345 F.Supp.2d 214 (2004) | Cited 3 times | D. Rhode Island | November 17, 2004


This case is before the Court on cross motions for partialsummary judgment. The dispute involves the amount payable under a"stop loss" insurance policy, which in turn depends on the properinterpretation in the language of the policy. The parties to thislitigation are the insured, Plaintiff Lifespan/PhysiciansProfessional Services Organization, Inc., (hereinafter "PSO");the insurance broker, Defendant Aon Risk Services ofMassachusetts, Inc., (hereinafter "Aon Mass"); and the insurancecompany, Defendant Combined Insurance Company of America(hereinafter "Combined"). When the payment received by PSOpursuant to the policy turned out to be much smaller than it hadanticipated, it filed this lawsuit, sounding in eight counts. Allthree parties filed motions for partial summary judgment. PSOmoves for summary judgment on Counts I and II, and requests that the Court interpret the policy. Aon Mass moves for summaryjudgment on Counts II, IV, VII, and VIII. Combined also seeks tohave the Court construe the language of the policy, and moves forsummary judgment on Counts I, III, and V. In addition, Combinedhas requested that the Court refer the matter to an independentauditor to make the calculations under the policy. No party hasmoved for summary judgment on Count VI of the operativecomplaint.

For the reasons that follow, the Court determines that Aon Massis entitled to summary judgment on Counts II, IV and VII of theAmended Verified Complaint, and Combined is entitled to summaryjudgment on Count V. Both the motions of PSO and Combined onCounts I and II are denied, as is Aon Mass' motion on Count VIII.Furthermore, the Court concludes that the language of theinsurance policy is ambiguous and that further evidence needs tobe presented at trial to determine its meaning. Because a trialis necessary to determine the proper interpretation of thelanguage of the insurance policy, Combined's motion to have thematter turned over to an independent auditor is premature, and isdenied.


Plaintiff PSO is a non-profit Rhode Island corporation made upof three hospitals and three membership entities, which includeover eight hundred physicians. On March 1, 1999, PSO signed a contract with Coordinated Health Partners, Inc., d/b/aBlueCHiP ("Bluechip"), which, inter alia, allocated thepotential financial risk resulting from PSO providing hospitaland physician services to Bluechip patient/subscribers. In thisso-called "risk contract," Bluechip set limits on the amount (or"capitated" the amount) it would pay PSO for medical servicesprovided to Bluechip subscribers, some of whom are Medicare andMedicaid recipients. If a Bluechip subscriber required medicalcare that exceeded the limit set by Bluechip, then PSO had toabsorb those excess costs.

To insure itself against the risk of those kinds ofcatastrophic medical costs, and because it was required to do soby federal Medicare regulations, PSO sought reinsurance, a newform known in the industry as "stop loss" insurance, prior toentering into the Bluechip contract. PSO contacted Aon RiskServices of Rhode Island, Inc. ("Aon RI"), a licensed insurancebroker with which PSO's affiliate Lifespan Corporation hadpreviously done business. Explaining that it did not have theexpertise to broker a "stop loss" insurance policy, Aon RI, inturn, referred PSO to its affiliate Defendant Aon Mass.

In early 1998, Aon Mass agreed to serve as PSO's broker tosecure a "stop loss" policy, and proceeded to solicit offers frominsurance companies offering this type of reinsurance coverage.Several proposals were presented to PSO during a series of meetings that took place over close to a year at which variousaspects of this complex coverage were explained by Aon Masspersonnel, most notably Senior Vice President Berni Bussell, toPSO's Chief Operating Officer, William Beyer. During this time,Beyer reviewed a specimen insurance policy provided by Combined.

In the spring of 1999, PSO zeroed in on the policy offered byDefendant Combined, and in April 1999 Beyer signed an InsuranceBinder for Combined's "stop loss" coverage. The policy wasdrafted to cover services provided by PSO over a year-long periodfrom March 1, 1999, to March 1, 2000.

The stop-loss policy

The policy provided PSO with two types of coverage: SpecificExcess of Loss coverage and Aggregate Excess of Loss coverage.The Specific Excess of Loss coverage was fairly simple, and, withthe exception of some disputed charges, the parties are inagreement as to its basic operation. For this coverage, aper-patient limit was set for doctors' services ($17,000) and onefor hospital services ($75,000). All eligible costs incurred byPSO over these limits were to be reimbursed by Combined at a rateof ninety per cent.

A distinguishing feature of the Combined policy — and the onethat has caused the major headaches for the parties to thisdispute — is the Aggregate Excess of Loss provision. Under thisprovision, all eligible costs ("Billed Charges for Eligible Services") are added together or "aggregated." A separatecalculation is then undertaken to arrive at an "AggregateAttachment Point," as follows: the number of Bluechip subscribersin the underlying risk contract is multiplied by a factorprovided in the policy (one for commercial patients and one forMedicare/Medicaid patients). The Aggregate Attachment Point isthen subtracted from the aggregated eligible charges. Alleligible charges exceeding the Aggregate Attachment Point are tobe reimbursed by Combined at the rate of ninety per cent.

