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A federal court of appeals has revived a case over an alleged failure of insurance broke Willis of New Jersey to notify the insurer for one of its New York clients of the presence of lead paint in his residential building in Queens.

The landlord, Paro Management Co., was sued by tenants for damages over their alleged exposure to lead paint. Its insurer denied Paro coverage for the claims because it had not been told about the lead paint on the premises.

Paro alleges that it instructed Willis to convey the notice about lead paint to its insurer and Willis promised to do so but did not follow through.

Paro sued the insurer, Allied World National Assurance Co., seeking a declaration of coverage. Both the former tenants’ lawsuit and the coverage action are pending in New York Supreme Court. Paro subsequently brought the action against Willis under New York law for negligence and negligent misrepresentation.

The federal district court in Manhattan dismissed Paro’s complaint as unripe and for failing to support its claims of broker negligence and misrepresentation.

However, the Second Circuit Court of Appeals has now reversed the lower court and remanded the case for further proceedings. The appeals court found that the case is ripe and does support the negligence claim. The appeals court agreed with the dismissal of the negligent misrepresentation claim.

Regarding ripeness, the district court referenced the two pending state court cases and reasoned that Paro was seeking relief against Willis because its insurer may succeed in denying coverage. The district court concluded that “any real, substantial controversy” between Paro and Willis, thus “depends upon contingent future events that may not occur as anticipated, or indeed may not occur at all.”

The Second Circuit found that in error, asserting that Paro’s claims against Willis are indeed constitutionally ripe. Paro alleges that the insurance policy covered claims for loss arising out of a pollution incident occurring at the Queens property up to the $10,000,000 policy limit. Willis’s failure to convey the lead paint notice to the insurer allegedly caused the insurer to disclaim coverage for the damages sought in the lead paint lawsuit, prompting Paro to sue the insurer for a declaration of coverage. The costs Paro has incurred in litigating the coverage action constitute a “pocketbook injury” allegedly caused by Willis’s negligence, the Second Circuit explained.

Moreover, the court said, Paro’s alleged injury does not depend on how the insurance lawsuit will be resolved. Even if Paro prevails in that case, it likely could not recover its litigation costs from its insurer because “it is well established that an insured may not recover from an insurer the expenses incurred in bringing an affirmative action against an insurer to settle its rights under the policy.”

Paro’s asserted pocketbook injury is thus “actual,” not “conjectural or hypothetical,” and it suffices to make the case constitutionally ripe, the court found, reversing the lower court.

In terms of the negligence claim against Willis, the district court concluded that the complaint did not adequately allege that Willis owed a duty to Paro to give the lead paint notice to the insurer. But the appeals court held that Paro does adequately allege such a duty. Paro alleges that it instructed Willis to convey the notice to the insurer and that Willis and its employees made “representations that notice would be provided” and that Willis asserted “it would take care of Paro’s insurance needs, including notifying the insurer of the claim” made lead paint exposure.

Willis contends that Paro’s allegations are vague and did “not establish the specific agreements or routine course of business that courts have found can create a special relationship” giving rise to a broker’s duty to notify the insurer, which would go beyond the broker’s responsibility for procuring coverage.

But the Second Circuit disagreed, finding Paro’s allegations, if true, would establish that Paro asked Willis to “take on an additional responsibility above and beyond procuring” coverage and that Willis “agreed to do so.” That agreement imposed on Willis a duty to notify the insurer, a duty Willis had to “execute with reasonable care,” the court said. The notice to the insurer need not include “detailed factual allegations” about the agreement, the court added.

Further, Paro’s assertion is that Willis’s failure caused the insurer to decline coverage in connection with the lead-paint lawsuit, forcing Paro to litigate a costly coverage action. Paro thus successfully states a claim for negligence.

Finally, the appeals court agreed with the lower court that Paro failed to state a plausible claim for negligent misrepresentation based on Willis’s promise to convey the notice to the insurer. The complaint maintains that Willis “never provided the notice it represented that it would provide.” But the complaint does not allege that Willis made these representations with the intention of never conveying the notice to the insurer. Willis’s promissory statements are thus not actionable as a negligent misrepresentation, the two courts agreed in dismissing this claim against Willis.

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