This article was originally published on Law.com.
In Part 1 of this trilogy – the “Citadel of Privity” (posted on July 31, 2012)—we explored the historical/legal antecedents/precedents in New York in respect of claims sounding in either contract or tort.
The Cardozo “quartet” – Glanzer, MacPherson, H.R. Moch and Ultramares – left the “citadel” of privity substantially in tact.
In Glanzer, defendants, who were engaged in business as public weighters, had every reason to know that the buyers intended to rely upon their certificates of weight.
In MacPherson, the automobile manufacturer knew that the retail dealer intended to re-sell the car to a third party.
In H.R. Moch, the record did not establish that the waterworks supplying water to the city undertook to be answerable to the public at large.
And, in Ultramares, the public accountants clearly owed a duty to both their client and their client’s counter-parties to prepare financial statements that were not fraudulent. However, absent fraud or gross negligence, the auditor had no duty or obligation to an open-ended class of possible recipients of the statements.
In this Part 2, we explore the evolution of the “privity” standards post-Cardozo and until the turn of the century. And in Part 3 (to be posted in September), we will discuss the current state of the law in New York with respect to privity.
Part 2: The Attack on the “Citadel”:
In Pulka v. Edelman, 40 N.Y.2d 781, 358 N.E.2d 1019, 390 N.Y.S.2d 393 (1976), the Court of Appeals was required to determine “whether the operators of a parking garage are liable in negligence for an injury to a pedestrian struck by a car while it was being driven out of the garage and across an adjacent sidewalk, not by a garage employee, but by a patron of the garage”.
As to the facts, the question was “whether, since there was evidence that patrons of the garage often drove their cars out of the garage and across the sidewalk without stopping, there arose a duty on the part of the garage to take measures to prevent or discourage this practice. Stated another way, the question [was] whether this garage, or any garage, ha[d] a duty to control the conduct of its patrons for the protection of off-premises pedestrians”.
The Court of Appeals concluded “that the garage is not liable in negligence for plaintiff’s injuries”; and, as follows, distinguished between “duty” and “forseeability”:
Forseeability should not be confused with duty. The principle expressed in Palsgraf v. Long Is. r. R. Co.…is applicable to determine the scope of duty-only after it has been determined that there is a duty. Since there is no duty here, that principle is inapplicable. In holding that there is no duty here, it must be stressed that not all relationships give rise to a duty. One should not be held legally responsible for the conduct of others merely because they are within our sight or environs. Neither should one be answerable merely because there are others whose activities are such as to cause one to envision damages or injuries as a consequence of those activities. In this respect, a moral duty should also be distinguished from a legal duty. The former is defined by the limits of conscience; the latter by the limits of law. A person may have a moral duty to prevent injury to another, but no legal duty. While a court might impose a legal duty where none existed before…, such an imposition must be exercised with extreme care, for legal duty imposes legal liability. When a duty exists, nonliability in a particular case may be justified on the basis that an injury is not foreseeable. In such a case, it can thus be said that foreseeability is a limitation on duty. In the instant matter, however, we are concerned with whether foreseeability should be employed as the sole means to create duty where none existed before…
In White v. Guarante, 43 N.Y.2d 356, 372 N.E.2d 315, 401 N.Y.S.2d 474 (1977):
The issue posed [was] whether accountants retained by a limited partnership to perform auditing and tax return services may be held responsible to an identifiable group of limited partners for negligence in the execution of those professional services.
The Court of Appeals [“held] that, at least on the facts here, an accountant’s liability may be so imposed”, explaining that:
Here, the services of the accountant were not extended to a faceless or unresolved class of persons, but rather to a known group possessed of vested rights, marked by a definable limit and made up of certain components [citing Ultrameres]. The instant situation did not involve prospective limited partners, unknown at the time and who might be induced to join, but rather actual limited partners, fixed and determined. Here, accountant Andersen was retained to perform an audit and prepare the tax returns of Associates, known to be a limited partnership, and the accountant must have been aware that a limited partner would necessarily rely on or make use of the audit and tax returns of the partnership, or at least constituents of them, in order to properly prepare his or her own tax returns. This was within the contemplation of the parties to the accounting retainer. In such circumstances, assumption of the task of auditing and preparing the returns was the assumption of a duty to audit and prepare carefully for the benefit of those in the fixed, definable and contemplated group whose conduct was to be governed, since given the contract and the relation, the duty is imposed by law and it is not necessary to state the duty in terms of contract or privity [citing Glanzer].
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Defendant Andersen’s contention, that plaintiff falls beyond the bounds of protected parties, rests primarily on the theory that its contract with the limited partnership circumscribed the extent of its obligation and the outer limits of its care. This reasoning fails to recognize that “[the] duty of reasonable care in the performance of a contract is not always owed solely to the person with whom the contract is made. It may insure to the benefit of others”…While Ultramares made it clear that accountants were not to be liable in negligence on the generalized basis that a contract for professional services creates liability in favor of the general populace, this plaintiff seeks redress, not as a mere member of the public, but as one of a settled and particularized class among the members of which the report would be circulated for the specific purpose of fulfilling the limited partnership agreed upon arrangement.
