count One, labeled "Post-Claim Misrepresentations," alleges that Primozich misrepresented the extent of coverage for alleged damage to Lillard-Roberts' property after the loss:
for the improper purpose of discouraging and frustrating Roberts in the hope that she would abandon her claims, and for his own pecuniary gain, because Primozich knew that Prudential would hold him accountable for underwriting the policy that gave rise to her claims.
Third-Party Complaint, ¶ 12.
Count Two of the fraud claim, labeled "Misrepresentations to Induce Purchase of the Policy," alleges that Primozich misrepresented that Prudential's policy "provided the type and extent of the coverage that she requested, namely that she would have coverage for any and all foreseeable causes of damage to her home and contents. . . ." Id, ¶ 15.
The negligence claim (Second Claim for Relief) alleges that Primozich breached his duties to Lillard-Roberts after she submitted her claims "in that he failed to refer her to Prudential claims office, failed to notify the Prudential claims office of her claims and denied her claims without conducting any investigation necessary to determine if the claims were covered." Id, ¶ 22. In the event that the policy does not cover her loss, Lillard-Roberts alleges that Primozich was negligent "in that he failed to provide the kind of coverage and/or policy that Roberts requested, and failed to advise her that Prudential did not provide the extent of coverage she requested." Id, ¶ 23.
Primozich seeks summary judgment against both the fraud and negligence claims because he had no special duty to Lillard-Roberts. He contends that the claims against him are identical to the First and Fourth Counterclaims for fraud and negligence previously asserted against Prudential by Lillard-Roberts which this court dismissed.
Lillard-Roberts' claims against Primozich are basically the same as her counterclaims against Prudential which this court dismissed based on its conclusion that Primozich, a captive insurance agent for Prudential, had no special duty to Lillard-Roberts. Nevertheless, Primozich is not entitled to a dismissal of all of Lillard-Roberts' claims against him for that same reason.
Whether Primozich owed a special duty to Lillard-Roberts is relevant only to the analysis of his alleged post-claim conduct. Once a contract has been entered into, the choice between contract and tort remedies rests upon whether the claim is based on a breach of that contract or on a standard of care "independent of the terms of the contract[.]" Georgetown Realty, Inc. v. The Home Ins. Co., 313 Or. 97, 106, 831 P.2d 7, 12 (1992). This independent standard of care may stem from "a particular special relationship between the parties." Strader v. Grange Mut. Ins. Co., 179 Or. App. 329, 333, 39 P.3d 903, 906 (2002), citing Georgetown Realty, Inc., 313 Or at 110-11, 831 P.2d at 14. As the court held in Strader, "breaches of the insurance contract and . . . violations of independent standards of care," do not necessarily create "a special fiduciary-like relationship[.]" Strader, 179 Or App. at 335, 39 P.3d at 906. A special responsibility is created when a defendant has a "mandate to exercise independent judgment for the sole benefit of plaintiffs." Id. Thus, an insured is permitted to bring a tort claim in cases where "an insurer refuses to settle within policy limits or refuses to undertake a defense, that is, situations in which the interests of the insurer come into conflict with the interests of the insured." Id, 179 Or App. at 335, 39 P.3d at 906-07 (internal quotations and citations omitted).
Because the extent of Lillard-Roberts' coverage is defined by the policy, she cannot seek a remedy against either Prudential or Primozich based on their duties and obligations arising out of the policy. Due to the absence of a special relationship between Lillard-Roberts and either Prudential or its captive agent, any claim by Lillard-Roberts arising out of the policy is contractual only. Claims involving Primozich's conduct after issuance of the policy fall into this category. This includes the claim that he negligently failed to refer her to Prudential's claims office, failed to notify Prudential of her claims, and denied her claims without conducting any investigation. That conduct relates solely to the proper handling of Lillard-Roberts' claim after the loss, which is governed by the policy provisions.
Similarly Lillard-Roberts has no tort claim for Primozich's misrepresentations after the loss concerning the extent of coverage because the policy defines the extent of coverage. As a result, Count One of the First Claim for Relief for "Post-Claim Misrepresentations" against Primozich must be dismissed, as well as that portion of the Second Claim for Relief for negligence premised upon his post-claim conduct.
However, Primozich's pre-claim conduct does not arise out of the policy because it precedes the issuance of the policy. Accordingly, the analysis with respect to that claim does not rest on the parties' special relationship. Instead, the analysis turns on whether Primozich fraudulently or negligently induced Lillard-Roberts to purchase inadequate insurance coverage.
In Oregon, it is well-settled that in order to establish fraud, Lillard-Roberts must prove:
(1) a representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted on by the person and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon; and (9) his consequent and proximate injury.
