International Surplus Lines Insurance Company, an Illinois Corporation v. Marsh & McLennan Incorporated, a Delaware Corporation, and Marsh & McLennan Incorporated, a Virginia Corporation v. City of Richmond, a Municipal Corporation, Third Party

Citation: 838 F.2d 124Docket: 87-2572

Court: Court of Appeals for the Third Circuit; January 31, 1988; Federal Appellate Court

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International Surplus Lines Insurance Company (ISLIC) appeals a district court's summary judgment favoring defendants Marsh McLennan, Inc. and Marsh McLennan, Incorporated. ISLIC sought indemnification for payments made to the City of Richmond under a liability insurance policy, alleging Marsh McLennan breached fiduciary duties during the City's pursuit of increased liability coverage. The district court ruled that ISLIC's claims were improperly categorized as indemnity claims and were barred by the applicable statutes of limitations for both contract and tort claims. 

In Spring 1980, the City of Richmond's Insurance Advisory Committee (IAC) engaged Marsh McLennan to secure public officials' and employees' liability insurance after unsuccessful attempts with licensed carriers. Marsh McLennan contacted ISLIC, which provided a quotation, leading to the issuance of a one-year liability policy effective July 1, 1980, with a renewal on July 1, 1981. In late 1981, the City requested increased coverage limits. ISLIC sought a warranty letter from the City regarding any existing claims, which was provided by Acting City Attorney William Hefty. This letter asserted no knowledge of claims as of October 29, 1981, although it acknowledged potential future claims. Marsh McLennan indicated the letter's vagueness raised concerns about possible claims. Subsequently, the Acting City Risk Manager, James Dellaripa, authorized an increase in coverage to five million dollars, affirming no knowledge of claims, and this authorization was sent to ISLIC’s managing general agent. The increased coverage took effect on October 29, 1981.

In August 1981, the City faced controversy over a proposed Hilton Hotel in downtown Richmond, which Mayor Henry L. Marsh, III believed threatened the Downtown Redevelopment Area. On November 9, 1981, Hilton developers submitted a building permit application, which was disapproved by the City's Director of Planning, Charles T. Peters, Jr., on November 25, 1981, followed by a formal denial on December 8, 1981. Subsequently, on December 23, 1981, the Hilton developers sued the City, prompting the City to notify its insurer, McLennan, which relayed the information to ISLIC. In July 1983, the City settled with the developers for one million dollars, covered by ISLIC's initial policy limit.

On December 7, 1984, the City filed a lawsuit against ISLIC to recover under a four-million-dollar increased limits endorsement. ISLIC attempted to bring Marsh. McLennan into the state court case, but the City objected, and the court denied the motion. Eventually, ISLIC settled with the City for an additional 1.75 million dollars. ISLIC claims that Marsh. McLennan breached its fiduciary duty by withholding critical information regarding the decision to increase coverage limits, misrepresenting claims against the City, and is seeking indemnification for the amounts paid exceeding the original policy limit.

Indemnification is typically applicable when one party (ISLIC) fulfills a duty that should have been discharged by another (Marsh. McLennan). ISLIC argues for its entitlement to indemnification based on the alleged breach of duty by Marsh. McLennan, even though the duty was not owed to the City. The court must determine whether ISLIC's claims constitute true indemnity claims or are time-barred contract or tort claims. Importantly, there is no express indemnity agreement between ISLIC and Marsh. McLennan, leading ISLIC to argue for an implied right to indemnification based on the circumstances of the case.

