In certain situations, an insurance company owes its policyholders fiduciary duties. Specifically, when an insured calls upon its carrier to defend it in a lawsuit, the carrier generally will owe fiduciary duties to the insured. But in other scenarios, policyholders face an uphill battle in proving that they have the requisite “special relationship” with their insurers necessary to state a claim for breach of fiduciary duty.
In Neurological Surgery, P.C. v. MLMIC Ins. Co., 208 A.D.3d 1238 (2d Dep’t 2022), the plaintiff attempted to expand the scope of its insurance carrier’s fiduciary duties to hold the carrier liable for failing to disclose a potential money-making opportunity.
The plaintiff (“NSPC”) was a neurological surgery practice, and the defendant (“MLMIC”) was the practice’s medical malpractice insurance carrier. NSPC maintained malpractice insurance through MLMIC from the early 1990s to July 2014, when NSPC discontinued its policies.
Two years later, in July 2016, MLMIC publicly announced that it intended to convert into a “stock insurance company,” and that it would be selling all of the stock generated during that conversion process. MLMIC’s policyholders and the Superintendent of the New York State Department of Financial Services voted to approve this transaction after a hearing pursuant to the state’s Insurance Law. The transaction went through, and MLMIC’s policyholders who held policies that had been in effect during the three years preceding July 15, 2016 received a cash payment based on the premiums paid to MLMIC during that period.
Unfortunately for NSPC, it discontinued its policies with MLMIC in July 2014. As a result, NSPC received only a fraction of the cash payment that it otherwise would have received if NSPC had maintained its MLMIC policies longer.
On this basis, NSPC filed suit against MLMIC to recover damages for breach of fiduciary duty. Specifically, NSPC claimed that MLMIC had a fiduciary duty to disclose the impending stock-sale transaction to NSPC during certain discussions between the parties in 2013 and 2014. On the basis of the parties’ insured-insurer relationship, NSPC argued, MLMIC should have disclosed the transaction to NSPC. If that had happened, then NSPC claims that it would have kept its malpractice policies in place throughout the necessary period.
MLMIC moved to dismiss this claim, and the lower court sided against MLMIC and denied its motion. But the Appellate Division reversed, dismissing NSPC’s complaint for failure to state a cause of action against MLMIC for breach of fiduciary duty.
First, the court recognized that insurance companies generally do not owe their insureds fiduciary duties except when called upon to defend insureds in lawsuits: “Generally, an insurance company does not owe its policyholder a common-law fiduciary duty except when it is called upon to defend its insured.” Neurological Surgery, P.C., at 1240.
Second, the court cautioned that a “special relationship” of the type that gives rise to fiduciary duties “does not arise out of an ordinary arm’s length business transaction between two parties.” Id. In other words, just because NSPC missed out on a business opportunity open to other MLMIC policyholders did not mean that MLMIC had breached its fiduciary duties. To the contrary, the court held that NSPC pleaded no factual allegations that gave rise to any fiduciary obligation on the part of MLMIC to disclose the stock sale to NSPC during their 2013 and 2014 discussions. Accordingly, the court dismissed NSPC’s complaint.
This case is a helpful reminder that an insurer’s fiduciary duties are narrowly circumscribed. Both policyholders and insurance companies should bear this in mind when assessing the merits of fiduciary-duty claims asserted by insureds.