Fired Up

In June 1997, Pelican Importing & Export (doing business as Interfert) leased an airport hangar to Volume Millwork (VMI) for a term of 5 years. VMI manufactured commercial cabinetry. Under the lease, VMI was required to obtain $1 million per occurrence in general liability coverage on the hangar "covering Tenant's activities in the Premises," and name the landlord as an additional insured under the policy.

In November 2001, Interfert sold the hangar to the Woodrow V. Lesikar Family Trust (the Trust), which assigned the lease to WHA. According to WHA, shortly after the hangar was sold to the Trust, VMI breached the lease. WHA and the Trust obtained an eviction order from the justice court; VMI appealed this order for de novo review by the county court. In August 2003, a judgment was signed in which the county court concluded the lease expired by its own terms on July 1, 2002, recognized WHA was awarded sole possession of the hangar on Nov. 14, 2002, and determined VMI was a holdover tenant during this four-month period. In October 2002, during the period when VMI was a holdover tenant, the hangar was damaged in a fire allegedly caused by a large oven used by VMI.

Additional litigation ensued between WHA and VMI, including WHA's claim that VMI was responsible for damages caused by the fire. During his deposition, VMI president Billy Shiver identified Millennium, through its agent and employee Roger Beathard, as the insurance agency that obtained insurance coverage for VMI. Shiver testified he provided a copy of the lease to Beathard and requested that Beathard obtain whatever coverage was required under the lease.

On Dec. 8, 2005, WHA sued Millennium, alleging "professional negligence" for failing to obtain the required amount of insurance coverage. Specifically, WHA alleged Millennium procured a policy that included a $50,000 limitation for damage caused by fire—far less than the lease-specified requirement of $1 million in general liability coverage. WHA contended that to the extent its damages are not covered by an applicable policy of insurance as required by the lease, its uninsured loss, if any, was proximately caused by the professional negligence of the agents and employees of Millennium.

WHA presented evidence that:

1. Shiver requested Beathard to procure whatever coverage was required under the lease
2. Beathard informed Shiver that the policy complied with the lease requirements, even though
3. The policy included a $50,000 limitation of liability for damages caused by fire.

Thus, the parties apparently do not dispute the fact that the comprehensive general liability feature of the policy provided $1 million in coverage; it is the $50,000 limitation for damage caused by fire that precipitated the dispute. Millennium filed a motion for summary judgment in which it argued, among other grounds, that it owed no duty to WHA and WHA's claim is barred by limitations. In August 2008, the trial court disposed of WHA's claim by granting Millennium's motion for summary judgment without specifying grounds. Subsequently, WHA filed a motion for reconsideration, which the trial court denied. In January 2010, WHA filed a motion for summary judgment requesting that the trial court deny Millennium's counterclaim for sanctions. The trial court granted WHA's motion on Feb. 26, 2010.

Related: Read another Zalma column "Cert Uncertainty."

WHA contended that the trial court erred by granting summary judgment based on Millennium's contention that it did not owe a duty of care to WHA. WHA alleged that Millennium committed acts amounting to professional negligence by failing to comply with VMI's request for liability coverage required under the lease. Millennium contends it did not owe a duty to WHA because there was no agent-client relationship between Millennium and WHA.

Texas courts have generally recognized that an insurance broker owes the following common-law duties to a client for whom the broker undertakes to procure insurance:

1. To use reasonable diligence when attempting to place the requested insurance
2. To inform the client promptly if unable to do so.

The parties did not cite, nor was the court able to find, any Texas cases interposing duties, if any, an insurance broker might owe to a non-client when the broker's client requests procurement of a general-liability policy with a certificate designating the non-client as an additional insured.

Generally, one who has sustained damages because of professional negligence may not proceed against the professional unless there is privity of contract. In its petition, WHA alleged as the sole basis for Millennium's negligence that Beathard did not obtain the correct amount of coverage after VMI instructed him to procure coverage required under the lease with a certificate naming the landlord as an additional insured.

The court of appeals concluded the summary-judgment evidence conclusively established that Millennium and WHA did not enter into any express or implied contract regarding insurance coverage. Thus, there was no contractual privity between Millennium and WHA.

Nevertheless, WHA argued that Millennium had a duty because it agreed to procure the insurance policy required under the lease, in which the landlord (subsequently, WHA as assignee) would be named as an additional insured. The court of appeals noted that WHA's status as an additional insured is not relevant.

Related: Read the column "Writers' Cramp" by Barry Zalma.

The underlying lease was between VMI and the landlord, and it was ultimately VMI's burden to procure liability coverage required under the lease. Hypothetically, if VMI requested coverage required under the lease, then instructed Millennium not to include the landlord as an additional insured, in the absence of privity between Millennium and the landlord, Millennium would certainly not be a cognizable professional-liability defendant for failing to protect the landlord's interests, despite the requirement in the lease that the landlord was to be named as an additional insured. We acknowledge that foreseeability of harm is the principal factor to consider when determining whether a party owes a duty.

Under the lease, VMI was required to obtain a policy in which the landlord was named as an additional insured with a cross-liability endorsement. A cross-liability endorsement provides liability coverage when an additional insured sues the named insured for negligence even though they are both covered by the same policy.

As previously discussed, the nature of the relationship between the plaintiff and defendant is a significant consideration in determining the existence of a duty of care. Considering the relationship between the parties in this case, we hold Millennium does not owe a professional duty to WHA, a third-party with whom Millennium never communicated regarding insurance coverage.

Millennium did not owe a duty of professional care to WHA relative to the amount of liability insurance coverage available to indemnify VMI under the lease. WHA's fourth issue was overruled. Because the court of appeals affirmed one of the grounds upon which summary judgment was granted, it found no reason to address WHA's remaining issues.

In its order denying reconsideration, the trial court explained that the summary judgment was granted because WHA's claims are barred by the statute of limitations. The court further noted it did not consider whether Millennium owed a duty to WHA. Hence, the trial court arguably limited the ground upon which it granted summary judgment to the affirmative defense of limitations. Nevertheless, the Court of Appeal still had the ability to affirm the judgment on other grounds raised in Millennium's motion for summary judgment.