The Brickman Group, Ltd. v. CGU Ins. Co.

Citations: 865 A.2d 918; 2004 Pa. Super. 487; 2004 Pa. Super. LEXIS 4936

Court: Superior Court of Pennsylvania; December 28, 2004; Pennsylvania; State Appellate Court

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The Superior Court of Pennsylvania affirmed the trial court's grant of summary judgment in favor of CGU Insurance Company, dismissing the Brickman Group Limited's lawsuit. Brickman alleged that CGU had made an oral and/or written agreement outside of the insurance policies to freeze premium rates for six years, which CGU purportedly breached by attempting to raise premiums or not renew policies during that period. The trial court ruled that such an agreement, not documented within the insurance policies, is unenforceable under Pennsylvania law. The undisputed facts included that the insurance policies did not reflect the terms of the alleged "Insurance Program Guarantee," were annual in nature, and contained specific provisions regarding non-renewal notifications and renewal premium quotes. Brickman had relied on this guarantee to switch its insurance from Royal Insurance Company to CGU in 1997 and continued with CGU based on this reliance. The court noted that Brickman had not paid extra for this guarantee and that the trial court's reasoning in prior orders remained consistent throughout the proceedings.

Brickman initiated legal action against CGU in July 2000, which led to CGU filing preliminary objections. In August, Brickman submitted a First Amended Complaint alleging breach of contract, breach of fiduciary duty, and bad faith insurance practices under 42 Pa.C.S. § 8371, seeking both equitable relief and damages. CGU responded with preliminary objections, including a demurrer to each count. On January 8, 2001, the trial court upheld CGU's demurrers regarding breach of fiduciary duty and bad faith claims, dismissing those counts without prejudice, while denying CGU's objections to the breach of contract claims.

On May 11, 2001, Brickman sought permission to amend its complaint to include additional factual material and reassert the bad faith claim, as well as to introduce a new fraud claim based on newly discovered evidence. The court allowed Brickman to amend the facts but denied the inclusion of bad faith and fraud claims. Both parties filed cross-motions for summary judgment, which the court denied on October 8, 2001, due to genuine material fact issues.

On November 28, 2001, the court permitted CGU to amend its Answer and Counterclaim to include a defense regarding premium rebates under 40 P.S. § 471. CGU later sought reconsideration of the denial of summary judgment, which the court granted, ultimately ruling in favor of CGU on the breach of contract claims. The court found that the Insurance Program Guarantee, which froze Brickman's insurance rates, constituted an illegal inducement and was therefore void and unenforceable.

Following this, Brickman sought reconsideration of the summary judgment grant and the denial of its amendment request. The trial court denied both motions. Brickman then applied for a determination of finality, which the court granted, leading to a review request that was denied for lack of a final appealable order. The parties later agreed to dismiss claims involving third-party defendants, finalizing the trial court's judgment and making the case ripe for review.

Brickman’s appeal raises three questions: (1) whether the trial court erred in allowing CGU to amend its Answer to include a defense regarding the Insurance Program Guarantee without allowing Brickman discovery, and subsequently granting summary judgment; (2) whether the court erred in denying Brickman's amendment to add a fraud count; and (3) whether it erred in dismissing Brickman's bad faith claim and denying leave to amend those allegations.

Brickman contends that the trial court's decision to grant summary judgment to CGU, based on the illegality of the Insurance Program Guarantee, inadvertently legitimized CGU's illegal actions. Brickman asserts that the trial court prioritized legal technicalities over justice, as it acknowledged the illegality of the contracts made by insurers to evade liability while still ruling in favor of CGU. He emphasizes CGU's alleged 'illegal conduct' throughout his argument, particularly focusing on the trial court's mention of insurers avoiding liability. However, the trial court's reference specifically addressed efforts by insurers to avoid liability to insured parties. CGU's actions, described as attempts to 'nonrenew' policies, are viewed by the court as efforts to alter its contractual relationship with Brickman rather than to evade liability. Notably, Brickman does not claim denial of benefits for covered claims or mishandling of existing claims, leading the court to classify his allegations regarding the Insurance Program Guarantee as a 'red herring.' The court also outlines its review standards, stating that summary judgment is appropriate when there is no genuine issue of material fact and that it evaluates the situation favorably for the nonmoving party, reversing only in cases of legal error or abuse of discretion.