In Dworman v. Lee, 83 A.D.2d 507, 441 N.Y.S.2d 90 (1981), the First Department reversed the Order of Special Term and dismissed an action for damages holding that:
Although the plaintiffs alleged that they became sureties under an international construction contract executed in 1977 in reliance upon the consolidated financial statements prepared by defendants for the years 1973-1976, none of the causes of action contained in the supplemental complaint submitted to Special Term take this appeal outside of the rule enunciated in Ultrameres v. Touche…, which held that accountants may be liable in negligence only to persons with whom they are in privity. Plaintiffs allege five causes of action. All are sufficient. The third, fourth and fifth causes of action charge defendants with negligence, and the first and second with fraud. Notwithstanding the nomenclature of the first and second causes sounding in fraud and the language in the third cause of action that defendants “knew or should have known the falsity of their representations”, we find that the first, second and third causes essentially plead negligence. These causes are not transformed into causes of action in fraud merely by pleading conclusory allegations of fraud. Contrary to the view expressed by Special Term, there can be no doubt that the rule in Ultrameres remains authoritative, as it was in fact reaffirmed in White v. Guarente (54 NY2d 356). There, the Court of Appeals simply allowed limited partners of the limited partnership which had contracted with defendant accountant to sue for alleged negligence by the accountant. The court…stressed that the limited partners were not members of an indeterminate class dealing with the limited partnership in reliance on the audit, but were members of “a settled and particularized class among the members of which the [accountants’] report would be circulated for the specific purpose of fulfilling the limited partnership agreed upon arrangement”. By contrast, plaintiffs in their own complaint concede they are merely members of the public relying on the financial statements certified by Andersen…It is also to be noted that Federal securities law has no impact on plaintiffs’ situation as their transactions with the concern whose obligations they guaranteed involved no issuance or sale of securities. Further, accountants’ liability for negligence to third-party members of the public under Federal securities law is extremely doubtful (see Ernst & Ernst v Hochfelder, 425 U.S. 185).
In Dworman v. Lee, 56 N.Y.2d 816, 438 N.E.2d 103, 452 N.Y.S.2d 570 (1982), the Court of Appeals summarily affirmed “for the reasons stated” by the Appellate Division.
In De Angelis v. Lutheran Medical Center, 58 N.Y.2d 1053, 449 N.E.2d 406, 462 N.Y.S.2d 626 (1983), the Court of Appeals summarily affirmed, as follows, the Orders of the Appellate division that reversed Supreme Court and dismissed claims “for loss of consortium”:
In each case, a child seeks recovery in a derivative action for loss of a consortium against an alleged tort-feasor who inflicted disabling injuries on one of the child’s parents. Such actions, however real the loss incurred, were not recognized at common law and we find no reason to recognize such a right now. In particular, the existence of the right of a husband or wife, in view of the nature of the martial relationship, to bring an action derived from injuries to his or her spouse, to whatever extent it may be said to be analogous, does not warrant extending this right to a child and certainly not on the equal protection grounds asserted by the appellants.
Duty is essentially a legal term by which we express our conclusion that there can be liability…It tells us whether the risk to which one person exposes another is within the protection of the law. In fixing the bounds of that duty, not only logic and science, but policy play an important role…
A line must be drawn between the competing policy considerations of providing a remedy to everyone who is injured and of extending exposure to tort liability almost without limit. It is always tempting, especially when symmetry and sympathy would so seem to be best served, to impose new duties and, concomitantly, liabilities, regardless of the economic and social burden. But, absent legislative intervention, the fixing of the “orbit” of duty, as here, in the end is the responsibility of the courts…
In New Castle Siding Company, Inc. v. Wolfson, 63 N.Y.2d 782, 470 N.E.2d 868, 481 N.Y.S.2d 70 (1984), defendant asserted a cross-claim against an accountant “in his individual capacity, seeking to recover for the delinquent taxes and penalties he has paid on behalf of the corporation and for loans made to the corporation above and beyond his initial investment”.
The Court of Appeals summarily affirmed the Order of the Appellate Division that reversed the Order of Special Term denying a motion to dismiss:
The former were made in appellant’s capacity as an officer or employee of the corporation (see US Code, tit 26, § 6671, subd[b]; § 6672; Tax law §§1085, 1131, 1134) and would be the result of respondent’s negligence, if any, in discharging his obligations to the corporation for which he would not be responsible to a stockholder (cf. White v. Guarante, 43 NY2d 356). In making the loans, appellant acted as a general creditor of the corporation, to whom it is well settled that no duty is owed by an accountant (see Ultramares Corp. v. Touche, 255 NY 170). Thus, in neither case can appellant, as an individual shareholder, have recovery against respondent.
In Strauss v. Belle Realty Company, 65 N.Y.2d 399, 482 N.E.2d 34, 492 N.Y.S.2d 555 (1985), the Court of Appeals “[was] asked to determine whether Con Edison owed a duty of care to a tenant who suffered personal injuries in a common area of an apartment building, where his landlord – but not he – had a contractual relationship with the utility”.
The Court of appeals concluded that:
In the case of a blackout of a metropolis of several million residents and visitors, each in some manner necessarily affected by a 25-hour power failure, liability for injuries in a building’s common areas should, as a matter of public policy, be limited by the contractual relationship.
The Court of Appeals noted that: “The essential question here is whether Con Edison owed a duty to plaintiff, whose injuries from a fall on a darkened staircase may have conceivably been foreseeable, but with whom there was no contractual relationship for lighting in the building’s common areas.”
As to privity, the Court of Appeals stated:
But while the absence of privity does not foreclose recognition of a duty, it is still the responsibility of courts, in fixing the orbit of duty, “to limit the legal consequences of wrongs to a controllable degree”…and to protect against crushing exposure to liability…”In fixing the bounds of that duty, not only logic and science, but policy play an important role”…The courts’ definition of an orbit of duty based on public policy may at times result in the exclusion of some who might otherwise have recovered for losses or injuries if traditional tort principles had been applied.
