Stop Loss Insurance Brokers, Inc. v. Brown & Toland Medical Group

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] OPINION

After it was sued for breach of contract and negligence by the Regents of the University of California (Regents), Stop Loss Insurance Brokers, Inc. (Stop Loss), filed a cross-complaint for comparative indemnity against Brown Toland Medical Group (BTMG). Following two rounds of amendments, the trial court sustained a demurrer to the cross-complaint without leave to amend. We affirm the judgment.

BACKGROUND As operator of the University of California at San Francisco Medical Center (UCSF Medical Center), the Regents participated in a capitated health care program, through which they contracted with various health care plans to provide services for patients in exchange for fixed, or "capitated," payments. Such payments were made to the Regents through BTMG, and UCSF Medical Center was a designated hospital provider for BTMG plan members. Hospitals participating in this capitated health care program were required to carry insurance coverage for charges exceeding a fixed amount. In March 2000, the Regents sought bids from insurance brokers to obtain the necessary insurance coverage. Shortly thereafter, the Regents retained Stop Loss and instructed it to procure a $1-million-per-claim insurance policy.

Under the policy Stop Loss procured, the Regents were required to notify the insurer of any potential and actual claims exceeding 50 percent of the policy's deductible. BTMG and Stop Loss worked together to provide this information to the insurer on a monthly basis. Every month, BTMG analyzed the Regents' claims to identify the ones that required notice to the insurer. BTMG sent this information to Stop Loss, and Stop Loss prepared the necessary claims forms. Stop Loss then sent the forms to BTMG for approval, and, once approved, BTMG forwarded the forms to the insurer for payment.

In 2001, a new insurance policy Stop Loss had procured expressly precluded coverage for any preexisting claim not disclosed by the Regents. The Regents signed a binder that purported to disclose all reportable claims, but unbeknownst to them the binder did not include a disclosure of the claim made by a BTMG plan member who had been repeatedly hospitalized for renal failure. When this patient's claim was submitted to the insurer for payment later in 2001, it was denied.

On October 6, 2003, the Regents filed a complaint against Stop Loss for breach of contract and negligence. The Regents alleged BTMG had submitted timely information to Stop Loss about the patient's renal failure claim but Stop Loss failed to prepare the form for reporting it in a timely fashion. As a result, the complaint claimed Stop Loss breached its contractual agreement with the Regents and also breached its professional duty of care as the Regents' insurance broker, causing the Regents to suffer a loss of over $1 million in unreimbursed expenses for the claim.

Stop Loss answered the complaint and filed a cross-complaint against BTMG. After the trial court sustained a demurrer to this pleading, Stop Loss filed a second amended cross-complaint against BTMG for comparative equitable indemnity and declaratory relief. In it, Stop Loss described the procedure it had established with BTMG to report claims to the Regents' insurer, though it noted this system "was not established pursuant to a contract."¹ Because BTMG knew its failure to analyze claims properly and submit information to Stop Loss in a timely fashion could result in the denial of insurance coverage for such claims, the cross-complaint alleged "BTMG owed a duty to [the Regents] to analyze claims properly, provide claims information to Stop Loss timely, and submit claim forms to the reinsurer timely." (Fn. omitted.) Stop Loss alleged BTMG breached this duty to the Regents because it did not make Stop Loss aware of the subject claim until well after the Regents had signed the disclosure form for the new insurance policy. As a result, the cross-complaint claimed BTMG was obligated to partially or fully indemnify Stop Loss for any damages it might be compelled to pay to the Regents. The trial court sustained a demurrer to Stop Loss's second amended cross-complaint without leave to amend, noting the cross-complaint "fail[ed] to state sufficient facts to give rise to a duty owed by BTMG to [the Regents] sounding in tort." This appeal followed.

DISCUSSION "In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. `We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.' [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff. [Citation.]" (Blank v. Kirwan (1985) 39 Cal.3d 311,318 [216 Cal.Rptr. 718, 703 P.2d 58].)

It is well settled in California that equitable indemnity is only available among tortfeasors who are jointly and severally liable for the plaintiff's injury. (Leko v.Cornerstone Bldg. Inspection Service (2001)86 Cal.App.4th 1109, 1115 [103 Cal.Rptr.2d 858]; Munoz v. Davis (1983) 141 Cal.App.3d 420, 425 [190 Cal.Rptr. 400].) With limited exception, there must be some basis for tort liability against the proposed indemnitor. (Munoz v. Davis,supra, 141 Cal.App.3d at p. 425.) "Generally, it is based on a duty owed to the underlying plaintiff [citations], although vicarious liability [citation] and strict liability [citation] also may sustain application of equitable indemnity. In addition, implied contractual indemnity between the indemnitor and the indemnitee can provide a basis for equitable indemnity. [Citation.]" (BFGC Architects Planners, Inc. v. Forcum/MackeyConstruction, Inc. (2004) 119 Cal.App.4th 848, 852 [14 Cal.Rptr.3d 721].)²

