When professionals of all types are sued by their clients for errors and omissions (E & O), the plaintiffs frequently assert both tort and contract claims against the defendants. This is particularly true when insurance policyholders or putative policyholders sue their insurance agents. Torts that are usually asserted include claims of actual fraud, constructive fraud, negligence and breach of fiduciary duty.  In addition, plaintiffs virtually always claim breach of contract.

In very general terms, a typical E & O case against an insurance agent is filed when the policy holder, after suffering a loss, experiences one or more of the following: (a) discovery that a policy was not procured at all (a putative policy holder); (b) the insurance company denies a claim in whole or in part; or (c) the insurance company concludes that the nature of the insurance policy procured by the agent did not conform to the needs of the policy holder.

The following is a brief description of typical tort claims made against insurance agents.  Under Virginia law, proof of a claim for actual fraud requires that the defendant knowingly made material false statements of fact upon which the plaintiff reasonably relied to his/her detriment.  Proof of a claim for constructive fraud requires that the defendant unintentionally made false statements upon which the plaintiff reasonably relied to his/her detriment. Proof of a claim for negligence requires that the defendant did not meet the standard of care in his/her industry or profession.  Finally, proof of a claim for breach of fiduciary duty requires that the defendant put his/her financial interests above those of the plaintiff.

Defending these claims includes attacking the tort claims at the pleading stage. Apart from claims of actual fraud, the Supreme Court of Virginia has ruled that only claims for breach of contract by an insurance agent are viable.  In Filak v. George, 267 Va. 612 (2004), the Court affirmed the trial court’s dismissal of tort claims against an insurance agent in an E & O case. The Court cited the “economic loss rule” and stated: “The primary consideration underlying tort law is the protection of persons and property from injury, while the major consideration underlying contract law is the protection of bargained for expectations…  Thus, when a plaintiff alleges and proves nothing more than disappointed economic expectations assumed only by agreement, the law of contracts, not the law of torts, provides the remedy for such economic losses.” 267 Va. At 613.

Dismissal of tort claims is important because of the impact such dismissal has on potential damages that may be awarded. In addition to the fact that contract damages, in general, are much narrower than tort damages, punitive damages cannot be recovered in a contract case.

One federal court has disregarded the Supreme Court of Virginia’s ruling in Filak. In Cincinnati Ins. Co. v. Ruch, 940 F. Supp2d 338 (2013), the United States District Court for the Eastern District of Virginia permitted a negligence claim to proceed against an insurance agent despite Filak. This court noted the decision in Filak but ruled that the economic loss rule should not apply.  Importantly, federal courts do not make substantive Virginia law and many Virginia trial courts have refused to follow Ruch, noting that only the Supreme Court of Virginia has the last word on establishing Virginia law.

In conclusion, absent viable claims of actual fraud, insurance agents defending E & O cases may rely on those cases proceeding only on breach of contract claims. While the economic loss rule can be complicated as applied to professionals other than insurance agents, it is alive and well in the insurance agent E & O world.