In finding that “Con Edison is not answerable to the tenant of an apartment building injured in a common area as a result of Con Edison’s negligent failure to provide electric service as required by its agreement with the building owner”, the Court of Appeals reasoned that:
Additionally, we deal here with a system-wide power failure occasioned by what has already been determined to be the utility’s gross negligence. If liability could be found here, then in logic and fairness the same result must follow in many similar situations. For example, a tenant’s guests and invitees, as well as persons making deliveries or repairing equipment in the building, are equally persons who must use the common areas, and for whom they are maintained. Customers of a store and occupants of an office building stand in much the same position with respect to Con Edison as tenants of an apartment building. In all cases the numbers are to a certain extent limited and defined, and while identities may change, so do those of apartment dwellers…While limiting recovery to customers in this instance can hardly be said to confer immunity from negligence on Con Edison…permitting recovery to those in plaintiff’s circumstances would, in our view, violate the court’s responsibility to define an orbit of duty that places controllable limits on liability.
In Credit Alliance Corporation v. Arthur Andersen & Co., 65 N.Y.2d 536, 483 N.E.2d 110, 493 N.Y.S.2d 435 (1985):
[P]laintiffs [were] major financial service companies engaged primarily in financing the purchase of capital equipment through installment sales or leasing agreements. Defendant, Arthur Andersen & Co. (“Andersen”), [was] a financial accounting firm, Plaintiffs’ complaint and affidavit allege[d] that prior to 1978, plaintiffs had provided financing to L.B. Smith, Inc. of Virginia (“Smith”), a capital intensive enterprise that regularly required financing. During 1978, plaintiffs advised Smith that as a condition to extending additional major financing, they would insist upon examining an audited financial statement. Accordingly, Smith provided plaintiffs with its consolidated financial statements, covering both itself and its subsidiaries, “For The Years Ended December 31, 1977 and 1976” (the “1977 statements”). These statements contained an auditor’s report prepared by Andersen stating that it had examined the statements in accordance with generally accepted auditing standards (“GAAS”) and found them to reflect fairly the financial position of Smith in conformity with generally accepted accounting principles (“GAAP”). In reliance upon the 1977 statements, plaintiffs provided substantial amounts of credit. Thereafter, in 1979, as a precondition to continued financing, plaintiffs requested and received from Smith the consolidated financial statements “For The Years Ended February 28, 1979 and December 31, 1977” (the “1979 statements”). Again, Andersen’s report vouched for its examination of the financial statements and the financial position of Smith reflected therein. Relying upon these certified statements, plaintiffs provided additional substantial financing to Smith.
Plaintiffs alleged that “both statements overstated Smith’s assets, net worth and general financial health, and that Andersen failed to conduct investigations in accordance with proper auditing standards, thereby failing to discover Smith’s precarious financial condition and the serious possibility that Smith would be unable to survive as a going concern. Indeed, in 1980, Smith filed a petition for bankruptcy. By that time, Smith had already defaulted on several millions of dollars of obligations to plaintiffs.”
And “[i]n August 1981, plaintiffs commenced this suit for damages lost on its outstanding loans to Smith, claiming both negligence and fraud by Andersen in the preparation of its audit reports. The complaint allege[d] that Andersen knew, should have known or was on notice that the 1977 and 1979 certified statements were being utilized by Smith to induce companies such as plaintiffs to make credit available to Smith. The complaint further state[d] that Andersen knew, should have known or was on notice that the certified statements were being shown to plaintiffs for such a purpose. It is also alleged that Andersen knew or recklessly disregarded facts which indicated that the 1977 and 1979 statements were misleading.”
Special Term denied the motion to dismiss in its entirety. The Appellate Division affirmed:
holding, in part, that despite the absence of contractual privity between the parties, plaintiffs were members of a limited class whose reliance upon the financial statements should have been specifically foreseen by defendants. The court concluded that plaintiffs fell within the exception to the general rule that requires privity to maintain an action against an accountant for negligence.
In the companion case, “the complaint, together with the affidavit in opposition to the motion to dismiss, allege[d] that plaintiff, European American Bank and Trust Company (“EAB”), made substantial loans to Majestic Electro Industries and certain of its subsidiaries (collectively, “Majestic Electro”) in March 1979 pursuant to their written agreements. Several months later, EAB partially financed Majestic Electro’s acquisition of Brite Lite Lamps Corp. by again advancing substantial funds.”
EAB sued for “damages for those losses allegedly resulting from its reliance upon S&K’s reports.”
EAB specifically allege[d] negligence in that S&K, in performing auditing and accounting services for Majestic Electro, at all relevant times knew that EAB was Majestic Electro’s principal lender, was familiar with the terms of the lending relationship, and was fully aware that EAB was relying on the financial statements and inventory valuations certified by S&K. Moreover, it [was] alleged that representatives of EAB and S&K were in direct communication, both oral and written during the entire course of the lending relationship between EAB and Majestic Electro, and, indeed, that representatives of EAB and S&K met together throughout this time to discuss S&K’s evaluation of Majestic Electro’s inventory and accounts receivable and EAB’s reliance thereon. The complaint also allege[d] a second cause of action, merely adding that defendants were “grossly negligent or recklessly indifferent” in performing professional services and that EAB was damaged as a result.
Special Term dismissed the complaint holding that, “absent a contractual relationship between the parties or an allegation of fraud, the complaint failed to state a cause of action. On appeal, the Appellate Division unanimously reversed and reinstated the complaint in its entirety. Focusing on the direct communications between the parties, the court held that contractual privity was not a prerequisite to liability inasmuch as S&K specifically knew that their reports would be relied upon by EAB for a particular purpose.”