The cross-complaint here does not allege vicarious or strict liability, nor an implied contractual obligation for BTMG to indemnify Stop Loss. Rather, after describing the process by which BTMG and Stop Loss analyzed claims and gave notice to the insurer, and alleging BTMG understood the consequences that could result from the failure to disclose a qualifying claim to the insurer, the cross-complaint simply asserts, "BTMG owed a duty to Plaintiff [the Regents] to analyze claims properly, provide claims information to Stop Loss timely, and submit claims forms to the reinsurer timely." Asserting this legal conclusion does not make it so, however. The question is whether, with respect to the claims analysis, BTMG owed the Regents a duty of care sounding in tort. While the cross-complaint alleges that "BTMG . . . assumed and understood its duties" under the parties' system for disclosing claims, this obligation could only have arisen out of the business relationship between BTMG and the Regents. The law imposes no duty on strangers to promptly process another's data that is comparable to the duty imposed on all persons to exercise due care to avoid injuring others. (See, e.g., Quelimane Co. v.Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 59 [77 Cal.Rptr.2d 709, 960 P.2d 513] ["With rare exceptions, a business entity has no duty to prevent financial loss to others with whom it deals directly"].) At most, if BTMG assumed a duty to process claims in a timely fashion, and the Regents relied on BTMG to do so, BTMG's performance was undertaken pursuant to an implied contract.

"A person may not ordinarily recover in tort for the breach of duties that merely restate contractual obligations. Instead, ` "[c]ourts will generally enforce the breach of a contractual promise through contract law, except when the actions that constitute the breach violate a social policy that merits the imposition of tort remedies."' [Citation.]" (Aas v.Superior Court (2000) 24 Cal.4th 627, 643 [101 Cal.Rptr.2d 718, 12 P.3d 1125], superseded by statute on another ground as stated in Rosen v. State Farm General Ins. Co. (2003)30 Cal.4th 1070, 1079-1080 [135 Cal.Rptr.2d 361, 70 P.3d 351].) Despite the cross-complaint's use of negligence terminology, the alleged misconduct by BTMG describes, at most, a breach of contract, not a breach of a legal duty of care. In short, "This is an improper attempt to recast a breach of contract cause of action as a tort claim. Nor is there any social policy that would demand resort to tort remedies. Without any action sounding in tort, there is no basis for a finding of potential joint and several liability on the part of [cross-]defendant [BTMG], thereby precluding a claim for equitable indemnity." (BFGC Architects Planners, Inc. v. Forcum/MackeyConstruction, Inc., supra, 119 Cal.App.4th at p. 853.)

Nevertheless, Stop Loss argues a duty of care on the part of BTMG can be inferred from the factors outlined in Biakanjav. Irving (1958) 49 Cal.2d 647, 650 [320 P.2d 16] (Biakanja), and applied in J'Aire Corp. v.Gregory (1979) 24 Cal.3d 799, 804 [157 Cal.Rptr. 407,598 P.2d 60] (J'Aire). These cases are distinguishable, however, and they do not support extending a tort duty to business parties' arms-length dealings. In Biakanja, the defendant was a notary who owed a professional and a contractual duty to the client for whom he drafted a will (seeBiakanja, supra, 49 Cal.2d at p. 648); inJ'Aire, the defendant was a general contractor who owed a contractual duty to the owner of premises it was working to improve. (See J'Aire, supra, 24 Cal.3d at p. 802.) In both cases, the question was whether the defendant's duty of care could be extended to a third party who was not in privity — i.e., the intended beneficiary of a will (Biakanja,supra, 49 Cal.2d at pp. 648-649) or the lessee of premises that were being improved (J'Aire, supra,24 Cal.3d at p. 802). The Supreme Court held that whether a defendant owes a duty of care to third parties in such a situation depends upon a balancing of six factors: "(1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant's conduct and the injury suffered, (5) the moral blame attached to the defendant's conduct and (6) the policy of preventing future harm. [Citation.]" (J'Aire, supra,24 Cal.3d at p. 804; see Biakanja, supra, 49 Cal.2d at p. 650.)

Contrary to Stop Loss's assumption, courts have not applied theBiakanja factors to create broad tort duties in arms-length business dealings whenever it is convenient to resort to the law of negligence. Biakanja andJ'Aire address the specific situation that arises when (1) the defendant was acting pursuant to a contract, and (2) the defendant's negligent performance of the contract injures a third party. Neither of these prerequisites is met in this case. First, the cross-complaint alleges BTMG's handling of the Regents' claims was not undertaken pursuant to a contract. Second, and more importantly, even if one concludes BTMG was acting pursuant to an implied contract with the Regents, the cross-complaint does not allege BTMG injured any thirdparty. Rather, Stop Loss claims BTMG's negligent claims-handling injured the Regents by causing it to lose insurance coverage.³ As noted, the Regents may not recover in tort for BTMG's breach of a contractual obligation. (See Aas v. Superior Court, supra,24 Cal.4th at p. 643.) Invoking the Biakanja factors to create a tort duty in the absence of injury to a third party would circumvent this rule and blur the law's distinction between contract and tort remedies. Stop Loss has cited no case holding a business entity owes a tort duty of care to prevent another business from suffering purely financial losses, and we decline to announce such a duty here.