An implied right to indemnification may arise in two scenarios when no express agreement exists: (1) based on a special contractual relationship between parties, known as an 'implied contract theory' or 'implied in fact' indemnity; and (2) 'implied in law' indemnity, which is tort-based and applicable when one party has disproportionately more fault and has paid for losses primarily caused by another. In this case, ISLIC does not dispute the absence of an express indemnity agreement or tort-based indemnity with Marsh. McLennan. The focus is on whether a special contractual relationship exists that would support an implied right to indemnification. The district court noted that any agency agreement between ISLIC and Marsh. McLennan was unwritten, but Marsh. McLennan acted as an agent for the City by seeking insurance quotes. The precedent case, Ryan Stevedoring Co. v. Pan-Atlantic S.S. Corp., illustrated an implied contractual right to indemnity, where the shipowner was indemnified by the stevedoring company due to its contractual obligations. However, in the current case, no special contractual relationship similar to that in Ryan exists, and no breach of duty by Marsh. McLennan to the City has been established, as ISLIC's payments to the City were not due to any breach by Marsh. McLennan.

The court established an implied right of indemnification in General Electric Co. v. Moretz, where a truck driver sued a shipper for negligence in loading, leading the shipper to seek indemnity from the common carrier responsible for securing the load. Under Virginia law, relevant federal statutes and regulations were deemed part of the contract, creating a unique contractual relationship that justified indemnity. However, the relationship between ISLIC and Marsh McLennan was found to be a standard insurance brokerage arrangement without any unique element to support an implied indemnity agreement. Allowing such an implication could erroneously classify all insurance brokers as insurers, contradicting existing indemnity law.

Regarding ISLIC's breach of fiduciary duty claims, the court determined they do not qualify as indemnity claims and must adhere to the statute of limitations. Virginia law distinguishes between contract and tort actions; without a written contract, the claims are governed by the three-year limitation for oral contracts, which expired in 1984. ISLIC's claims arose from Marsh McLennan's alleged misrepresentation regarding claims against the City in 1981, thus falling outside the limitation period.

If categorized as tort claims, the one-year limitation applies, starting from when ISLIC discovered the breach. ISLIC was aware of the 'Hefty letter' by mid-April 1983, leading the court to conclude that these claims were also barred by the tort statute of limitations. ISLIC attempted to argue that the cause of action did not accrue until December 7, 1984, when the City filed suit, suggesting the claims were timely. However, this argument did not succeed in overcoming the limitations bars.

In the absence of injury or damage, a plaintiff lacks a cause of action. A right of action can only accrue when there is a valid cause of action. The case at hand is notable because the injury occurred prior to the discovery of the alleged breach of contract. In December 1981, the Hilton developers sued the City, which subsequently notified ISLIC and demanded $5 million in coverage, leading ISLIC to set aside reserves and incur legal fees starting in 1982. 

Virginia law dictates that even a minimal injury can trigger the statute of limitations. The precedent case Laburnum established that a cause of action arises at the time of breach, even if the full extent of damages becomes apparent later. It is immaterial whether all damages are sustained immediately; the statute of limitations begins when any injury is sustained due to another's wrongful act. In this context, ISLIC's cause of action was complete upon discovering the breach indicated by the existence of the "Hefty letter," and thus the breach of fiduciary duty claim is time-barred under the tort statute of limitations.

Consequently, ISLIC's claims were improperly framed as indemnity claims, and both contract and tort statutes of limitation preclude them. The district court's decision to grant summary judgment to Marsh McLennan is affirmed.

Marsh McLennan operated under surplus lines brokers licenses from the Virginia State Corporations Commission per Va.Code Sec. 38.1-327.46, which has been repealed and replaced by Va.Code Sec. 38.2-4800. The settlement in question, though not detailed in terms or amount, is noted to exceed $1 million. The precedent set in Ryan was overturned by the Longshoremen's and Harbor Workers' Compensation Act Amendments of 1972. Relevant Virginia statutes include Va.Code Sec. 8.01-246(4), which stipulates a three-year limitation for actions on unwritten contracts, and Va.Code Sec. 8.01-230, which specifies that the limitation period begins at the time of injury or breach, not upon discovery of damage. Additionally, Va.Code Sec. 8.01-248 mandates a one-year limitation for personal actions without specific prescriptions, while Va.Code Sec. 8.01-249(1) states that causes of action for fraud or mistake accrue upon discovery or when they should have been discovered through due diligence.