The trial court granted CGU summary judgment based on its interpretation of 40 P.S. 275 and 471, which prohibit insurance agents and companies from offering any rebates or inducements not specified in insurance policies. Section 275 specifically prohibits agents from offering rebates, commissions, or other benefits for insurance policies, while Section 471 applies similar prohibitions to insurance companies. The Pennsylvania Supreme Court has established that these statutes aim to prevent unfair treatment of insurance applicants by ensuring all individuals in the same class receive equal offers. The court emphasized that any reduction in cost is a violation of these statutes.

The trial court found no dispute regarding the status of the Insurance Program Guarantee as not being incorporated into the insurance policies. Consequently, it ruled the guarantee potentially illegal under the aforementioned statutes and refused to enforce it. In response, Brickman contested the trial court’s finding that CGU offered any inducement as defined by the statutes. However, the court dismissed this argument, noting that Brickman's Vice President testified that the costs under CGU's rates could be significantly higher—up to $1 million annually—compared to the rates supposedly guaranteed. Furthermore, Brickman later accepted less favorable terms from another insurer after CGU declined to honor the guarantee, undermining Brickman's claim of no rate reduction from the Insurance Program Guarantee.

Brickman's argument that the insurance premiums paid, as listed in the contract, did not violate non-rebate laws is unconvincing. The insurance policies were documented as one-year policies, yet Brickman claims the Insurance Program Guarantee effectively transformed them into six-year policies. This discrepancy, not reflected in the policy documentation, could hinder regulatory review, placing the policies in violation of statutory provisions 275 and 471. The trial court's ruling on the illegality of the contract is upheld.

Brickman further argues that equity should enforce the illegal contract against CGU, alleging it is less culpable due to its lack of technical knowledge regarding insurance agreements. Brickman cites precedent that allows for enforcement when parties are not equally responsible for the illegality. However, the court finds both parties equally responsible, as Brickman was represented by brokers who participated in forming the illegal contract. Therefore, Brickman is deemed to be the proponent of the illegal agreement, and the trial court's decision is reaffirmed.

Under Pennsylvania's administrative code, a broker authorized by a client to secure insurance is deemed the client's legal agent, meaning the broker's knowledge is imputed to the client. In this case, Brickman, as the insured, is responsible for the broker's knowledge regarding the insurance policies. Pennsylvania imposes strict licensing requirements on insurance brokers. Brickman failed to provide evidence that the knowledge necessary for a brokerage license differs from what should be imputed to CGU, the insurer. Brickman's argument claiming a brokerage relationship with CGU does not create an exception under the code. Acknowledgment by William Curtis, a broker, confirmed he acted on Brickman's behalf in seeking insurance terms. Consequently, both Brickman and CGU share responsibility for any illegalities in the Insurance Program Guarantee, precluding enforcement of such a contract.

The record contradicts Brickman's claim of ignorance of the law, as evidence shows that Brickman and its brokers were aware of the premium increases, nonrenewal, and cancellation terms clearly stated in the policies. The risk management consultant for Brickman was responsible for setting the criteria for insurance bids and demonstrated knowledge of these provisions. Several policies included specific language that exceeded statutory notice requirements, indicating that Brickman actively tailored these provisions rather than overlooking them as standard terms. This suggests that Brickman and its representatives understood the discrepancies between the policies and the agreement in the Insurance Program Guarantee.

Brickman's public policy argument lacks merit, as even if the Restatement (Second) Contracts, § 179, cmt. C, is applicable, it does not support Brickman's claim that ruling against it would lead to widespread misconduct by insurance companies. The court distinguishes between CGU's alleged failure regarding the Insurance Program Guarantee and its obligations under the actual policies. A ruling favoring CGU could encourage insurance brokers to ensure multi-year rate guarantees are clearly endorsed in policies, aligning with the intent of Pennsylvania legislation aimed at regulatory transparency and consumer protection. Concerns about insurance companies engaging in fraudulent practices as a result of this ruling are unfounded. The trial court's summary judgment in favor of CGU is affirmed.

Brickman's second appeal point contests the trial court's denial of leave to amend its complaint to include claims of fraud and statutory bad faith against CGU. Pennsylvania law dictates that bad faith claims must arise from statute, as there is no common law remedy. The court will consider Brickman's bad faith argument alongside the relevant statutes. The standard of review for denying a motion to amend is that an appellate court will only overturn the trial court's decision if there was a legal error or an abuse of discretion. The trial court holds broad discretion in such matters, and while amendments are generally favored, they can be denied if the proposed claim is not viable.