The Schedule of Insurance

The formula outlined above for calculating the AggregateAttachment Point and determining the amount subject toreimbursement under the Aggregate Excess of Loss provision wasdiscussed in the meetings between Aon Mass and PSO, and wasgenerally understood by the parties. However, at some point somenew concepts and terms were introduced into the mix.

The new terms are found in the Schedule of Insurance which wasadded to the policy and incorporated therein by the time PSOreceived a final copy of the policy on April 21, 2000. The newterms are found in the Insurance Binder, although with differentnumeric values than those found in the Schedule. The InsuranceBinder was signed by PSO's Chief Operating Officer Beyer on April6, 1999. The new terms are not found in any section of theSpecimen Policy, including the specimen schedule, the definitions, exclusions, etc., that PSO examined during thepresentation of the proposal. A central question of fact posed bythis dispute is when did PSO become aware of the new terms andconcepts in the Schedule — which new terms, concepts and numericlimits serve to significantly change the coverage delineated inthe body of the policy.

The new terms

Item #6 of the Schedule of Insurance, a provision entitled"Aggregate Excess of Loss Insurance," contains three new conceptsthat are not included or defined in the body of the policy, andwhich this Court determines to be ambiguous.

1) The first of these is the "Minimum Aggregate AttachmentPoint." After completing the calculations to determine theAggregate Attachment Point as described above and explained inthe policy, Combined contends that these figures now must bescrapped, and new figures substituted. The new figures are theMinimum Aggregate Attachment Points provided in the Schedule. TheMinimum Aggregate Attachment Points are described by Combined as"underwriting safeguards." These figures, in both the case ofcommercial patients and Medicare/Medicaid patients, are muchhigher than those tallied in the initial calculations. The resultis that when the new figures are subtracted from the eligiblecharges, little remains to be reimbursed by Combined at the rateof ninety per cent. Combined contends that the Minimum Aggregate Attachment Pointsare to be substituted for the Aggregate Attachment Points derivedfrom the calculations; however, this interpretation of the wordsused is not apparent without Combined's explanation. Neither thepolicy nor the Schedule provides an explanation of the meaning orimpact of the term "Minimum Aggregate Attachment Point." Themeaning of the term is not apparent from the four corners of theagreement.

This Court concludes that the phrase "Minimum AggregateAttachment Point" is not defined and is not self-explanatory asused in the insurance policy documents and, consequently, isambiguous. Extrinsic evidence is necessary to determine whetheror not this term was explained adequately and in a timely mannerto PSO, and, if not, why not.

2) Also new in Item #6 of the Schedule is the phrase "LossLimit Per Covered Person." "Loss Limit Per Covered Person" isexplained in the schedule as follows: Hospital: $35,000 in excess of the first $40,000 of the Covered Amount Physician: $7,000 in excess of the first $10,000 of the Covered Amount

As Defendants have subsequently explained in their briefs andat oral argument, this provision is intended to limit theeligible charges that are aggregated. The correct total does notsimply represent an aggregate of the Billed Charges for Eligible Services as previously defined and used in the Aggregate Excessof Loss Insurance provision of the policy; instead, it is onlythose charges, in the case of hospital services, over $40,000.00but under $75,000.00 that accrue to the aggregate and, in thecase of physician services, only those properly billed chargesover $10,000.00 but under $17,000.00 that accrue to theaggregate.

PSO claims that it was unaware of this limitation on theaccrual of Billed Charges for Eligible Services, and believedthat all Billed Charges for Eligible Services would accrue to theaggregate. Confusion was rampant among both Defendants' employeeswhen, at the conclusion of the policy term, medical charges weresubmitted to the broker and the insurance company foradjudication (a determination of which charges are "eligible").The confusion is illustrated by the many e-mail messagesexchanged by Aon Mass and Combined staff members debating thecorrect implementation of the Loss Limits.

While the Court is convinced that Combined intended the LossLimits to work as explained above; the Court finds that thephrase is not clear on its face. No definition or explanation isprovided in the body of the policy or in the Schedule. Again, thequestion is how clearly, if at all, was this limitation explainedto the insured? And by whom? And when?

3) The third unexplained term in the Schedule is found in Item #6c, labeled "Maximum Limit of the Company's AggregateLiability:"

Commercial: $1,000,000 in excess of the Aggregate Deductible Medicare/Medicaid: $1,000,000 in excess of the Aggregate Deductible

The phrase "Aggregate Deductible" is not defined or explainedin the policy or in the Schedule. The Court must underscore thatneither side has raised an issue concerning the interpretation ofthe Aggregate Deductible; however, as PSO urges that it now mustbe paid the $1,000,000 maximum limit, the question may stillarise. Without explanation or definition, this phrase is alsoambiguous.

