Highlands Ins. Co. v. Hobbs Group, LLC.

• Decision Date: 24 June 2004
• Docket Number: No. 03-1760.,03-1760.
• Citation: 373 F.3d 347
• Parties: HIGHLANDS INSURANCE COMPANY f/k/a Highlands Insurance Group, Inc., Appellant v. HOBBS GROUP, LLC; Robert Markel; Nissan Perla; Frontier Insurance Company and Global Risk Management Services, Inc.
• Court: U.S. Court of Appeals — Third Circuit

373 F.3d 347

HIGHLANDS INSURANCE COMPANY f/k/a Highlands Insurance Group, Inc., Appellant v. HOBBS GROUP, LLC; Robert Markel; Nissan Perla; Frontier Insurance Company and Global Risk Management Services, Inc.

No. 03-1760.

United States Court of Appeals, Third Circuit.

Argued March 12, 2004.

June 24, 2004.

Louis R. Moffa, Jr. (Argued), Ballard Spahr Andrews & Ingersoll, LLP, Voorhees, NJ, for Appellant.

Michael O. Kassak (Argued), Stephen Trzcinski, White and Williams LLP, Westmont, NJ, for Appellee, Hobbs Group, LLC.

Stephen G. Rhoads (Argued), Kristen E. Polovoy, Montgomery McCracken Walker

& Rhoads, LLP, Cherry Hill, NJ, for Appellee, Global Risk Management Services, Inc.

Before SLOVITER and NYGAARD, Circuit Judges, and SHADUR,¹ District Judge.

OPINION OF THE COURT

SHADUR, District Judge.

In February 1999 Highlands Insurance Company, Inc. ("Highlands") issued a policy to Olympic Limousine, Inc. ("Olympic") that provided Olympic with commercial automobile insurance coverage, subject to a $2.5 million aggregate annual deductible (as to which Olympic was effectively self-insured). Before the policy was cancelled by Highlands just seven months later, Highlands found itself responsible for handling in excess of $3 million in claims against Olympic. Unfortunately for Highlands, Olympic never paid the $2.5 million deductible on those claims. Even more unfortunately for Highlands, Olympic had also failed to pay the $62,500 premium required to button up a surety arrangement that would have protected Highlands against such nonpayment.

In response to those events, Highlands filed a federal court diversity action against a slew of defendants, including (1) Hobbs Group, LLC ("Hobbs"), the insurance broker that had arranged for the underlying liability insurance policy between Highlands and Olympic and had also dealt with Highlands in the course of the surety bond procurement process and (2) Global Risk Management Services, Inc. ("Global"), the surety bond broker that had worked with Hobbs and with proposed surety Frontier Insurance Co. ("Frontier"). Eventually Highlands' action was whittled down to three counts-claims of negligent misrepresentation and negligence against Hobbs and a claim of negligence against Global. Both Hobbs and Global then moved for summary judgment pursuant to Fed.R.Civ.P. 56 ("Rule 56"). After full briefing, the district court concluded that under New Jersey law neither Hobbs nor Global owed any duty to Highlands, and it therefore granted summary judgment dismissing all three claims.

Highlands now appeals those rulings, and we have jurisdiction under 28 U.S.C. § 1291. We hold that under New Jersey law Hobbs did owe a duty to Highlands that rendered the latter's negligence claims viable, so we reverse and remand for a trial on those claims. But we find that the district court was correct in holding that no such duty ran from Global to Highlands, and we therefore affirm the district court's dismissal of Global as a defendant.

Facts

Olympic was a limousine and livery service that operated in and around Manhattan. It sought out Hobbs in late 1998 to act as its insurance broker in securing a new commercial automobile insurance policy to take over when Olympic's old policy expired in early 1999. Hobbs in turn got in touch with Highlands,² and the parties began to discuss terms for potential coverage. After much negotiation Highlands and Olympic (through Hobbs) agreed on a policy that included the following relevant provisions:

1. Highlands would initially process and pay for claims against Olympic. Each month Highlands would then invoice Olympic for the claims it had paid and Olympic would reimburse Highlands, subject to a $250,000 loss deductible per vehicle/$1 million coverage per vehicle rate. But under no circumstances would Olympic's annual reimbursement obligation to Highlands exceed $2.5 million.

2. Olympic would secure a surety bond (with Highlands as the obligee) in the amount of Olympic's $2.5 million aggregate annual deductible.³

With the expiration date of Olympic's existing policy approaching rapidly, Hobbs communicated with Global to see if it would be interested in procuring the surety bond that Highlands required under its policy with Olympic. Global was indeed interested. Working as an agent for Frontier, Global locked in Frontier as the expected surety for Olympic's deductible and relayed that commitment back to Hobbs. Although it had already agreed to be Olympic's surety, Frontier expressly conditioned the issuance of the actual surety bond on two events: Several parties were required to sign indemnification agreements, and Olympic had to pay the first year's premium of $62,500.