The trial court determined that Brickman's fraud claim was barred by the 'gist of the action' doctrine, which prevents tort claims that are collateral to breach of contract claims. It found Brickman's fraud allegations were rooted in the alleged breach of the Insurance Program Guarantee, thus falling within the breach of contract framework rather than as a separate tort claim. The doctrine aims to preserve the distinction between tort and contract claims, as tort actions arise from legal duties imposed by social policy, while contract actions are based on mutual agreements between parties. Breaches of contract do not automatically constitute fraud unless the alleged wrongdoing constitutes the essence of the claim, with the contract being secondary. The applicability of the gist of the action doctrine is a legal issue subject to plenary review, focusing on the overall nature of the action rather than isolated incidents. In the case eToll, the Pennsylvania appellate court affirmed that the doctrine applies to fraud claims related to contract performance. Brickman argued that its fraud claims stemmed from the circumstances surrounding the execution of the Insurance Program Guarantee rather than the Guarantee itself. Additionally, Brickman contended that the claim persisted due to CGU's alleged admission of improper conduct following the Guarantee's unenforceability; however, this argument was previously rejected in relation to unsupported claims of CGU's illegal conduct. The first argument about the nature of the fraud allegations requires further examination.

The trial court recognized that the "gist of the action" doctrine typically does not apply when a defendant breaches a contract and simultaneously makes misrepresentations to deceive the plaintiff regarding their contractual rights. It concluded that Brickman's fraud allegations were intrinsically linked to its breach of contract claim against CGU for failing to fulfill the Insurance Program Guarantee, which involved the right to be sold insurance policies at guaranteed rates over a specified period.

Brickman contended that claims of fraud in the inducement are permissible in contractual disputes, even if the gist of the action doctrine would preclude fraudulent performance claims. This aligns with principles established in previous case law, distinguishing between contract and tort actions based on the nature of the duties breached. The trial court erred in suggesting that the gist of the action was not primarily a tort issue, as Brickman's claims could be seen as fraud related to the inducement to enter the Insurance Program Guarantee, although such a claim is barred by the doctrine.

The ruling on this issue does not end the inquiry nor guarantee a favorable outcome for Brickman. The appellate court is not constrained by the trial court's reasoning and can uphold its decision on any valid grounds. If Brickman inadequately articulated a fraud claim that warrants relief, the trial court's denial of leave to amend the complaint stands as justified.

The essential elements for a cause of action for fraud or deceit include: misrepresentation, a fraudulent statement, intent to induce action, justifiable reliance, and resulting damage. In this case, Brickman was represented by certified insurance brokers, and the policy documents clearly stated one-year coverage terms, including clauses on premium increases and the right to nonrenew or cancel. These provisions, crafted by CGU's agents, offered protections beyond legal requirements. Given Brickman's obligation to understand the law through its brokers and the evident inconsistencies between the policies and the Insurance Program Guarantee, the trial court correctly determined that the necessary elements to prove fraud were not present, thus affirming its decision to deny Brickman's request to amend its complaint to include a fraud claim.

Regarding Brickman's challenge to the dismissal of its statutory bad faith claim under 42 Pa.C.S. § 8371, the trial court concluded that 'bad faith' pertains solely to an insurance company's improper denial or refusal to pay claims under the policy. The court cited precedents indicating that claims for bad faith failure to renew policies do not fall under this statute. Upon reconsideration of Brickman's request to amend the complaint, the court rejected Brickman’s argument of anticipatory breach, stating that CGU's refusal to renew policies did not constitute a breach under § 8371.

Section 8371 allows courts to impose penalties against insurers found to have acted in bad faith, including awarding interest on claims, punitive damages, and attorney fees. The Pennsylvania legislature established this section to protect insured parties from unjust denials of coverage. Courts evaluating insurer conduct under this statute may consider other relevant cases, the statute's plain meaning, and conduct violating the Unfair Insurance Practices Act (UIPA). To prove bad faith under 8371, a claimant must show that the insurer lacked a reasonable basis for denying benefits and that the insurer knew or recklessly disregarded this lack, with evidence required to be clear and convincing.

Brickman argued that CGU acted in bad faith by misinterpreting policy provisions related to non-renewal and premium increases, claiming this constituted an anticipatory breach of contract. However, the court found that Brickman’s allegations did not meet the established criteria for bad faith, noting that the policy terms were clear and Brickman was represented by a broker. Furthermore, Brickman failed to establish the existence of an anticipatory breach claim in this scenario. As a result, the court affirmed the trial court's decision to grant CGU summary judgment and deny Brickman's request to amend its complaint.