The Eleventh Circuit U.S. Court of Appeals recently affirmed a lower Federal Court’s ruling in favor of an insurer based on an underlying lawsuit seeking damages for past due premiums pursuant to a contract between the insured employee-leasing company and its third-party health care insurer. Overall, the Court found the underlying suit was nothing more than a “run-of-the-mill” breach of contract case. Payroll Mgmt., Inc. v. Lexington Ins. Co., 815 F.3d 1293 (11th Cir. 2016)
Payroll Management, Inc. (PMI Florida) and Payroll Management, Inc. of Delaware (PMI Delaware) are related employee-leasing companies. As their names imply, PMI Florida is a Florida corporation responsible for leased employees working only in Florida, whereas PMI Delaware is a Delaware corporation responsible for all other employees.
PMI Florida and PMI Delaware entered into a contract with BlueCross BlueShield of Florida (“Blue Cross”) to secure health care coverage for their employees. Unfortunately, after the PMI entities failed to make their premium payments, Blue Cross canceled their coverage and filed suit to recover the missing payments.
PMI Florida then submitted a claim to its insurer, Lexington Insurance Company (“Lexington”), under its employment practices liability insurance (“EPLI”) policy.
Before any coverage decision had been made, Lexington was contacted by Yoohoo Capital, LLC (“Yoohoo”). Yoohoo was considering investing in both PMI Florida and PMI Delaware and wanted assurances that Lexington would cover any losses under the Blue Cross lawsuit. Yoohoo went on to acquire PMI Florida and PMI Delaware prior to Lexington’s coverage determination.
Lexington ultimately denied coverage and PMI Florida, PMI Delaware, and Yoohoo filed suit. The PMI entities alleged breach of contract and sought a declaratory judgment that there was coverage for the Blue Cross lawsuit. Yoohoo asserted a claim for negligent misrepresentation alleging that it purchased the PMI entities based on its communications with Lexington.
The District Court for the Northern District of Florida dismissed PMI Delaware from the case as a “nominal party” and entered summary judgment in favor of Lexington as to all other counts. Accordingly, the PMI entities and Yoohoo appealed to the Eleventh Circuit.
PMI Delaware and the Jurisdictional Issue
PMI’s dismissal revolved around the Federal Courts’ ability to retain diversity jurisdiction. As to this issue, it’s important to note that this case actually went to the Eleventh Circuit twice. The first time, the Eleventh Circuit remanded the case because federal diversity jurisdiction had not been properly established as PMI Delaware and Lexington were both considered citizens of Delaware. As a result, the Eleventh Circuit was interested in whether PMI Delaware could be dismissed from the case in order to preserve diversity jurisdiction. On remand, the Northern District of Florida did just that after determining PMI Delaware was not a “real and substantial party” but was rather a “nominal or formal party.”
On appeal, the Eleventh Circuit agreed with the District Court’s dismissal of PMI Delaware. In particular, the Court found that PMI Florida was the only entity that made a claim for coverage to Lexington. Secondly, at the time PMI Florida made the claim, PMI Delaware was not a party to the Blue Cross lawsuit. Lastly, the Court noted there was some question as to whether PMI Delaware was ever a party to the Blue Cross contract because it provided health care coverage only to PMI Florida’s leased employees. As a result, the Eleventh Circuit found that any relief sought by PMI Florida in the Blue Cross lawsuit would be the exact same as that sought by PMI Delaware. Consequently, there was no reason for PMI Delaware to seek coverage against Lexington, and the Eleventh Circuit upheld the District Court’s decision to dismiss PMI Delaware.
Next, the Court turned to PMI Florida’s claim for breach of contract and declaratory judgment. The relevant insuring language from the EPLI policy provided coverage for any “wrongful professional act” which was defined as “any breach of duty, neglect, error, misstatement, misleading statement or omission in performing or failing to perform services for others for a fee in the administration of Leased Employees assumed from the client.” Additionally, the EPLI policy contained a contractual liability exclusion stating “[t]his insurance does not apply to any Claim against an Insured . . . arising out of the liability the Insured assumed under any contract or agreement.”
The District Court found that the definition of “wrongful professional act” in the policy did not cover breach of contract losses such as the PMI entities failure to pay their premiums to Blue Cross. On appeal, PMI Florida argued the “wrongful professional act” under the terms of the policy was not its failure to make the premium payments, but rather its former president’s negligent diversion of funds that ultimately prevented PMI Florida from making the premium payments.
The Eleventh Circuit was unimpressed with PMI Florida’s argument and found the plain meaning of the policy did not provide coverage for such a “run-of-the mill breach of contract claim brought by a third-party distinct from any of PMI Florida’s client service agreements.” Furthermore, and unlike the District Court, the Eleventh Circuit also found that the contractual liability exclusion “squarely applie[d]” to the type of claim brought by Blue Cross.
Interestingly, the Eleventh Circuit also noted the contractual-liability exclusion could be ambiguous in circumstances where the underlying suit is brought pursuant to contracts between PMI Florida and its employees or clients as opposed to the third-party vendor in this case. In this case, the ambiguity would arise from the conflicting nature of the insuring language and the exclusion. While its reference in this was simply dicta, it highlighted a gray area that insurers should be aware of when seeking to enforce contractual liability exclusions involving an insured’s own employees or clients.
Lastly, the Eleventh Circuit addressed Yoohoo’s claim of negligent misrepresentation. The bulk of Yoohoo’s claim arose from a single communication between Yoohoo and Lexington claims examiner in which the latter stated “[a]s we discussed, there appears to be coverage for this matter […] but, as we also discussed, I must review with my supervisor.” The District Court held that no jury could find that Yoohoo justifiably relied on such an “equivocal” statement in determining whether to acquire the PMI entities. On appeal, Yoohoo attempted to assert additional communications between the parties as well as the length of time it took Lexington to render an coverage opinion. The Eleventh Circuit however found the additional evidence did little, if anything, to alter the District Court’s holding and simply reiterated that there was no evidence to support a negligent misrepresentation.