Insurance – Agency – Failure To Procure Policy Naming Building Owner As Payee

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Where (1) a commercial tenant was required under the terms of a lease to maintain insurance coverage on the building for the benefit of the owners, (2) a sublease of the property required the subtenant to maintain insurance coverage on the building for the benefit of the owners and on the building’s printing equipment for the benefit of the lessee (which held a security interest in such equipment), (3) a policy obtained by the subtenant did not name the building owners or the lessee as beneficiaries and (4) the building and its equipment eventually were damaged by fire, it must be concluded that neither the defendant insurance company that issued the policy nor the codefendant insurance agency that procured the policy can be held liable to the plaintiffs (the owners and the lessee) for negligence or breach of contract in failing to name the plaintiffs as loss payees in the policy.

Thus, we affirm a Superior Court judgment in the defendants’ favor on the negligence and contract claims asserted by the plaintiffs.

Tort Claim

“The plaintiffs assert two tort theories: that [defendants] Cochrane & Porter [Insurance Agency Inc.] and Royal Insurance [Companies] were negligent in failing to include them as loss payees on [subtenant] Bay State [Graphics Inc.]’s insurance policies, and that the defendants negligently misrepresented to them that they were included as loss payees in the insurance policies. The defendants respond that Cochrane & Porter acted as the agent for Bay State, and had no duty to protect third parties such as the [plaintiff] trustees [who owned the building] and [coplaintiff lessee] Journal Transcript [Newspapers Inc.], absent a request by Bay State to do so. It is undisputed, they claim, that Cochrane & Porter was asked to procure a policy of insurance covering Bay State’s interests, which it did, and that it was not asked to procure a policy covering the trustees or Journal Transcript.

“In Rae v. Air-Speed, Inc., 386 Mass. 187, 192-193 (1982), we held that in certain limited circumstances an agent’s failure to procure insurance coverage may give rise to liability to a third party. In that case, the agent promised an employer that he would procure a workers’ compensation insurance policy for the employer, and failed to do so. We concluded that the insurance agent could be held liable on a tort theory to the statutory dependent of the employee (his widow) because, in light of the statute requiring workers’ compensation insurance, it was foreseeable that the agent’s failure to procure a workers’ compensation policy would harm the employee or his widow. … In Flattery v. Gregory, 397 Mass. 143 (1986), we elaborated that a necessary prerequisite to a recovery under either tort or third-party contract liability is the existence of a promise by the agent to procure the insurance requested by the client. … As to Journal Transcript, it has failed to establish any facts that could prove Cochrane & Porter agreed to procure insurance coverage for its interest in the printing equipment, and failed to do so. Cochrane & Porter was not aware even of Journal Transcript’s security interest in the printing equipment. Journal Transcript fails to meet the necessary prerequisite to maintain a tort claim against the defendants.

“As to the claim by the trustees, Cochrane & Porter was instructed to and did procure a policy covering Bay State. It was instructed by Bay State not to add [plaintiff trustee] Stephen Quigley to the policy, and it owed Bay State a ‘duty to proceed in accordance with [Bay State’s] instructions.’ … The trustees point to the undisputed fact that Cochrane & Porter knew of Stephen Quigley’s insurable interest in the building, and claim that Cochrane & Porter had ‘reason to know’ that the trustees would rely on the insurance agent to protect their interest. Even viewing these facts in the light most favorable to the trustees, we are dubious that there is a genuine issue as to whether Cochrane & Porter agreed to procure coverage that would protect the interests of the trustees. …

“Even were we to conclude that there is a genuine issue as to whether Cochrane & Porter agreed with Bay State to procure a policy that would insure the trustees’ interests and failed to do so, there is an independent reason why the trustees’ tort claim must fail. In Flattery, supra at 146, we said that the third party would also have to prove that the alleged facts established a ‘legally recognized duty’ that was owed by the agent to the third party. In that case, we held that the motor vehicle operator did not meet this requirement because he could not ‘rightfully and foreseeably’ expect insurance beyond what was required by statute to be in effect. … In the absence of foreseeable reliance on the promised services being performed by someone, we have never held that ‘a promisor of services may be liable in tort not only to the promisee but also to potential beneficiaries of the promise.’ … Applying the Flattery test to the undisputed facts of this case, we conclude that the trustees have not established that they ‘rightfully and foreseeably’ relied on any promise by Cochrane & Porter to Bay State to obtain coverage naming them as loss payees of the insurance agreement procured by Bay State. There is no statutory or other legal obligation imposed on the tenant of the building to carry the coverage in question. … Although they rely on Rae and Flattery, the trustees can claim no foreseeable reliance on that basis.