Rice v. McAlister, 268 Or. 125, 128, 519 P.2d 1263, 1265 (1974), citing Conzelmann v. N.W.P. D. Prod. Co., 190 Or. 332, 350, 225 P.2d 757,764 (1950).
"Actionable fraud may be committed by a concealment of material facts as well as by affirmative and positive misrepresentations." Musgrave v. Lucas, 193 Or. 401, 410, 238 P.2d 780, 784 (1951).
A special relationship is not an element of a fraud claim. Thus, Lillard-Roberts can sue Primozich for intentional misrepresentations prior to issuance of the policy by proving each element of fraud by clear and convincing evidence. If Lillard-Roberts sought insurance coverage for those losses which the policy does not cover, as she claims, then Primozich sold Lillard-Roberts inadequate coverage. Whether Primozich acted with the requisite fraudulent intent is uncertain, but Primozich does not seek summary judgment based on a lack of evidence. Instead his motion is premised solely on the lack of a special relationship with Lillard-Roberts, which is irrelevant to a fraudulent inducement claim. Thus, Primozich is not entitled to dismissal of Count Two of the First Claim for Relief for "Misrepresentations to Induce Purchase of the Policy."
Lillard-Roberts' claim against Primozich for a negligent failure to procure adequate insurance is more problematic based on DeJonge v. Mutual of Enumclaw, 315 Or. 237, 843 P.2d 914 (1992). In that case, plaintiffs requested an insurance agent to provide "full" or "complete" coverage for their small grocery store. Id, 315 Or at 239, 843 P.2d at 915. Although the insurance agent knew plaintiffs sold alcoholic beverages at the store, he never specifically discussed coverage for liquor liability, which the policy excluded. Plaintiffs did not read the policy and were unaware of the exclusion until three years later when they were named as defendants in a wrongful death action. After a judgment was entered against them, plaintiffs sought declaratory judgment on coverage for their wrongful death liability despite the clear exclusion of such coverage.
Relying on its prior decision in ABCD . . . Vision v. Firemans' Fund Ins. Co., 304 Or. 301, 306-07, 744 P.2d 998, 1001-02 (1987), the Oregon Supreme Court reaffirmed the general rule that estoppel cannot be used to negate an express exclusion in an insurance policy and rejected any distinction by that rule between pre-loss and post-loss conduct:
The often-expressed principle that estoppel cannot be invoked to negate an express exclusion in a written insurance policy applies even when the alleged representation occurred before the loss, at least where, as here, the exclusion on which the insurer relies is unambiguous and the insurer did not dissuade the insured from reading or understanding the exclusion. The parties' insurance policy excluded coverage for liability related to the sale of liquor to a minor, and defendant was not estopped to deny such coverage.
DeJonge, 315 Or at 245-46, 843 P.2d at 919 (footnotes omitted).
Although an insured has no viable estoppel claim against the insurer to negate an express exclusion, the majority decision in DeJonge noted that "the insured may have a remedy in the form of a claim against the agent for negligent failure to procure insurance." Id, 315 Or at 246 n8, 843 P.2d at 919 n8 (emphasis in original). The plaintiffs had also brought that claim, but the trial court had granted summary judgment against it which the Court of Appeals affirmed based on the statute of limitations. Id., 315 Or at 240 n2, 834 P.2d at 916 n2.
However, in his dissenting opinion, Justice Unis expressed great concern that by applying "contract principles in a tort context," the majority had limited the scope of any claim against the agent for negligent failure to procure insurance. Id, 315 Or at 257, 843 P.2d at 925-26. He explained that although such a tort claim should be available to the insured, it is likely foreclosed in light of Onita Pacific Corp. v. Trustees of Bronson, 315 Or. 149, 160-63, 843 P.2d 890 (1992):
Where the agent's misrepresentations are based on the agent's negligence in understanding and interpreting the insurance contract to the insured, and where the agent knows or intends the information for the insured's benefit and the insured justifiably relies on the representation, causing economic loss, a tort action for negligent misrepresentation should be available. The majority concludes the plaintiffs' contract action is not available in this case, and I fear that the majority's analysis in Onita Pacific Corp. v. Trustees of Bronson, supra, may unwittingly make the tort action unavailable under similar circumstances.
* * *
In Onita Pacific Corp. v. Trustees of Bronson, supra, 315 Or at 161-62, 843 P.2d 897, the majority of this court held that the tort of negligent misrepresentation is not actionable when parties are negotiating at arms length.