The controversy arises

PSO alleges that it was unaware of the new terms in theSchedule and their potential impact until long after thetermination of the policy period. PSO submitted its records toAon Mass in due time, and was distressed when no payment wasforthcoming from Combined within the forty-five day periodspecified in the policy. As more and more time elapsed, PSO'sstaff began to pressure Aon Mass to find out from Combined whythe claim had not been paid. Combined never communicated directlyor via Aon Mass that the information provided by PSO wasinaccurate or incomplete. Finally payment was made by Combined,but PSO determined that it was too little, too late, and this lawsuit was filed.

The payment made by Combined was in the amount of $420,427.48for coverage under the Specific Excess of Loss provision of thepolicy, and $162,756.04 under the Medicare/Medicaid portion ofthe Aggregate Excess of Loss provision of the policy. No paymentwas made pursuant to the commercial portion of the AggregateExcess of Loss provision of the policy because the aggregatedcharges in this category failed to exceed the new MinimumAggregate Attachment Point of $1,000,000.00. This constitutes apartial denial of PSO's claim.

An additional fact of possible relevance is that Aon Mass andCombined are both owned by the same parent company, a fact thatPSO claims to have learned only after the breakdown in thebusiness relationship among the parties. Aon Mass maintains thatthis fact was disclosed to PSO prior to its selection of theCombined insurance policy.

Interpretation of the policy language

Both PSO and Combined have requested that the Court construethe language of the policy. Both moving parties urge the Court tofind that the language of the policy is clear and unambiguous,and in accord with their respective interpretations. PSO arguesthat the Schedule of Insurance is not rightfully part of theinsurance policy and is not part of the contract between theparties. Consequently, PSO argues, the Court should interpret only the clear and unambiguous language found in the body of thepolicy. Combined argues that the Schedule of Insurance isincorporated into the policy proper, and that its language isclear and unambiguous and must be applied as it is written. TheCourt concurs with Combined's view that the Schedule of Insuranceis incorporated into the policy and cannot be ignored; however,the Court finds that the language therein is unclear andambiguous.

The law is well settled that the court is to interpret theterms of an insurance policy according to the principles setforth for interpretation of contracts generally. Casco IndemnityCompany v. Rhode Island Interlocal Risk Management Trust,929 F.Supp. 65, 69 (D.R.I. 1996). The court must examine the policyin its entirety in order to determine the intent of the partiesand, whenever possible, to effectuate that intent. Id. at 69.

The language used in the policy must be given its plain, ordinary, and usual meaning. When the terms are found to be clear and unambiguous, the task of judicial construction is at an end. The contract terms must then be applied as written and the parties bound by them.Id., quoting Malo v. Aetna Casualty and Sur. Co.,459 A.2d 954, 956 (R.I. 1983).

However, where the language of the policy is subject to morethan one interpretation, and there is a reasonable dispute aboutthe coverage provided, the court may consider extrinsic evidence concerning the surrounding circumstances as they may shed lighton the parties' intent. Eagle-Picher Industries, Inc. v. LibertyMutual Ins. Co., 682 F.2d 12, 17 (1st Cir. 1982). "For example,evidence of the construction given to the language by the partiesand of the customary usage of persons in the same commercialsetting is normally admissible." 682 F.2d at 17. TheEagle-Picher Court goes on to suggest that a district judge,sitting without a jury, might admit all admissible extrinsicevidence of the parties' intent "to guard against reversal."682 F.2d at 18. See also Mendez v. Brites, 849 A.2d 329, 338 (R.I.2004). In Commercial Union Ins. Co. v. Seven Provinces Ins. Co.,Ltd., the First Circuit deemed proper the trial court'sadmission of expert testimony on trade usage and industrypractice to aid in the interpretation of the language of aninsurance policy. 217 F.3d 33, 38 (1st Cir. 2000).

In the present dispute, the issue that must be resolved by afact-finder is not what the insurance company intended by the newprovisions in the Schedule of Insurance, but what the partiesunderstood at the onset of the contract. Was there a sharedintent, and, if so, what was it?

In the case of ambiguous policy language, it is black letterlaw that insurance policies are interpreted against the drafter(contra proferentum) and in favor of the insured, in order toachieve the public policy goal of providing insurance coverage for consumers. Mallane v. Holyoke Mut. Ins. Co., 658 A.2d 18,20 (R.I. 1995). Courts seek to determine not what the insurerintended by its policy language, but what an ordinary reader andtypical insurance consumer would understand the language to mean.Zarrella v. Minnesota Mut. Life Ins. Co., 824 A.2d 1249, 1259(R.I. 2003). This ordinary and typical insurance purchaser is one"untrained in either the law or insurance field." New LifeBrokerage Services v. Cal-Surance Assoc., 334 F.3d 112, 113 (1stCir. 2003).