After reviewing “the seminal case of” Ultramares, distinguishing the decision in Glanzer, and noting the then recent decisions in White, Dworman and New Castle, the Court of Appeals concluded that:
In the appeals we decide today, application of the foregoing principles presents little difficulty. In Credit Alliance, the facts as alleged by plaintiffs fail to demonstrate the existence of a relationship between the parties sufficiently approaching privity. Though the complaint and supporting affidavit do allege that Andersen specifically knew, should have known or was on notice that plaintiffs were being shown the reports by Smith, Andersen’s client, in order to induce their reliance thereon, nevertheless, there is no adequate allegation of either a particular purpose for the reports’ preparation or the prerequisite conduct on the part of the accountants. While the allegations state that Smith sought to induce plaintiffs to extend credit, no claim is made that Andersen was being employed to prepare the reports with that particular purpose in mind. Moreover, there is no allegation that Andersen had any direct dealings with plaintiffs, had specifically agreed with Smith to prepare the report for plaintiffs’ use or according to plaintiffs’ requirements, or had specifically agreed with Smith to provide plaintiffs with a copy or actually did so. Indeed, there is simply no allegation of any word or action on the part of Andersen directed to plaintiffs, or anything contained in Andersen’s retainer agreement with Smith which provided the necessary link between them.
By sharp contrast, in European American, the facts as alleged by EAB clearly show that S&K was well aware that a primary, if not the exclusive, end and aim of auditing its client, Majestic Electro, was to provide EAB with the financial information it required. The prerequisites for the cause of action in negligence, as well as in gross negligence, are fully satisfied. Not only is it alleged, as in Credit Alliance, that the accountants knew the identity of the specific nonprivy party who would be relying upon the audit reports, but additionally, the complaint and affidavit here allege both the accountants’ awareness of a particular purpose for their services and certain conduct on their part creating an unmistakable relationship with the reliant plaintiff. It is unambiguously claimed that the parties remained in direct communication, both orally and in writing, and, indeed, met together throughout the course of EAB’s lending relationship with Majestic Electro, for the very purpose of discussing the latter’s financial condition and EAB’s need for S&K’s evaluation. It cannot be gainsaid that the relationship thus created between the parties was the practical equivalent of privity. The parties’ direct communications and personal meetings resulted in a nexus between them sufficiently approach privity under the principles of Ultramares, Glanzer and White to permit EAB’s causes of action.
In Westpac Banking Corporation v. Deschamps, 66 N.Y.2d 16, 484 N.E.2d 1351, 494 N.Y.S.2d 848 (1985), the Court of Appeals admonished at the outset that:
In an action at common law by a lender against accountants for negligence in the preparation of a borrower’s financial statements, where a link between the accountants and the lender is not shown a complaint is properly dismissed…even though the Federal securities laws provide that the accountants may have statutory liability to the public.
The plaintiff alleged:
In its third cause of action, Westpac alleges that Seidman was grossly negligent or reckless in the conduct of its audit examination and its report and in its fourth cause of action, Westpac alleges that Seidman was negligent in its audit examination and its report.
Special Term denied the motion to dismiss the cause of action for fraud and, based upon Credit Alliance, granted the motion to dismiss the fourth cause of action sounding in negligence.
The Court of Appeals noted that:
In Credit Alliance we concluded that certified public accountants may be held liable to noncontractual parties who rely on negligently prepared financial reports only where certain prerequisites are satisfied: (1) the accountants must have been aware that the financial reports were to be used for a particular purpose; (2) in furtherance of which a known party was intended to rely; and (3) there must be some conduct on the part of the accountants linking them to that party, which evinces the accountants’ understanding of that party’s reliance.
And the Court of Appeals, as follows, reversed and reinstated the fourth cause of action (negligence).
Here, the allegations of the complaint against Seidman fail to demonstrate a relationship between the parties sufficiently approaching privity. Although obtaining a bridge loan may be “a particular purpose” for which the financial statements were to be used by Turnkey – a purpose Seidman allegedly knew – the complaint does not allege that Seidman knew that Turnkey was showing the reports to Westpac. Rather, Westpac claims only that it was one of a class of “potential bridge lenders,” to which class as a whole Seidman owed a duty, and that it should be considered a “known party” because it was as of the date of the certification a substantial lender to Turnkey, and “thus a prime candidate for a bridge loan.” This is not, however, the equivalent of knowledge of “the identity of the specific nonprivy party who would be relying upon the audit reports”…
Moreover, there is no allegation that Seidman had any dealings with Westpac, had specifically agreed with Turnkey to prepare the report for Westpac’s use or according to Westpac’s requirement, had agreed with Turnkey to provide Westpac with a copy, or actually did so. Indeed, there is simply no allegation of any word or action on the part of Seidman directed to Westpac, or anything contained in Seidman’s retainer agreement with Turnkey which provided the necessary link between them…
Westpac asserts that the purpose of the third requirement of Credit Alliance has been satisfied because, under the Federal securities laws, had a public offering been made Seidman would have been subject to liability to members of the public who purchased Turnkey stock for negligent misstatements or omissions in the certified statements…Accordingly, Westpac argues, Seidman should be deemed to have accepted the risk that it could be sued by members of the public and therefore, the risk that it could be sued by potential bridge lenders. In Credit Alliance, we concluded that the resolution of competing policy considerations embodied in Ultramares Corp. v. Touche…remained sound and that under the common law of this State accountants should not have a duty to the public at large. Section 11 of the Securities Act of 1933 addressed to different policy concerns, was enacted as part “of the federal regulatory scheme governing transactions in securities”…in order “to assure compliance with the disclosure provisions of the Act by imposing a stringent standard of liability on the parties who play a direct role in a registered offering”…Thus, the fact that Seidman might have been subject to actions under this Federal statute should not affect the scope of its duty at common law.
In William Iselin & Co., Inc. v. Landau, 71 N.Y.2d 420, 522 N.E.2d 21, 527 N.Y.S.2d 176 (1988), the Court of Appeals summarily asserted at the outset that:
An accountant is not immune from liability to a lender for negligence in reviewing a borrower’s financial statements and rendering an uncertified report, but where, as here, the lender failed to offer evidence of a relationship sufficiently approaching privity between the lender and the accountant, summary judgment was properly granted to the accountant.
