Traditionally, professionals could not be held liable to non-clients absent fraud or an intentional tort. Only a few jurisdictions still apply this traditional rule. Theories of liability vary, but more and more courts are allowing claims by non-clients against professionals.
There are three primary theories of liability:
1. Third-Party Beneficiary. A third-party beneficiary analysis allows a non-client to assert a claim against a professional if the non-client was an intended beneficiary of the professional’s agreement or relationship with his client. There are two variations:
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- Tort – In the tort context, the professional owes a duty to a non-client by reason of the non-client’s position as an intended beneficiary of the professional’s relationship with his client. The state of Virginia, for example, follows a strict privity rule regarding third-party claims against accountants. The claim is in tort for the accountant’s negligence in performing his services, and the duty to the non-client arises if the third party is an intended beneficiary of the accountant/client relationship.
- Contract actions – In the contract context, the professional is deemed to owe a contractual duty to the non-client by reason of the non-client’s standing as a third-party beneficiary of the agreement between the professional and his client. These claims often are asserted against insurance brokers and agents in the context of failure to procure insurance. Generally, the non-client must be an intended beneficiary of both the insurance policy and the insured’s agreement with the agent or broker to procure coverage.
2. Negligence. The threshold issue is always whether the professional owes the non-client a duty. Traditionally, under the economic loss doctrine a professional has no liability to entities with whom the professional has no contractual privity for losses or damages that are purely economic. Many jurisdictions now allow a negligence claim against some professionals, approaching the duty question in varying ways:
- Foreseeability – Many courts use a foreseeability analysis in non-client cases. Foreseeability is the cornerstone of negligence generally. When the defendant’s actions create a foreseeable risk of harm to the plaintiff, the defendant owes the plaintiff a duty to use reasonable care.
- Balance of Factors – Many jurisdictions apply a balance of factors test for determining whether a professional may be held liable to a third party not in privity with the professional. These courts weigh the following factors in determining whether a duty is owed to a non-client: the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him/her, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the professional’s conduct and the injury suffered, the moral blame attached to the conduct, and the policy of preventing future harm.
- Primary purpose doctrine – Other courts meld general negligence principles with third-party beneficiary principles in determining liability. In these cases, the non-client has a claim against the professional only when the intent or the primary purpose of the professional relationship was to benefit the non-client third party. In the prototypical case, a putative will beneficiary does not inherit because of a lawyer’s negligence in drafting or supervising the execution of the will.
3. Negligent Misrepresentation. Negligent misrepresentation claims have been allowed against a wide and seemingly ever-expanding range of professionals, including:
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- Bankers and mortgage professionals
- Accountants
- Doctors
- Lawyers
- Real estate brokers and agents
- Securities brokers and agents
- Surveyors
- Title agents and insurers
- Pharmacists
- Architects and engineers
- Appraisers
Restatement § 552. Most courts that have allowed such a claim have adopted Restatement (Second) of Torts § 552, which provides:
“One who, in the course of his/her business, profession or employment, or in any other transaction in which he/she has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he/she fails to exercise reasonable care or competence in obtaining or communicating the information.
“Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered either by the person or one of a limited group of persons for whose benefit and guidance he/she intends to supply the information or knows that the recipient intends to supply it; and through reliance upon it in a transaction that he/she intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.”
Application of § 552 has varied widely, particularly in regard to the intent and knowledge requirements.
- The strictest view requires that the defendant know with substantial certainty that the plaintiff (or a class of persons to which he/she belongs) will rely on the representation in the course of a particular transaction, or specific type of transaction, the defendant intended to influence.
- Other courts require knowledge but do not focus to such a great extent on intent and direct undertaking of responsibility.
- Some courts do not require that the defendant’s knowledge be specific or that it arise from any particular transmittal of information from the client, but rather, hold a professional liable to all persons who might reasonably been foreseen as relying upon his/her work product.
Near Privity. A number of jurisdictions apply a much narrower “near privity” requirement in negligent misrepresentation claims because of concerns for indeterminate liability – that is, liability in an indeterminate amount for an indeterminate time to an indeterminate class. The “near privity” approach allows a claim only if, for example, the non-client’s reliance on the professional is known to and intended by the professional and there is some conduct by the professional linking him/her to the non-client, showing the professional’s understanding of the non-client’s reliance.
Negligence vs. Negligent Misrepresentation vs. Third Party Beneficiary – Why it Matters
As noted, most jurisdictions allow claims by non-clients against some professionals under some circumstances. In cases involving some kind of opinion (audited financial statement, appraisal, etc), a third party could couch its claim as negligence (for the improper performance of the service) or negligent misrepresentation (for negligently communicating false information) or even in contract based on a third-party beneficiary theory.
So, does it really matter what the claim is? It most definitely does matter.
First, depending on the jurisdiction, some theories are viable and others are not, so it is important for counsel defending such a claim to really press to make the plaintiff narrowly plead his claim. Second, the focus of the claims is very different. For example, with negligence, the focus is on the professional’s duty and breach of that duty; with misrepresentation, the focus is on the third party’s reliance. So, discovery and trial can be very different depending on the claim asserted. Perhaps most importantly, however, the manner in which the claim is asserted may affect whether insurance coverage is available. For example, if the claim is couched in terms of negligent performance of professional services, it is likely to be covered under a professional liability policy or an errors and omissions policy; but if under the same factual scenario, the claim is asserted as a third-party beneficiary breach-of-contract claim, it may be excluded under a contractual liability exclusion.