Pointing out that PSO's Chief Operating Officer Beyer had over20 years in the health industry risk management field, Defendantstake issue with the depiction of PSO as an ordinary purchaser ofinsurance. To support their position, Defendants point out thatcourts have identified a "sophisticated parties" exception to the"ordinary purchaser" rule, where two parties to an insurancecontract are "equally sophisticated," or where the "insurednegotiated for contract terms tailored to govern the outcome ofthe lawsuit." Commercial Union Ins. v. Walbrook Ins. Co.,7 F.3d 1047, 1053 n. 8 (1st Cir. 1993).

While noting the exception to contra proferentum, theCommercial Union Court points out that it is invoked sparingly,and declines to employ it in any case, where it finds theinsurance policy before it to be unambiguous. Id. at n. 8.

The Rhode Island Supreme Court also recognized the "sophisticated consumer" exception but refused to use it inTextron, Inc. v. Aetna Cas. and Sur. Co., 754 A.2d 742, 749(R.I. 2000). Pointing out that other jurisdictions have upheldthe contra proferentum doctrine not just in the case ofunsophisticated consumers, but also in the case of corporationsdespite their increased "business acumen and bargaining power,"the Rhode Island Supreme Court explained: To apply this principle to large corporations such as Textron makes more sense in the insurance-policy context than it might in other settings: while business customers of insurance companies may at first glance appear to have more power in negotiating an insurance contract, in fact the only negotiation that typically occurs over the policy language is that between state regulators and the insurers. (cites omitted) Often the commercial insured such as Textron does not even view the policy's language until after it pays the premiums.Id. at 749-750, n. 2.

While PSO may not have bargained for the contractual terms inthe policy, Aon Mass is prepared to present evidence that thedisputed terms in the Schedule were explained to PSO personnelextensively prior to the signing of the Insurance Binder.Further, Aon Mass will argue that PSO's staff understood, orshould have understood, or was provided with ample opportunity tounderstand, the terms in question. This extrinsic evidence willbe relevant to a determination of whether or not the ambiguousterms in the Schedule of Insurance should be construed in favor of PSO.

The Counts in the Complaint Standard of Review

When ruling on a motion for summary judgment or partial summaryjudgment, the court must look to the record and view all thefacts and inferences therefrom in the light most favorable to thenonmoving party. Continental Cas. Co. v. Canadian Universal Ins.Co., 924 F.2d 370, 373 (1st Cir. 1991). Once this is done, Rule56(c) requires that summary judgment be granted if there is noissue as to any material fact and the moving party is entitled tojudgment as a matter of law. A material fact is one affecting thelawsuit's outcome. URI Cogeneration Partners, L.P. v. Board ofGovernors for Higher Education, 915 F.Supp. 1267, 1279 (D.R.I.1996). Factual disputes are genuine when, based on the evidencepresented, a reasonable trier of fact could return a verdict forthe nonmoving party. Anderson v. Liberty Lobby, Inc.,477 U.S. 242, 248 (1986).

To win summary judgment on a particular count of the complaint,the moving party must show that "there is an absence of evidenceto support" the nonmoving party's claim. Celotex Corp. v.Catrett, 477 U.S. 317, 325 (1986). In response, the nonmovingparty cannot rest on its pleadings, but must "set forth specificfacts demonstrating that there is a genuine issue for trial" asto the claim that is the subject of the summary judgment motion. Oliver v. Digital Equipment Corp.,846 F.2d 103, 105 (1st Cir. 1988).

Count I

In Count I, PSO alleges breach of contract against Combined.Both PSO and Combined have moved for summary judgment on thisCount.

PSO charges that Combined breached the contract — the insurancepolicy — by making its payment almost a year after it was due; bymaking a payment that was not the full amount due under thecontract; and by including new terms in the Schedule of Insurancethat were not discussed previously, and, consequently, were notpart of the bargain.

Combined does not dispute that the payment was late. Thisproblem ultimately can be cured, Combined points out, through theaddition of interest at the time that the underlying dispute isresolved. As for the other allegations, Combined responds thatthe terms of the contract were accepted by PSO when it signed theInsurance Binder.

As with other contracts, the formation of a contract ofinsurance requires "a manifestation of mutual assent in the formof an offer or proposal by one party and an acceptance thereof bythe other." John Hancock Mutual Life Ins. Co. v. Dietlin,97 R.I. 515, 518, 199 A.2d 311, 313 (1964). "Ordinarily, theapplication for a policy is the offer, and before a contractual relationship can come into being the offer must beunconditionally accepted." Id. at 518, 199 A.2d at 313. Seealso Goucher v. John Hancock Mutual Life Ins. Co.,113 R.I. 672, 676, 324 A.2d 657, 660 (1974).