* * *
Further, in Onita Pacific Corp., the majority concluded improperly, in my view, . . . that, when purely economic damages are involved, a special duty must be invoked to impose liability. . . . It remains to be seen whether an agent/insured relationship satisfies the majority's test for the recovery of the economic damage of failing to be compensated for loss represented to be covered under an insurance policy.
Id, 315 Or at 257-58, 843 P.2d at 926.
As a result, Justice Unis concluded that "[u]nless the majority backtracks from its analysis of Onita Pacific Corp., those claims excluded from the scope of estoppel in contract may also be excluded form the scope of the tort of negligent misrepresentation." Id, 315 Or at 258, 843 P.2d at 926. Despite Justice Unis' misgivings, the Oregon Supreme Court has not backtracked from either DeJonge or Onita Pacific Corp.
Lillard-Roberts alleges a negligent misrepresentation claim against Primozich that Judge Unis predicted would be barred by Onita Pacific Corp. She and Primozich negotiated at arms length, and Primozich owed her no special duty. Because Lillard-Roberts seeks only economic damages, she cannot recover against Primozich for a negligent misrepresentation regarding the adequacy of her insurance coverage. Onita Pacific Corp, 315 Or at 161-63, 843 P.2d at 897-98. Thus, that portion of Lillard-Roberts' Second Claim for Relief for negligence premised upon Primozich's pre-claim conduct must be dismissed.
II. Lillard-Roberts Cross-Motion to Modify or Vacate
Pursuant to FRCP 60, Lillard-Roberts moves to modify or vacate this court's dismissal of her fraud counterclaim and coverage by estoppel defense based on new evidence. That new evidence is the deposition of Terry Katausky ("Katausky") taken on July 26, 2002. Katausky is Lillard-Roberts' ex-husband who overheard Lillard-Roberts' end of her first telephonic conversation with Primozich and who was present during a later lengthier in-person conversation between Lillard-Roberts and Primozich at the home. He testified that Lillard-Roberts asked Primozich for a policy covering water damage, including damage resulting from a leaking roof, windows or the plumbing system, and that Primozich, after asking questions concerning the kind of coverage requested, assured her that Prudential would issue a policy covering those kinds of losses. Primozich did not discuss possible exclusions and did not explain that a loss due to a roof leak or to mold damage would not be covered.
Lillard-Roberts contends that this court previously dismissed her fraud counterclaim and affirmative defense of coverage by estoppel because it found that her request for full coverage was too vague. She urges this court to revisit that decision in light of Katausky's testimony. Prudential first responds that Katausky's evidence is not new evidence. This response ignores Prudential's request for a stay pending disposition of its motion for summary judgment. This court denied the motion for a stay at the same time it ruled on the motion for summary judgment. Thus, it was not unreasonable for Lillard-Roberts to take Katausky's deposition after this court denied Prudential's motion for summary judgment.
Prudential also objects to Katausky's evidence as inadmissible hearsay. However, Lillard-Roberts does not offer these statements for the truth of the matter asserted, but only to establish that they were made. See, e.g., Adzick v. Unum Life Ins. Co., 2002 WL 1991117, *2 (D Minn 2002) (finding the testimony of an insured's employer was not hearsay because testimony was not offered to prove truth of insured's income in years in question, but rather to demonstrate that statements by employer were made and that insured relied on those statements to answer income questions on application); see also FED R EVID 801(C) ADVISORY COMMITTEE NOTE (noting that "[i]f the significance of an offered statement lies solely in the fact that it was made, no issue is raised as to the truth of anything asserted, and the statement is not hearsay"). Thus, to prove that Primozich made a misrepresentation, Lillard-Roberts is entitled to offer into evidence the statements that she alleges are the misrepresentations. Because Katausky heard the statements made by Primozich to Lillard-Roberts on which she claims to have relied to her detriment, Prudential's objection is not well-taken.
Despite consideration of Katausky's testimony, Lillard-Roberts' fraud counterclaim against Prudential and her coverage by estoppel defense are not saved. This court previously concluded that both the estoppel defense and misrepresentation claim require reasonable, detrimental reliance by Lillard-Roberts on Primozich's oral representations concerning the scope of coverage that are contrary to the policy. Primozich's representations concerning the scope of coverage do not erroneously interpret any ambiguous policy provision. Instead, he allegedly induced Lillard-Roberts to purchase a policy that does not provide the scope of coverage that she intended to buy. As discussed above, an insured's claim under these circumstances, if any, is in the form of a claim against the agent for negligent failure to procure insurance, not against the insurer under the policy that was procured. DeJonge, 315 Or at 246 n8, 843 P.2d at 919 n8.
