Lloyd's v. Walnut Advisory Corp.

• Decision Date: 24 June 2010
• Docket Number: Civil No. 09-1697 (FLW).
• Citation: 721 F.Supp.2d 307
• Parties: SYNDICATE 1245 AT LLOYD'S, Plaintiff, v. WALNUT ADVISORY CORPORATION, et al., Defendants.
• Court: U.S. District Court — District of New Jersey

721 F.Supp.2d 307

SYNDICATE 1245 AT LLOYD'S, Plaintiff,

v.WALNUT ADVISORY CORPORATION, et al., Defendants.

Civil No. 09-1697 (FLW).

United States District Court,D. New Jersey.

June 24, 2010.

COPYRIGHT MATERIAL OMITTED.

Robert F. Priestley, Timothy Michael Jabbour, Mendes & Mount, LLP, Newark, NJ, for Plaintiff.

Gretchen Beth Connard, L'Abbate, Balkan, Colavita & Contini, LLP, Livingston, NJ, for Defendants.

OPINION

FREDA L. WOLFSON, District Judge.

Plaintiff Syndicate 1245 at Lloyd's (“Lloyd's”) filed the instant action against Defendant Walnut Advisory Corporation (“Walnut”), and John Does 1-5, alleging primarily that Walnut breached the parties' agreement by writing insurance for bars and nightclubs. Lloyd's claims sound in breach of contract, breach of fiduciary duty, and negligence. Walnut filed the instant motion to dismiss based on Lloyd's failure to file an affidavit of merit (“AOM”) pursuant to N.J.S.A. 2A:53A-26, et seq. (“Affidavit of Merit Statute” or “AOM Statute”). Lloyd's subsequently served Walnut with an AOM and cross-moved for nunc pro tunc compliance with the statute. This Court held oral argument on April 27, 2010, and denied Walnut's motion to dismiss for failure to timely submit an AOM with respect to the breach of contract and breach of fiduciary duty claims. The Court now denies Walnut's motion to dismiss with respect to the negligence claim, and grants Lloyd's cross-motion for nunc pro tunc compliance.

I. BACKGROUND

Lloyd's alleges that it entered into a “2004 Binding Authority Agreement” (“the Agreement”) with Walnut, whereby Walnut served as its Coverholder, i.e., insurance agent. Compl. at ¶ 1. Under the Agreement, Walnut was to “bind insurances and amendments thereto....” Id. at ¶ 6. While granting Walnut general authority to bind policies, the Agreement included underwriting guidelines that limited Walnut's authority to write policies for certain businesses. See id. at ¶¶ 8-9. Specifically, the Agreement provided the following limitations:

No bar, tavern, or nightclub business to be written.

No hospitality business to be written without an Assault and Battery exclusion unless Liquor receipts are below 33.3% of total receipts, which inclusion of the Assault and Battery exclusion is at the Coverholder's discretion.

Id. at ¶ 10. The underwriting process, further, required Walnut to inspect an insured's business premises and operations after coverage was bound and to create an inspection report detailing the results of that inspection. Id. at ¶ 19.

In binding policies under the 2004 Binding Authority Agreement, the Complaint alleges, Walnut utilized the services of producing agents. Id. at ¶ 11. One of these agents was The Carman Agency (“Carman”). Id. According to the Complaint, Carman repeatedly submitted applications to Walnut for full Assault and Battery coverage. See id. at ¶¶ 12-13. “Notwithstanding the aforementioned underwriting guidelines and restrictions imposed by the [Agreement] and the knowledge which Walnut possessed regarding Carman's insistence on [Assault and Battery] Coverage, Walnut continuously accepted applications from Carman and bound insurance without A & B exclusions in contravention of [the A]greement,” the Complaint alleges. Id. at ¶ 13. In addition, the Complaint continues, Walnut issued policies to bar, tavern, and nightclub businesses after receiving such applications from Carman, also in contravention of the Agreement. Id.

The Complaint, further, characterizes Walnut as having “held itself out ... as a competent Coverholder who adhered to accepted professional standards in the practice of writing and placing insurance, and that it was skilled and capable in matter [sic] involving the issuance of insurance for the Lloyd's of London insurance market.” Id. at ¶ 22. Also, in paragraph 23 of the Complaint, Lloyd's alleges that “Walnut owed a duty to exercise the skill, prudence, and diligence ordinarily possessed by a Coverholder in the rendering of their services.” Id. at ¶ 23. Lloyd's alleges that it incurred over $7,876,932 in damages as a result of Walnut's breaches and derelictions. Id. at ¶ 26.