In this case, the proposal from Combined served as the offer.The unconditional acceptance occurred when Beyer of PSO signedthe Insurance Binder. Were the offer and acceptance a result of ameeting of the minds enjoyed by the parties at any point in thetransaction? Was it a breach of contract for Combined to insertnew concepts in the Insurance Binder that were not included inthe Specimen Policy and that had not been discussed during a yearof meetings between PSO and Aon Mass? Was it a breach of contractfor Combined to use new numeric values in the Schedule ofInsurance that were not those specified in the Binder? These arequestions of fact that must be resolved by the finder of fact.Consequently, as these questions go to the heart of the disputeover the interpretation of the contract language, summaryjudgment is not appropriate at this stage of the proceedings.Therefore the motions of both PSO and Combined are denied onCount I of the Amended Verified Complaint.

Count II

In Count II, PSO charges that Aon Mass breached the insurancecontract, or, in the alternative, breached its agreement to serveas PSO's insurance broker. Aon Mass responds to the former charge by pointing out that it was not a party tothe insurance contract and so cannot be in breach.

As for the allegation that Aon Mass breached its agreement toserve as PSO's broker, Aon Mass maintains that, to whateverextent its conduct was governed by an agreement with PSO, itfulfilled its part of the bargain when it procured "stop loss"insurance coverage for PSO.

PSO alleges that Aon Mass may not have forwarded its billedcharges to Combined for adjudication in a timely manner; that AonMass may have refrained from urging Combined to complete itsadjudication in a timely manner; and that Aon Mass may not havedouble checked Combined's adjudication, but merely forwardedCombined's final package to PSO. However, PSO presents noevidence to support these allegations. More importantly, PSOpresents no evidence of a verbal or written agreement between PSOand Aon Mass. It is undisputed that Aon Mass did procure "stoploss" insurance coverage for PSO. It is also undisputed that thecoverage offered by Combined was the only coverage available thatincluded any kind of an aggregate excess of loss provision. WhilePSO may have misunderstood the nature of the coverage, or mayeven have been misled as to the nature of the coverage, there isno evidence that this misunderstanding represents any kind ofbreach of contract by Aon Mass.

In order to avoid summary judgment, a party "may not rest upon mere allegations or denials in its pleadings and has anaffirmative duty to set forth specific facts showing a genuineissue of fact to be resolved at trial." Russian v. Life-Cap TireServices, 608 A.2d 1145, 1147 (R.I. 1992). The United StatesSupreme Court has observed that Rule 56(c) mandates an entry ofsummary judgment against a party who fails to make a sufficientshowing to establish an element essential to that party's case,and on which that party bears the burden of proof at trial.Celotex Corp. v. Catrett, 477 U.S. at 322.

In this case, PSO has not presented sufficient evidence of acontract with Aon Mass, or sufficient evidence of a breach, tosurvive Aon Mass' summary judgment challenge. The Court grantssummary judgment in favor of Defendant Aon Mass on Count II ofthe Amended Verified Complaint, and, for obvious reasons, deniesPSO's motion for summary judgment on that count.

Count III

Count III charges a breach of the implied duty of good faithand fair dealing by Combined. Combined seeks summary judgment onthis Count.

Under Rhode Island law, there is an "implied covenant of goodfaith and fair dealing between parties to a contract so thatcontractual objectives may be achieved." Ide Farm & Stable, Inc.v. Cardi, 110 R.I. 735, 739, 297 A.2d 643, 645 (1972). ThisCourt has written previously that, "The applicable standard in determining whether one has breached the implied covenant of goodfaith and fair dealing is whether or not the actions in questionare free from arbitrary or unreasonable conduct." Ross-Simons ofWarwick, Inc., v. Baccarat, Inc., 66 F.Supp.2d 317, 329 (D.R.I.1999). The implication of the duty is that the parties will actin a manner consistent with the purposes of the contract. HordCorp. v. Polymer Research Corp. of America, 275 F.Supp.2d 229,237 (D.R.I. 2003). If the particular actions were contemplated bythe parties when the contract was formed, there is no breach ofthe covenant of good faith and fair dealing. Consequently, "aparty's actions must be viewed against the backdrop ofcontractual objectives in order to determine whether thoseactions were done in good faith." Id. at 238.

Unfortunately, the contractual objectives of PSO and Combinedare at the center of the dispute between these parties. Bothsides argue that the policy's objectives were clear, and that theother side altered those objectives unilaterally in order toachieve individual goals. Their arguments present genuine andcentral issues of material fact preventing the imposition ofsummary judgment. Consequently, Combined's Motion for SummaryJudgment on Count III of the Amended Verified Complaint isdenied.