On February 28, 1999 the insurance policy between Olympic and Highlands took effect, and Highlands dutifully began to pay out on Olympic's claims as they accrued. But although Highlands then invoiced Olympic for the reimbursements that Olympic owed Highlands under the terms of the policy, Olympic did not honor its reimbursement obligation.

For a variety of reasons (including Highlands' realization that it had exposed itself to a far greater risk than it had originally anticipated, as well as other legal compliance issues with its policy), Highlands began efforts to cancel the policy with Olympic as early as April 1999. It nonetheless remained responsible for claims against Olympic until September 1999, when the cancellation took effect.

But neither Hobbs nor Global ever informed Highlands that even though Global had prepared the surety bond (on Frontier's behalf), the bond was never executed and was ultimately "cancelled flat"⁴ because of Olympic's failure to pay the premium on the bond. Highlands was completely unaware until well after it began the cancellation process with Olympic that it was not protected, as the obligee under the surety bond, from the huge loss that resulted from Olympic's nonpayment. And it is that failure to inform that Highlands asserts gives rise to Hobbs' and Global's liability.

Rule 56 Standard and Standard of Review

We review de novo the decision to grant summary judgment and use the same Rule 56 standards as did the district court (Petruzzi's IGA Supermkts., Inc. v. Darling-Del. Co., 998 F.2d 1224, 1230 (3d Cir.1993)). Those standards establish that the Rule 56 movant bears the burden of showing the absence of any "genuine issue of material fact" (Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)): that is, the failure to provide "evidence such that a reasonable jury could return a verdict for the nonmoving party" (Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)), even while "accepting its evidence as true and drawing all justifiable inferences from the evidence in its favor" (Sameric Corp. of Del. v. City of Philadelphia, 142 F.3d 582, 590 (3d Cir.1998)).

New Jersey's Rules of Decision

As always in diversity cases, a federal court must apply the substantive law of the forum state-and where the state's highest court has not spoken definitively on a particular issue, the federal court must make an informed prediction as to how the highest state court would decide the issue (Erie R.R. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Clark v. Modern Group Ltd., 9 F.3d 321, 326 (3d Cir.1993)). To that end the federal court may consider a wide range of reliable sources, including relevant state precedents, analogous decisions and reasoned dicta, as well as the policies and doctrinal trends informing and emerging from those decisions (Scotts African Union Methodist Protestant Church v. Conference of African Union First Colored Methodist Protestant Church, 98 F.3d 78, 92 (3d Cir.1996)). But the court must also be mindful not "to expand state law in ways not foreshadowed by state precedent" (City of Philadelphia v. Beretta U.S.A. Corp., 277 F.3d 415, 421 (3d Cir.2002)).

In New Jersey (as in all other jurisdictions) any tort of negligence requires the plaintiff to prove that the putative tortfeasor breached a duty of care owed to plaintiff and that plaintiff suffered damages proximately caused by that breach (Weinberg v. Dinger, 106 N.J.469, 524 A.2d 366, 373 (1987)). In particular, under New Jersey law negligent misrepresentation requires a showing that defendant negligently provided false information and that plaintiff incurred damages proximately caused by its reliance on that information (Karu v. Feldman, 119 N.J.135, 574 A.2d 420, 425 (1990)). In that respect a defendant may be liable (because it owes a duty) to any reasonably foreseeable recipient who relies on the information (id.).

For Highlands to prevail on any of its claims, then, it must first show that the defendant being considered owed it a relevant duty of care. That determination is quintessentially a question of law for the court (City Check Cashing, Inc. v. Mfrs. Hanover Tr. Co., 166 N.J.49, 764 A.2d 411, 416 (2001)).

Because the New Jersey Supreme Court has not squarely addressed whether a surety bond broker owes a duty to the obligee of that bond, under Erie principles we must predict whether that court would recognize such a duty under the circumstances presented here. In that respect the district court determined as a matter of law that Highlands' claims of negligent misrepresentation against Hobbs and of negligence against Hobbs and Global could never succeed because New Jersey does not impose a duty of care on either party with respect to Highlands. We review that prediction and application of New Jersey tort law de novo (Clark, 9 F.3d at 327).

Highlands relies primarily on Carter Lincoln-Mercury, Inc. v. EMAR Group, Inc., 135 N.J. 182, 638 A.2d 1288 (1994) to argue that both Hobbs and Global owed a duty to Highlands. It is conventional wisdom that an insurance broker must "act with reasonable skill and diligence in performing the services of a broker" with respect to its insured (id. at 1291)...