The Court of Appeals noted the difference between a report and a certified audit stating that:
The latter requires the auditor’s certification that the audit was performed under generally accepted accounting standards to ensure that the financial statements and the underlying information contained in those statements are reliable, and that the statements were prepared according to generally accepted accounting principles (GAAP)…
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The report offers only the limited assurance that the accountant is not aware of any material modifications that should be made to the client’s financial statements in order for them to conform with GAAP.
Because of the noted differences, the Court of Appeals held that:
While the essential character of a Review Report thus differs from that of the traditional audit, the accountant nevertheless has a duty to exercise due care in performance of its engagement. That duty runs primarily, of course, to the party contracting for the accountant’s services. In the absence of a contractual relationship between the accountant and the party claiming injury, the potential for accountant liability is carefully circumscribed. In Credit Alliance Corp. v. Andersen & Co…we said that accountants may be held liable to noncontractual parties who rely to their detriment on negligently prepared financial reports only when certain prerequisites are satisfied: “(1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party or parties’ reliance”…In sum, the noncontractual party must demonstrate a relationship with the accountants “sufficiently approaching privity”…
concluded that:
In applying those well-established principles…the Appellate Division properly granted summary judgment to defendant Mann. Iselin was obligated to submit evidence of Mann’s awareness that Suits, intending that Iselin would rely on the Reports, would use them for the purpose of procuring credit from Iselin. Beyond that, Iselin was required to show a nexus with Mann from which Mann’s understanding of Iselin’s reliance could be drawn.
and held that:
No evidence in admissible form is offered showing a link between the parties from which Mann’s awareness of Iselin’s reliance may be drawn. The conclusory assertion by Iselin’s president that Mann knew of Iselin’s reliance is clearly insufficient to defeat summary judgment on that critical issue; and even if it were properly shown that a Review Report was sent by Mann to Iselin at Suits’ request, the single act of sending the Report at an undetermined time for an unknown purpose would not satisfy the burden of coming forth with evidence evincing Mann’s understanding of Iselin’s reliance…
Reviewing the whole of Iselin’s submission, we find nothing in relation to the contacts between Mann and Iselin which would establish a nexus between them sufficiently approaching privity…Thus, no material issue of fact has been presented requiring a trial.
In Ossining Union Free School District v. Anderson LaRocca Anderson, 73 N.Y.2d 417, 539 N.E.2d 91, 541 N.Y.S.2d 335 (1989), at the outset of the opinion the Court of Appeals, as follows, framed the dispute:
At issue is a question that has long been a subject of litigation: in negligent misrepresentation cases, which produce only economic injury, is privity of contract required in order for plaintiff to state a cause of action? Whether defendants are accountants (as in several recent cases) or not (as here), our answer continues to be that such a cause of action requires that the underlying relationship between the parties be one of contract or the bond between them so close as to be the functional equivalent of contractual privity. Such a bond having been alleged in the present action against engineers, we reverse the Appellate Division order and deny defendants’ motion to dismiss the complaint.
The suit arose: “from certain reports made by defendants following tests done on school district premises in order to determine the structural soundness of the high school annex. Specifically, defendant Thune and thereafter, at the school district’s request to Anderson, a second engineering firm – defendant Geiger – tested the concrete at various locations throughout the building. Both reported that there were serious weaknesses in the building, particularly the concrete slabs that formed the building’s superstructure, and Anderson informed the school district of those findings.”
The Court of Appeals sought “to define the ambit of duty or limits of liability for negligence, which in theory can be endless” – and to examine “[c]ontractual privity as the basis for defining the ambit of duty in negligence cases[.]”
After reviewing the line of decisions from Winterholton v. Wright, 10 M&W 109, 152 Eng Rep. 402 [Ex 1842] through Ultramares, Glanzer, Credit Alliance, Westpac Banking and Iselin, the Court of Appeals concluded that:
In none of these cases, however, has the court erected a citadel of privity for negligent misrepresentation suits. Thus, the rule is not, as erroneously stated by the Appellate Division, that “recovery will not be granted to a third person for pecuniary loss arising from the negligent representations of a professional with whom he or she has had no contractual relationship”…The long-standing rule is that recovery may be had for pecuniary loss arising from negligent representations where there is actual privity of contract between the parties or a relationship so close as to approach that of privity.
Nor does the rule apply only to accountants. We have never drawn that categorical distinction, and see no basis for establishing such an arbitrary limitation now. It is true that in many of the cases involving claims for negligent misrepresentation, the defendants are accountants. Indeed, in attempting to fashion a rule that does not expose accountants to crippling liability, we have noted the central role played by that profession in the world of commercial credit. But while the rule has been developed in the context of cases involving accountants, it reflects our concern for fixing an appropriate ambit of duty, and there is no reason for excepting from it defendants other than accountants who fall within the narrow circumstances we have delineated. Notably, Glanzer itself did not involve a suit against accountants.
And, after reiterating the ground rules of Credit Alliance:
Most recently, in Credit Alliance, we spelled out the following criteria for liability: (1) awareness that the reports were to be used for a particular purpose or purposes; (2) reliance by a known party or parties in furtherance of that purpose; and (3) some conduct by the defendants linking them to the party or parties and evincing defendants’ understanding of their reliance…
the Court of Appeals concluded that:
For present purposes, the facts asserted in plaintiff’s submissions satisfy these prerequisites. Plaintiff alleges that through direct contact with defendants, information transmitted by Anderson, and the nature of the work, defendants were aware – indeed, could not possibly have failed to be aware – that the substance of the reports they furnished would be transmitted to and relied upon by the school district. Plaintiff asserts that that was the very purpose of defendants’ engagement.
In Eaves Brooks Costume Company, Inc. v. Y.B.H. Realty Corp., 76 N.Y.2d 220, 556 N.E.2d 1093, 557 N.Y.S.2d 286 (1990), the question presented was: “whether the tenant can recover against the two companies under contract with the building’s owners to inspect the sprinkler system and to maintain an alarm system”.