Count IV

PSO also alleges a breach of the covenant of good faith and fair dealing against Aon Mass. Aon Mass seeks summary judgment onthis Count.

As previously stated, the Rhode Island Supreme Court has foundthat every contract has an implied term of good faith and fairdealing consistent with the achievement of the contractualobjectives. Ide Farm & Stable, 297 A.2d at 645. However, theimplied contractual term is only found in the context of abinding contract between the parties. Centerville Builders, Inc.v. Wynne, 683 A.2d 1340, 1342 (R.I. 1996). As the Court hasindicated above, PSO has presented no evidence of a verbal orwritten contract between PSO and Aon Mass, and no evidence of abreach. Aon Mass undoubtedly agreed to assist PSO in theprocurement of appropriate reinsurance. Aon Mass fulfilled thesebroker responsibilities when it procured a "stop loss" policy forPSO. Aon Mass' conduct in providing PSO with several proposalsfrom different insurance companies was consistent with theparties' goal to achieve reinsurance coverage for PSO's riskcontract with Bluechip.

PSO has failed to present any evidence of a breach of contract,or breach of an implied contractual term, on the part of AonMass. Consequently, Aon Mass' motion for summary judgment onCount IV of the Amended Verified Complaint is granted.

Count V

In Count V, PSO charges that it relied on Combined's negligent misrepresentations concerning the coverage provided bythe policy and that Combined knew or should have known that itdid not intend to fulfill the terms of those representations.

Combined responds that, as it had no direct contact with PSO,it made no representations to PSO, let alone negligent ones.Combined responds further that, to the extent that PSO relied onthe terms in the Specimen Policy, its reliance was notjustifiable. After PSO's Chief Operating Officer Beyer signed theInsurance Binder, Combined continues, PSO can no longer claimreliance on the Specimen Policy.

To make out a prima facie case for the tort of negligentmisrepresentation, the plaintiff must establish the followingelements: 1) a misrepresentation of a material fact; 2) the partymaking the representation must do so without knowledge as to itstruth or falsity, or must do so under circumstances in which heor she should have known of its falsity; 3) the party making therepresentation must intend to induce another to act upon it; and4) an injury must result to the party acting in justifiablereliance on the misrepresentation. Mallette v. Children's Friendand Service, 661 A.2d 67, 69 (R.I. 1995).

In addition, as with all torts, the defendant must owe theplaintiff a duty of care and must breach that duty of care. 70. The Rhode Island Supreme Court has identified the dutyowed by an insurance company to an insured as a "fidiciary obligation to act in the best interests of its insured and notits own pecuniary interest at all times." Skaling v. Aetna Ins.Co., 799 A.2d 997, 1012 (R.I. 2002).

As this Court has written previously, the Rhode Island SupremeCourt has also made it clear that contractual privity is not anelement of the cause of action for misrepresentation. Forcier v.Cardello, 173 B.R. 973, 978 (D.R.I. 1994), citing Dowling v.Narragansett Capital Corp., 735 F.Supp. 1105. "Any third party,"this Court wrote in Forcier, "who is intended as a recipient ofthe information and who foreseeably relies on such information isentitled to recovery if he or she does indeed rely."173 B.R. at 987.

Based on the Forcier analysis, Combined's argument that itmade no representations to PSO because it had no direct contactwith PSO fails. As PSO states, Combined's initial proposal to itwas a representation, as was the Specimen Policy.

However, the shortcoming in PSO's claim of negligentmisrepresentation is its inability to demonstrate an injuryresulting from its reliance on Combined's representations.Damages for a claim of negligent misrepresentation are limited topecuniary losses suffered. Gale v. Value Line, Inc.,640 F.Supp. 967, 972 (D.R.I. 1986). In Gale, plaintiff claimed thathe had missed out on anticipated profits because of defendant'sfailure to include a key fact in an article concerning aninvestment. In addressing his negligent misrepresentation claim, the Courtwrote: Plaintiff relies heavily upon Restatement of Torts 2d § 552. However, when it comes to the matter of damages, plaintiff shifts to a theory similar to a contract theory of damages. Plaintiff seeks to obtain the profits which would have accrued to him had the transaction gone according to his plan. . . . However, under Restatement of Torts 2d § 552B(b) this theory of damages is expressly rejected.Gale at 972.

In the present case, PSO is also advancing a "contract theoryof damages." Aon Mass did procure a "stop loss" policy for PSOand Combined did provide coverage pursuant to the policy. Thereis a question as to whether or not Combined has remitted theproper amount under the policy. However, PSO cannot say "but for"the misunderstanding about the coverage, it would have procured abetter insurance policy that would have provided greatercompensation. Those kinds of damages are speculative, and PSOoffers no evidence to establish that it considered or reviewedany other reinsurance policy that would have reimbursed itslosses at a higher rate. In fact, Aon Mass and Combined havestated, and it is not disputed by PSO, that the Combined policywas the only policy that offered aggregate excess of losscoverage.