The type of ambiguity which gives rise to an estoppel theory is described in Farley v. United Pac. Ins. Co, 269 Or. 549, 525 P.2d 1003 (1974). There the insurance agent read over the telephone to the insured the provision that would be included in the policy and told the insured that he was covered under that wording. The agent was wrong because the wording excluded the risk for which the insured later sought coverage. As explained by DeJonge:
It was the agent's construction of the policy provision that this court found pivotal: "It seems entirely reasonable to us that [the insured] should not appreciate the fact that the language of the policy would not cover him when considered in the face of the agent's assurance that he was covered. . . . [T]he insurance company is estopped to assert the actual meaning of the provisions of its policy because the insured is entitled to rely upon a contrary interpretation of those provisions by the company's general agent."
DeJonge, 315 Or at 246 n6, 843 P.2d at 919 n6, quoting Farley, 269 Or at 558-59, 525 P.2d at 1007-008 (internal citations omitted).
An estoppel theory permits Lillard-Roberts to rely upon Primozich's contrary interpretation of ambiguous policy provisions. Even considering Katausky's testimony, Primozich did not posit an erroneous interpretation of any ambiguous policy provision. Lillard-Roberts discussed with Primozich the scope of her policy coverage, including her request for "full coverage" for "flood [and] water damage." Katausky Depo, p. 31. When asked, Lillard-Roberts also told Primozich the type of water damage she wanted covered, which included "floods, leaks, roof leaks, windowsill leaks or window leaks." Id at 32. In response, Primozich stated, "I think I can give you what you're looking for." Id at 33. Notably, Katausky does not state that Lillard-Roberts expressed a specific concern about mold damage or a roof leak caused by faulty workmanship. Katausky's testimony may assist Lillard-Roberts in proving her fraudulent inducement claim against Primozich if the fact-finder determines that "full coverage" includes all types of damage resulting from flood and water and, indeed, Primozich promised such coverage. However, absent Primozich's erroneous construction of a pivotal policy provision, an estoppel theory is not appropriate to expand the scope of coverage under the policy.
Lillard-Roberts also argues that she is entitled to a remedy pursuant to Smothers v. Gresham Transfer, Inc., 332 Or. 83, 23 P.3d 333 (2001). She argues that Article I, Section 10 of the Oregon State Constitution assures that for every wrong there is a remedy which Strader failed to consider. Since this court has concluded that Lillard-Roberts may have a pre-claim misrepresentation cause of action, it need only address whether the holding in Smothers provides her with a post-claim misrepresentation cause of action.
The second clause of Article I, section 10 mandates that "every [person] shall have remedy by due course of law for injury done him in his person, property, or reputation."
In Smothers, the Oregon Supreme Court went to great lengths to explain when the remedies clause of the Oregon State Constitution overpowers a legislature's ability to abolish a common law cause of action. Id, 332 Or at 123-24, 23 P.3d at 356. In that case, plaintiff filed a negligence action against his employer due to exposure to acid mist and fumes at work which were determined to not be the "major contributing cause" of plaintiff's respiratory condition and other ailments, and therefore, not a "compensable injury" under ORS 656.018 (1995), a workers' compensation statute. Id, 332 Or at 125, 23 P.3d at 357 (emphasis in original). In finding the "exclusive remedy provisions" of ORS 656.018 unconstitutional, the court held that "under present workers' compensation law, plaintiff was left with no means for seeking redress for the injuries that he alleges that he suffered at work and for which a common-law cause of action would have been available before the advent of the workers' compensation system." Id, 332 Or at 126, 23 P.3d at 357.
Smothers does not apply to this case. Lillard-Roberts does not challenge any legislative act. Moreover, Lillard-Roberts' post-claim misrepresentation cause of action does not hinge on whether she has a statutory compensable injury which once was available at common law. Instead, Lillard-Roberts simply cannot establish an essential element of her common law cause of action, as discussed above.
As this court has previously determined, Primozich was a captive insurance agent for Prudential and had no special duty to Lillard-Roberts. Thus, Lillard-Roberts' claim for post-claim misrepresentation fails as a matter of law. Accordingly, this court declines to modify or vacate its prior Order dismissing Lillard-Roberts' First Counterclaim for fraud against Prudential and Third Affirmative Defense for promissory estoppel.
ORDER
For the reasons set forth above:
1. Third-Party Defendant Primozich's Motion for Summary Judgment (docket #91) is GRANTED as to Count One of the First Claim for Relief (Post-Claim Misrepresentations) and the Second Claim for Relief (Negligence) and DENIED as to Count Two of the First Claim for Relief (Misrepresentations to Induce Purchase of the Policy); and
2. Defendant's Cross-Motion to Modify or Vacate Order Under FRCP 60 (docket #97) is DENIED.