The owner of a building engaged New York Automatic Sprinkler Service Co. to inspect the sprinkler system and Wells Fargo Alarm Services to install and maintain a central station fire alarm system.
Plaintiff/tenant alleged that:
“[o]n or about Saturday, November 14, 1981 a sprinkler head on the fifth floor of the building malfunctioned and began discharging water at a rate of about 2,760 gallons per hour. The building was unoccupied over the weekend and the alarm system failed to operate. Thus, the flooding continued until it was discovered by plaintiff’s employees on Monday, November 16. By that time, the water had done extensive damage to plaintiff’s inventory of costumes stored in the building.”
Plaintiff sued the building owner, New York Automatic and Wells Fargo for damages in excess of $1 million. Supreme Court dismissed several claims but “denied defendants’ motions, holding that defendants could be liable in tort for the negligent performance of contractual duties if their conduct amounted to misfeasance”. The Appellate Division reversed and dismissed the tort claim.
The Court of Appeals affirmed holding that:
In our view, the proper inquiry is simply whether the defendant has assumed a duty to exercise reasonable care to prevent foreseeable harm to the plaintiff. In the ordinary case, a contractual obligation, standing alone, will impose a duty only in favor of the promisee and intended third-party beneficiaries and mere inaction, without more, establishes only a cause of action for breach of contract…But even inaction may give rise to tort liability where no duty to act would otherwise exist if, for example, performance of contractual obligations has induced detrimental reliance on continued performance and inaction would result not “merely in withholding a benefit, but positively or actively in working an injury”…In such a case, the defendant has undertaken not just by his promises but by his deeds a legal duty to act with due care.
* * *
We conclude that liability should not be imposed upon New York Automatic and Wells Fargo in these circumstances. Significantly, nothing in our decision precludes plaintiff from seeking damages from the building’s owner, and the owners and plaintiff are both in a position to insure against losses such as those sustained here. The plaintiff and the owners know or are in a position to know the value of the goods stored and can negotiate the cost of the lease and limitations on liability accordingly.
If, on the other hand, New York Automatic and Wells Fargo were answerable for property damage sustained by one not in contractual privity with them, they would be forced to insure against a risk the amount of which they may not know and cannot control, and as to which contractual limitations of liability may be ineffective. The result would be higher insurance premiums passed along through higher rates to all those who require sprinkler system and alarm services. In effect, the cost of protection for those whose potential loss is the greatest would be subsidized by those with the least to lose. In this setting, we see no reason to distribute the risk of loss in such a manner.
In Security Pacific Business Credit, Inc. v. Peat Marwick Main & Co., 79 N.Y.2d 695, 597 N.E.2d 1080, 586 N.Y.S.2d 87 (1992), the issue presented was:
whether defendant accountants may be held liable in negligence by application of the principles of the Credit Alliance Corp. v. Andersen & Co. (65 NY2d 536) line of precedents.
The Court of Appeals summarized the facts as follows:
Plaintiff, an institutional lender lacking a contractual or other direct business relationship with defendant accounting firm, seeks to hold the defendant liable for alleged negligence committed by defendant’s predecessor in its 1984 audit of financial statements of its client, Top Brass Enterprises, Inc. (Top Brass). In October 1984, plaintiff, Security Pacific Business Credit, Inc. (SPBC), an asset based lender, and Bankers Trust Co. loaned Top brass approximately $40 million on a $50 million line of credit, secured by Top Brass’s accounts receivable and merchandise inventory. After Top Brass filed for bankruptcy in 1986, SPBC sued defendant Peat Marwick Main & Co., as successor to Main Hurdman. SPBC alleged that it had relied on Main Hurdman’s 1984 unqualified audit opinion and financial statements, which did not accurately present the financial position of Top Brass in that they negligently over-valued Top Brass’s accounts receivable and merchandise inventory. SPBC’s alleged reliance is premised essentially on a telephone call from its vice-present, Seiden, to Main Hurdman’s audit partner, Freeman, during and with respect only to the 1984 audit process and audit work papers supplied to SPBC by Top Brass. SPBC claimed losses on the loans of at least $8 million.
and concluded that:
SPBC failed to demonstrate the existence of a relationship between itself and defendant’s predecessor accounting firm “sufficiently approaching privity”.
Summarizing, the state of the law as to accountant liability, the Court of Appeals wrote:
When accountants conduct a traditional financial audit, they undertake a duty of due care in the performance of their engagement to the party which has contracted for their services…In “carefully circumscribed” instances, accountants may also incur liability to injured third parties who rely on their work, even in the absence of a direct contractual relationship between the accountants and the third party. This Court established an analytical framework for determining the applicability of this policy-based extension of common-law liability in Credit Alliance Corp. v. Andersen & Co.… “(1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party or parties’ reliance. The indicia, while distinct, are interrelated and collectively require a third party claiming harm to demonstrate a relationship or bond with the once-removed accountants” sufficiently approaching privity” based on “some conduct on the part of the accountants”.
And, applying the law to the facts, the Court of Appeals concluded:
Applying the precedents and principles to this case, we conclude that on this record plaintiff has failed to make the necessary demonstration of the existence of a relationship between the parties to this litigation “sufficiently approaching privity”. In opposing Peat Marwick’s motion for summary judgment, SPBC was required to produce evidentiary proof, in admissible form, of all three elements of the Credit Alliance analysis, warranting a trial on material questions of fact.