Likewise, very little precedent supports our concurring colleague's theory that equitable indemnity may be had based upon breach of an implied tort duty arising from negligent performance of an implied contract. (Cone. opn., post, at pp. 1056-1057, 1059-1062.) In North American ChemicalCo. v. Superior Court (1997) 59 Cal.App.4th 764, 774 [69 Cal.Rptr.2d 466], the Court of Appeal described the common law duty contracting parties have to perform with reasonable care, skill, expedience and faithfulness, and stated that "the same wrongful act may constitute both a breach of contract and an invasion of an interest protected by the law of torts. [Citation.]" After quoting this statement from NorthAmerican Chemical, the Supreme Court in Erlich v.Menezes qualified it by noting that "conduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law. [Citation.] `"`An omissionto perform a contract obligation is never a tort, unless thatomission is also an omission of a legal duty.'"' [Citation.]" (Erlich v. Menezes (1999) 21 Cal.4th 543,551 [87 Cal.Rptr.2d 886, 981 P.2d 978], italics added.) The high court proceeded to the central question, "is the mere negligent breach of a contract sufficient?" and responded with an unequivocal "no." (Id. at p. 552.) The court explained that the remedy for a breach of contract is generally limited to contract law, and recovery in tort is not permitted unless: "`(1) [T]he breach is accompanied by a traditional common law tort, such as fraud or conversion; (2) the means used to breach the contract are tortious, involving deceit or undue coercion or; (3) one party intentionally breaches the contract intending or knowing that such a breach will cause severe, unmitigable harm in the form of mental anguish, personal hardship, or substantial consequential damages.' [Citation.]" (Id. at pp. 553-554.)

Even though no implied contract was pleaded in the cross-complaint, nor the breach of any duty of care arising from such an implied contract, and even though the Supreme Court has expressly held that the negligent breach of such a duty does not give rise to tort damages, the concurring opinion argues breach of the common law duty discussed in NorthAmerican Chemical can support a claim for equitable indemnity. The concurrence cites no authority for this position, but merely asserts that the policy reasons courts have resisted expanded tort liability do not apply in the context of equitable indemnity. While that may be true, it is hard to see why a tortfeasor should receive the windfall of an equitable set-off when the law precludes the injured party from recovering tort damages for the same wrongful conduct. Why should the law favor the wrongdoer with a more advantageous measure of damages?⁴ We decline to apply an inconsistent rule — converting a breach of contract into a tort for some purposes but not others — absent authority for doing so. "If every negligent breach of a contract gives rise to tort damages the limitation would be meaningless, as would the statutory distinction between tort and contract remedies." (Erlich v. Menezes, supra, 21 Cal.4th at p. 554.) Because negligent performance of a contract gives rise to contract damages only (id. at pp. 552-554), such alleged negligence will not support a claim for equitable indemnity.

DISPOSITION The judgment is affirmed. Respondent shall recover its costs on appeal.

Parrilli, J., concurred.

¹ In contrast to the Regents' complaint, the cross-complaint alleged BTMG, not Stop Loss, decided which claims required notice and BTMG, not Stop Loss, was responsible for sending claims forms to the insurer.

² As the concurring opinion recognizes (cone, opn.,post, at pp. 1049-1051, 1054-1055), California law does not permit equitable apportionment of damages for breach of contract, and we are not bound to follow an out-of-state decision adopting a contrary rule. (See cone, opn.,post, at p. 1053, discussing In re Consol. VistaHills Litigation (1995) 119 N.M. 542 [893 P.2d 438].)

³ Our concurring colleague's assertion that Stop Loss is the injured third party (cone, opn., post, at p. 1062, fn. 11) ignores the allegations of the cross-complaint and turns Biakanja on its head. Stop Loss did not allege it was the injured party. Rather, consistent with the requirements of a claim for equitable indemnity, the cross-complaint alleged BTMG's breach of duty — a duty Stop Loss sought to infer based on the Biakanja factors — was a concurrent cause of the economic lossthe Regents suffered. The novel analysis in the concurrence applies Biakanja to conclude that BTMG owed an implied duty of care to Stop Loss to avoid causing an injury for which Stop Loss, if it also acted negligently, could be held concurrently liable. Not surprisingly, our colleague cites no case extending Biakanja to find a duty of care among joint tortfeasors (or contract breachers) to prevent losses that will not be subject to equitable apportionment. It is hard to envision where such an expansive duty would end.

⁴ In response to this question, the concurring opinion resorts to the general policy supporting equitable indemnity among joint tortfeasors. (Cone, opn., post, at p. 1060, fn. 9, quoting American Motorcycle Assn. v. SuperiorCourt (1978) 20 Cal.3d 578, 607-608 [146 Cal.Rptr. 182,578 P.2d 899].) But this answer does not suffice because, contrary to the application of equitable indemnity in a typical tort case, here indemnity is sought for a measure of damages — i.e., tort — that the plaintiff itself is precluded by law from recovering.