In late 2007, Lloyd's engaged the services of Paul Frank & Collins Insurance Services (“PFC”) to review Walnut's underwriting for the 2004 contract year. Id. at 16. Walnut cooperated with PFC and, after reviewing Walnut's documents, PFC produced a written audit (“PFC Audit”) containing its findings. In the PFC Audit, the Complaint alleges, PFC focused on two Walnut practices: (1) writing policies to bars, taverns, and nightclubs; and (2) writing policies to hospitality businesses, that had over 50% liquor receipts, without obtaining an Assault and Battery exclusion. Id. at ¶ 17. In terms of writing policies to bars, taverns, and nightclubs, the audit states that Walnut “routinely ignored information within ... inspection reports that the insureds being provided coverage ... were in many cases bars and taverns with only incidental food service, or were nightclubs, rather than quality restaurants that served alcohol.” Id. at ¶ 21. In terms of writing policies to hospitality businesses, the audit states that Walnut received applications that expressly indicated greater than 33.33% liquor receipts. When Walnut subsequently inspected these businesses, “[i]n most instances the inspection report which was generated either confirmed the percentage of liquor sales stated in the application, or indicated a higher percentage of liquor sales than was stated on the application....” Id. at ¶ 20. “[H]owever,” the audit continues, “Walnut failed to react to the inspection report as it relates to the 2004 Binding Authority Agreement permitted class of businesses.” Id.

In September 2008, and prior to bringing the instant suit, Lloyd's sent a letter to Walnut highlighting salient portions of the PFC Audit. See Manganiello Letter dated September 8, 2008 at 2-3, Jabbour Cert., Exh. 13. In that correspondence, Lloyd's stated that the PFC Audit “provides compelling grounds for a breach of contract claim against Walnut due to Walnut's issuing policies ... that should have never been issued or should have included an [Assault and Battery] exclusion.” Id. at 1. The correspondence cites one example from the PFC Audit as follows:

The underwriting file for Twelfth Air Command provides an example of an insured that is clearly a nightclub, yet the policy application described it as a restaurant and tavern with 44% liquor sales. Notwithstanding the application, the inspection report unequivocally states ‘this establishment is a nightclub.’ ... Walnut did not react to this inspection report and the policy was issued.

Id. at 3. After providing several of these examples, the correspondence stated that “[w]hile the Carman Agency may have misled Walnut concerning the nature and quality of risks presented, it appears that Walnut had enough independent information to discover the true nature of these business operations.” Id. Thus, the correspondence continues, “Walnut failed to appropriately react to the information contained in the inspection reports” and this “apparent failure to effectively use the inspection process was a significant factor resulting in the binding authority violations.” Id. Lastly, the correspondence clarified that Lloyd's damages claim against Walnut was based on “PFC's audit finding on losses from [Assault and Battery] claims that should have fallen under an [Assault and Battery] exclusion and all claims against bars, taverns, or nightclubs.” Id. at 4.

Several months later, in December 2008, Lloyd's sent another letter to Walnut. Manganiello Letter dated December 3, 2008, Jabbour Cert., Exh. 14. In that letter, Lloyd's responded to a request from Walnut for a complete copy of the PFC Audit. Id. at 1. Lloyd's expressed its willingness to forward a complete copy, provided that Walnut agreed to disclose to Lloyd's certain emails, notes, and other communications relating to the parties' agreement. Id. By January 8, 2009, Walnut had not agreed to disclose the information Lloyd's sought. See Manganiello Letter dated January 8, 2009, Jabbour Cert., Exh. 19.

Meanwhile, Liberty Syndicates, another syndicate of Lloyd's, was also encountering difficulties with Walnut regarding the latter's writing and binding of policies for nightclubs and similar establishments. On March 23, 2009, Liberty Syndicates brought an action against Walnut in this Court, alleging that it “suffered ... damages in the form of claims that Liberty [Syndicates] has paid ... on policies wrongfully issued by Walnut in violation of its binding authority....,” Am. Compl. at ¶ 27, Liberty Syndicates at Lloyd's v. Walnut, Civil Action No. 09-1343. Liberty Syndicates also alleges that Walnut was a Coverholder for Liberty Syndicates, id. at ¶ 8, and that Walnut bound insurance for nightclubs in contravention of the parties' agreement, id. at ¶ 16. That complaint, further, alleges that Walnut “issue [d] policies to insureds who derive more than 50% of their receipts from liquor sales without [the syndicate] having been consulted and having approved the risk or binding” and such policies “failed to include assault and battery exclusions” where the parties' agreement “required such an exclusion be included....” Id. The Liberty Syndicates Complaint asserts claims for “Negligent Errors and Omissions/Professional Malpractice,” breach of contract, and breach of fiduciary duty, against Walnut.

It is important to summarize here the similarities between the Liberty Syndicates action and the instant action. The plaintiffs in each action are different Lloyd's Syndicates. The agreements in both suits are substantially the same, though they govern different time periods. Walnut is the defendant in both suits, and is represented by the same counsel. The alleged breaches by Walnut are mirrored in the complaints. Lastly, both complaints assert negligence-based claims, although the Liberty Syndicates action utiliz...