In Prudential Insurance Company of America v. Dewey Ballantine, Bushby, Palmer & Wood, 80 N.Y.2d 377, 605 N.E.2d 318, 590 N.Y.S.2d 831 (1992), the relevant and undisputed facts, as stated by the Court of Appeals, were:
In early 1986, United States Lines (U.S. Lines), a major shipping concern, informed the Prudential Insurance Company of America (Prudential) and certain of its other key creditors that it was anticipating difficulty in meeting its debt obligations. Prudential thereafter agreed to a restructuring of a $92,885,000 debt that U.S. Lines owed it in connection with a 1978 loan. At the time, that debt was secured by a first preferred fleet mortgage on certain vessels owned by U.S. Lines.
In order to implement the debt restructuring, Prudential and U.S. Lines executed an amendment to the financing and security agreement that they had entered into when the 1978 loan was made. Section 4 of that amendment set forth various conditions to Prudential’s agreeing to the restructuring, including a requirement that Prudential receive “[t]he favorable opinion of Messrs. Gilmartin, Poster & Shafto [Gilmartin], counsel to [U.S. Lines], to such effect as shall be satisfactory to Prudential.”
In fulfillment of that requirement, Gilmartin, at the specific direction of U.S. Lines, thereafter drafted and delivered an opinion letter to Prudential. The opinion letter contained an assurance that the mortgage documents that were to be recorded in connection with the debt restructuring, and which, incidentally, had been prepared by other counsel, represented “legal, valid and binding” obligations of U.S. Lines. Moreover, according to Gilmartin’s letter, neither Federal nor State law would interfere “with the practical realization of the benefits of the security intended to be provided” by those documents. Prudential ultimately accepted Gilmartin’s opinion letter as satisfactory, and permitted the recording of those mortgage documents Prudential later learned that one of the recorded documents erroneously stated the outstanding balance of the first preferred fleet mortgage securing the debt as $92,885, rather than the correct sum of $92,885,000. As a result, Prudential suffered significant losses when U.S. Lines subsequently filed for bankruptcy. Those losses ultimately included 17.5% of the net proceeds ($11,400,000) from a foreclosure sale of five of the ships involved in the first preferred fleet mortgage, which percentage Prudential had agreed to pay U.S. Lines in settlement of their dispute at the time the validity of the mortgage was in doubt. The claimed losses also included the related Federal court litigation costs associated with defending the mortgage…
Prudential sued Gilmartin:
contending that the law firm’s opinion letter had falsely assured it that the mortgage documents in question would fully protect its existing $92,885,000 security interest. Although Prudential acknowledged that it was not actually in privity with Gilmartin, it nevertheless contended that the relationship between them was sufficiently close so as to support a cause of action in negligence. Alternatively, it maintained that Gilmartin could be held liable to it, in contract, on a third-party beneficiary theory.
The Court of Appeals, as follows, then spoke to attorneys’ liability for negligent misrepresentation:
Initially, it must be stressed that attorneys, like other professionals, may be held liable for economic injury arising from negligent representation. Although the defendants in many of the prior cases addressing this issue have been accountants, there is no reason to arbitrarily limit the potentially liable defendants to that class of professionals …Indeed, liability was imposed on engineering consultants in Ossining and in Ultramares and Glanzer, it was suggested that in the right circumstances pecuniary recovery might be had from lawyers. We now conclude that in circumstances such as these, a theoretical basis for liability against legal professionals can be presented.
Because Prudential conceded that “it was not in direct privity with Gilmartin”, the Court of Appeals was required to determine “whether the relationship between Prudential and Gilmartin was sufficiently close to support liability”.
After reviewing the decisions in Ossining, Credit Alliance, Ultramares, Glanzer, White, European American Bank and Security Pacific, the Court of Appeals, as follows, found that “Gilmartin owed Prudential a duty of care[.]”.
The Credit Alliance criteria and the cases on which those criteria are based clearly support the imposition of liability here. First, it is undisputed that Gilmartin was well aware that the opinion letter which U.S. Lines directed it to prepare was to be used by Prudential in deciding whether to permit the debt restructuring. Thus, the end and aim of the opinion letter was to provide Prudential with the financial information it required. Indeed, the amendment to the 1978 financing and security agreement made Prudential’s receipt of the opinion letter a condition precedent to closing.
Second, as fully expected by Gilmartin, Prudential unquestionably relied on the opinion letter in agreeing to the debt restructuring. Specifically, Prudential focused on certain statements in the letter which assured it, generally, that the mortgage documents represented “legal, valid and binding” obligations of U.S. Lines which, once recorded, would be enforceable against it “in accordance with [their] respective terms.” Finally, by addressing and sending the opinion letter directly to Prudential, Gilmartin clearly engaged in conduct which evinced its awareness and understanding that Prudential would rely on the letter, and provided the requisite link between the parties. Accordingly, contrary to the conclusion of the courts below, the bond between Gilmartin and Prudential was sufficiently close to establish a duty of care running from the former to the latter…
Upon a review of the facts, the Court of Appeals concluded that:
In sum, a duty of care was owed to Prudential in these circumstances, and the facts do not prove a breach of that duty. In preparing the opinion letter, Gilmartin represented that it took the particular procedural measures, as discussed above, in investigating and substantiating the mortgage documents in question. After taking those mearsures, Gilmartin made certain general assurances to Prudential in the opinion letter. Those assurances did not set forth a specific dollar amount as securing the debt. It was agreed that the letter was to be in a form satisfactory to Prudential, which condition was satisfied when Prudential accepted the letter containing no more than general assurances. We can only conclude on these facts, where neither procedural nor substantive misrepresentations were made by Gilmartin, that the law firm was properly awarded summary judgment.
In Kimmell v. Schaefer, 89 N.Y.2d 257, 675 N.E.2d 450, 652 N.Y.S.2d 715 (1996), the issue on appeal “[was] whether the relationship between the parties was sufficient to render defendant liable to plaintiff for the tort negligent misrepresentation”. Supreme Court found that a sufficient relationship existed; the Appellate Division agreed; and the Court of Appeals affirmed.