Assuming arguendo, that Combined did negligently misrepresent the terms of its insurance coverage to PSO, PSOcannot establish that it suffered a compensable loss as a result.Consequently, Combined's motion for summary judgment on Count Vof the Amended Verified Complaint is granted.

Count VII

Count VII alleges negligence against Aon Mass, for failing inits duty to procure adequate "stop loss" insurance coverage forPSO. Specifically, PSO charges that Aon Mass claimed it wouldprocure the best "stop loss" policy possible for PSO; that itwould represent PSO in a manner consistent with PSO's bestinterests; and that it would communicate all relevant options for"stop loss" coverage to PSO.

In response, Aon Mass claims that PSO cannot maintain anegligence claim on an issue of this complexity without experttestimony; and that, at any rate, Aon Mass did procure the propercoverage for PSO and extensively explained all aspects of thecoverage to them. Moreover, Aon Mass charges that PSO is asophisticated multi-million dollar entity affiliated with one ofthe largest health care systems in New England. It isindefensible and incredible that PSO could have entered into theinsurance contract without a full understanding of its terms.

Finally, Aon Mass points out that PSO has provided no evidencethat there was any better insurance coverage available on themarket, and so there were no adverse consequences to PSO as a result of its failure to fully understand the coverageprovided by the policy.

It is this final argument that the Court finds most compelling.To best illustrate this point, the readers' attention must bedirected across the country to Colorado, where the owner of arestaurant and bar, when faced with a lawsuit from a disgruntledpatron, was dismayed to discover that his insurance policy lackedliquor liability coverage. Bayly, Martin & Fay v. Pete'sSatire, 739 F.2d 239 (Colo. 1987). Referencing Prosser andKeeton on Torts § 30, at 164-165 (5th ed. 1984), the Bayly,Martin Court wrote: Basic principles of tort law provide the framework for determining the burden of proof in a negligence action predicated on the failure of an insurance broker or agent servicing the insurance needs of the plaintiff to procure a particular type of insurance coverage sought by the plaintiff. A cause of action founded on negligence requires proof of the following elements: (1) a duty or obligation, recognized by law, requiring the defendant to conform to a certain standard of conduct for the protection of others against unreasonable risks; (2) a failure or breach of duty by the defendant to conform to the standard required by law; (3) a sufficient causal connection between the offensive conduct and the resulting injury; and (4) actual loss or damage resulting to the interests of the plaintiff.Bayly, Martin at 242.

The Court continues that it is indisputable that the broker or agent who agrees to obtain a certain type of coverage musteither obtain it or notify his or her client of the failure to doso. Bayly, Martin at 243. Notwithstanding a breach of thisduty, the successful negligence action also requires ademonstration of causation and damages: It would be insufficient under these circumstances merely to allege loss of opportunity to seek insurance coverage where the attempt might not have been successful; rather, the ultimate purpose to be effected is to allow recovery where, had the defendant acted properly, plaintiff would not only have the opportunity to seek, but also could have successfully procured alternative insurance. . . . The law is well established that the plaintiff must show by the preponderance of the evidence that other insurance could have been obtained, which requirement arises out of the plaintiff's obligation to prove causation and damages.Bayly, Martin at 243. The Court explains further that theplaintiff must prove by a preponderance of the evidence that thedesired insurance coverage was generally available in theinsurance industry when the broker procured the inadequatecoverage for the plaintiff. Id. at 244.

In the present case, PSO has made no showing that there was anybetter insurance coverage to be had. Unlike the poor bar owner inthe Pete's Satire case who discovered he had no insurancecoverage, Plaintiff here had "stop loss" reinsurance coverageprocured by its broker. With hindsight, PSO is not sure whetherit was the best coverage that might have been available. However, both Defendants assert that the policy in question wasthe only policy available that offered aggregate excess of losscoverage. PSO does not dispute this assertion. PSO has notfulfilled its burden to demonstrate that there was betterinsurance coverage available on the market, and that it wasdamaged by Aon Mass' failure to procure a better policy.Consequently, PSO's negligence claim fails and Aon Mass' motionfor summary judgment on Count VII of the Amended VerifiedComplaint is granted.

Count VIII

In Count VIII of the complaint, PSO charges that Aon Massbreached its fiduciary duty to act in good faith in procuring"stop loss" insurance for PSO. Specifically, PSO claims that AonMass breached its duty when it failed to disclose its corporateaffiliation with Combined when it recommended Combined'sinsurance policy to PSO. Aon Mass denies that it failed todisclose its corporate affiliation with Combined in a timelymanner. It also asserts that its relationship with PSO was anarm's length commercial/contractual relationship, not a fiduciaryrelationship. Moreover, Aon Mass states, it fulfilled whateverduty it had to PSO when it procured the "stop loss" policy.