“The trustees also argue that, as provided in its sublease with Journal Transcript, Bay State had a contractual obligation to procure insurance coverage protecting them, and that they foreseeably relied on that contractual obligation to protect their interest. We have said that a contractual obligation may support a claim for foreseeable reliance. Craig v. Everett M. Brooks Co., 351 Mass. 497, 501 (1967). In Craig however, we emphasized ‘that the plaintiff had relied on the defendant’s performance of its obligations under its contract with the developer, and that the extent of that reliance was known to the defendant‘ (emphasis added). … Here, there is nothing to suggest that Cochrane & Porter knew that the trustees would rely on Bay State to protect their interest. While Cochrane & Porter had been informed that Stephen Quigley was the owner of the property, there is no fact to which the trustees can point to establish that Cochrane & Porter knew that Bay State was required to obtain insurance coverage for the plaintiffs’ interest. It is undisputed that Cochrane & Porter never saw the lease agreement between say State and Journal Transcript, and was never informed that Bay State had contracted to insure the trustees’ interests. There is no showing that Cochrane & Porter had actual knowledge of Bay State’s contractual obligation to its landlord, and no showing that it knew that the trustees would rely on the sublease.

“As an alternative basis for tort recovery, the trustees claim that Cochrane & Porter misinformed or misled them when it issued the certificate of insurance to Stephen Quigley. … This theory is unavailing to the trustees. They have not demonstrated any misrepresentation by Cochrane & Porter: the certificate of insurance issued to Stephen Quigley in 1991 is accurate. Second, the certificate by its terms applied only to the policy year in question, ending on October 23, 1992, six weeks before the fire. … The trustees have not demonstrated that Cochrane & Porter had actual knowledge that they would rely on the certificate as confirming that Bay State had procured insurance to cover their interests, as opposed to Bay State’s interest in the property. The plain terms of the certificate stated otherwise.”

Contract Claim

“Plaintiffs assert that there are material facts in dispute as to whether they were intended beneficiaries of the insurance contract between Cochrane & Porter and Bay State. … In Flattery, supra at 150-151, we said that to recover against an insurance agent on a contract claim, a potential beneficiary must demonstrate that the agent had promised the person seeking insurance that the insurance would be obtained; and that the contracting parties intended the third party to be a beneficiary of the insurance contract. It is not disputed that Cochrane & Porter procured insurance for Bay State that insured the building and its contents. But the plaintiffs have not met the second prong of the test. Viewing the facts most favorably to them, they do not establish that either [Michael] Ploude, as president of Bay State, or Cochrane & Porter intended the policy to insure their interests.

“As to Bay State, the undisputed evidence is that Ploude sought to obtain insurance for Bay State alone. He expressed that intention to Cochrane & Porter’s client services manager. The plaintiffs argue that Ploude’s intention to include them as loss payees is evidenced by his request after the fire that the trustees and Journal Transcript be added as insured parties to Bay State’s policy. No such inference can be drawn. Ploude specifically rejected the inquiry by Cochrane & Porter that Stephen Quigley be added as a named insured. Ploude also failed to forward a copy of Bay State’s lease to Cochrane & Porter, despite its request that he do so. His actions after the fire, particularly when viewed in light of his later conviction of arson, is not probative of his intent prior to the fire.

“There is also no evidence that either Cochrane & Porter or Royal Insurance intended the plaintiffs to be beneficiaries of the policy. The trustees argue that because Bay State ‘owned neither the building nor the printing equipment,’ only the plaintiffs would be ‘entitled to the proceeds in the event of a loss.’ The claim is without merit. … Bay State had its own insurable interest in the property, and would have been had a claim for the proceeds in the event of a loss but for the insurance fraud.

“Judgment affirmed.”

Quigley, et al. v. Bay State Graphics, Inc., et al. (Lawyers Weekly No. 10-113-98) (14 pages) (Marshall, J.) Case heard by Whitehead, J., on motions for summary judgment, and entry of separate and final judgment ordered by Richard E. Welch III, J., in Superior Court. Phillip B. Kraft for the plaintiffs; Michael R. Byrne and Carolyn G. Sullivan for Cochrane & Porter Insurance Agency Inc.; Jacques N. Parenteau and Alexander J. Cochis for Royal Insurance Companies (Docket No. SJC-07618).