This Court has written previously that, "A fiduciaryrelationship arises when the facts show a special relationship oftrust and confidence that requires the fiduciary to act in the other party's best interests." Fraioli v. Lemcke,328 F.Supp.2d 250, 267(D.R.I. 2004). The case law indicates, and Aon Mass has cited such acase, Stockett v. Penn Mut. Life Ins. Co., 82 R.I. 172,177 (1954), that the commercial relationship between aninsurance company and the insured is not ordinarily a fiduciaryone. See Vanwest v. Midland, 2000 WL 34019293 (D.R.I.).However, the relationship between an agent and its principal isdistinctly different. See Affleck v. Kean, 148 A. 324, 325(R.I. 1930); Matarese v. Calise, 305 A.2d 112, 119 (R.I. 1973);Cahill v. Antonelli, 390 A.2d 936, 939 (R.I. 1978).

In a New Jersey case that is on point, Tomaszewski v. McKeonFord, Inc., 573 A.2d 501, (N.J.Super.A.D. 1990), a salesman at acar dealership sold Mrs. Tomaszewski a car, along with a creditlife and disability insurance policy to cover the financing ofthe car. Although Mrs. Tomaszewski wanted to buy the car in herown name, she did not have sufficient credit and the dealershipinsisted that her husband be joined as a co-buyer. However, thedealership failed to include Mr. Tomaszewski as an insured on theinsurance policy. When her husband died soon thereafter, Mrs.Tomaszewski was unable to make the car payments and her car wasrepossessed. While recognizing that Mrs. Tomaszewski had notfully read the insurance policy, the Court pointed out that thecar salesman was the only one in the position of advising her ofthe importance of including her husband on the policy. The Court explained: One who holds himself out to the public as an insurance broker is required to have the degree of skill and knowledge requisite to the calling. When engaged by a member of the public to obtain insurance, the law holds him to the exercise of good faith and reasonable skill, care and diligence in the execution of the commission. He is expected to possess reasonable knowledge of the types of policies, their different terms, and the coverage available in the area in which his principal seeks to be protected. If he neglects to procure the insurance or if the policy is void or materially deficient or does not provide the coverage he undertook to supply, because of his failure to exercise the requisite skill or diligence, he becomes liable to his principal for the loss sustained thereby.Tomaszewski at 503.

In the present case, the undisputed facts indicate that PSOtrusted and relied on Aon Mass to guide it through the thicket ofreinsurance choices. Though some members of PSO weresophisticated businessmen, it is also clear that the particular"stop loss" coverage in question was not only something new inthe industry but also formidable in its complexity. PSO turned toAon Mass, rather than the local office of Aon, because of itsexpertise in this field. Despite Aon Mass' assertions to thecontrary, it is definitely possible, when all the facts aredeveloped, that the Court could find that a fiduciary relationship existed between the parties.1

Once a fiduciary relationship is established, the samequestions arise that are pertinent to the analysis of the priorcounts. Was Aon Mass aware of the new terms in the Schedule ofInsurance and the impact that those terms would have on PSO'srecovery under the policy? Was Aon Mass aware that PSO did notunderstand those terms? What were Aon Mass' motivations inrecommending the Combined coverage to PSO? These are allquestions to be addressed at trial. Consequently, Aon Mass'motion for summary judgment on Count VIII of the Amended VerifiedComplaint is denied.


For the reasons stated above, the Court denies the motions forsummary judgment of both Combined and PSO as to Count I; grantsAon Mass' motion for summary judgment on Count II and deniesPSO's motion on that Count; denies Combined's motion for summaryjudgment on Count III; grants Aon Mass' motion for summaryjudgment on Count IV; grants Combined's motion for summaryjudgment on Count V; grants Aon Mass' motion for summary judgmenton Count VII; and denies Aon Mass' motion for summary judgment on Count VIII. Combined's motion to have the matterturned over to an independent auditor is denied as premature. Torecap, what is left for trial is as follows: Count I, a breach ofcontract claim by PSO against Combined; Count III, a breach ofthe implied duty of good faith and fair dealing claim by PSOagainst Combined; Count VI, a fraudulent misrepresentation claimby PSO against Combined (no motion was made as to this Count);and Count VIII, a breach of fiduciary duty claim by PSO againstAon Mass.

No judgment shall enter until all claims in this case areresolved.

It is so ordered.

1. Breach of fiduciary duty is an equitable claim and, assuch, is not subject to jury determination. See Ed PetersJewelry Co., Inc. v. C & J Jewelry Co., 51 F.Supp.2d 81, 90-91(D.R.I. 1999), aff'd. 215 F.3d 182, 186 (1st Cir. 2000). TheCourt intends that evidence on this claim will be presented attrial; but findings of fiduciary duty and breach, if any, will bemade by the Court.

Back to top