The Court of Appeals summarized the facts as follows:
Plaintiffs invested $320,000 each in a limited partnership called Cogenic Embarcadero L/P. This partnership involved one of several projects developed by Cogenic Energy Systems, Inc. (CESI) for the purpose of providing heat and electricity to industrial and commercial energy users through on-site-gas-powered “cogeneration” units. The incentive for employing cogeneration to meet energy needs stemmed from the lower cost of self-generated energy as compared to the rates charged by utility companies for supplying the equivalent units of power. In return for providing and installing the cogeneration units, CESI shared a portion of the energy cost savings realized by the participating facilities.
* * *
Defendant, a lawyer, certified public accountant and former chief financial officer of Pepsico for 26 years became involved with CESI in 1985 after he retired from Pepsico. Defendant had been recruited to serve on CESI’s board because the company believed that his reputation would enhance its credibility with potential investors. In the fall of 1987, CESI’s president asked defendant if he knew of anyone who would be interested in buying or investing in the Embarcadero project. At that time, defendant was the chairman of CESI’s board. In December 1987, defendant also became CESI’s chief financial officer. Defendant became the contact person at CESI for the Embarcadero project and he began seeking investors for the limited partnership.
* * *
Defendant’s efforts to solicit investors occurred in a climate which was rapidly becoming unfavorable for the San Diego cogeneration industry.
* * *
In early January 1988, based on the revenues received from the Embarcadero project in November and December 1987, a new set of projections predicting an even higher rate of return from the project was issued at defendant’s behest. The new projections estimated a 10% increase in energy savings over the November 1987 projections. Defendant sent the revised projections to Gross with a cover memo which stated, in relevant part, “[a]fter a thorough discussion with our West Coast administrator to assure ourselves that the first two months are not an aberration, it is reasonable to assume that we are and will exceed our original projection, done some time ago, by at least 10%”. Defendant intended the memo and the revised projections, dated January 6, 1988, to reach plaintiffs and assumed that Gross would deliver the documents to them. Plaintiffs received and reviewed the revised projections.
Unfortunately, defendant and the revised projections failed to account for the recent and substantial change in local utility rates. Since the January 6, 1988 projections were not based on the current and actual utility rates in effect, they misrepresented the potential rate of return on the Embarcadero project. As of January 1, 1988, the Embarcadero project was unlikely to generate any returns for its investors.
The Court of Appeals summarized the prior proceedings:
Plaintiffs commenced this action seeking damages arising out of their failed investment in the Embarcadero project. After a nonjury trial, Supreme Court found that defendant had negligently misrepresented, both directly and by encouraging plaintiffs to rely on the projections generated by CESI, that the Embarcadero project would earn income, and that plaintiffs relied on this misrepresentation to their detriment. Supreme Court also found the existence of a special relationship sufficiently resembling privity to justify holding defendant liable for negligent misrepresentation. The Appellate Division affirmed Supreme Court’s findings of fact, determined that there was ample support for the trial court’s conclusions and held that defendant was liable for negligent misrepresentation…
The Court of Appeals noted that:
Defendant contends that he was not in privity or in a relationship sufficiently resembling privity with plaintiffs to render him liable for negligent misrepresentation [and] Defendant also argues that he did not owe plaintiffs a duty to speak with care.
* * *
The Court of Appeals explained that:
Liability for negligence may result only from the breach of a duty running between a tortfeasor and the injured party. Although the existence of a duty is an issue of law for the courts…once the nature of the duty has been determined as a matter of law, whether a particular defendant owes a duty to a particular plaintiff is a question of fact. We turn first to the nature of the duty which may give rise to liability for negligent misrepresentation.
In the commercial context, a duty to speak with care exists when “the relationship of the parties, arising out of contract or otherwise, [is] such that in morals and good conscience the one has the right to rely upon the other for information”…This reliance must be justifiable, as a “casual response given informally does not stand on the same legal footing as a deliberate representation for purposes of determining whether an action in negligence has been established”…
Since a vast majority of commercial transactions are comprised of such “casual” statements and contacts, we have recognized that not all representations made by a seller of goods or provider of services will give rise to a duty to speak with care…Rather, liability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified. Professionals, such as lawyers and engineers, by virtue of their training and expertise, may have special relationships of confidence and trust with their clients, and in certain situations we have imposed liability for negligent misrepresentation when they have failed to speak with care.
The analysis in a commercial case such as this one is necessarily different from those cases because of the absence of obligations arising from the speaker’s professional status. In order to impose tort liability here, there must be some identifiable source of a special duty of care. The existence of such a special relationship may give rise to an exceptional duty regarding commercial speech and justifiable reliance on such speech.
Whether the nature and caliber of the relationship between the parties is such that the injured party’s reliance on a negligent misrepresentation is justified generally raises an issue of fact. In determining whether justifiable reliance exists in a particular case, a fact finder should consider whether the person making the representation held or appeared to hold unique or special expertise; whether a special relationship of trust or confidence existed between the parties; and whether the speaker was aware of the use to which the information would be put and supplied it for that purpose. The record here contains ample support for the finding that defendant’s relationship with plaintiffs gave rise to a duty to speak with care.
As CESI’s chief financial officer and chairman, defendant was uniquely situated to evaluate the economics of the Embarcadero project in December 1987 and January 1988. Moreover, as the general partner of Cogeneration Partners, a limited partnership involving six CESI cogeneration installations, defendant was experienced with the sale of CESI projects to investors through the limited partnership form and the business aspects of cogeneration. Plaintiffs who knew of defendant’s involvement with Cogeneration Projects, justifiably assumed that defendant possessed expertise n this area and relied on his apparently unique knowledge of CESI and its operations.
Defendant’s efforts sought to induce plaintiffs to invest in the project. The record indicates that the Embarcadero projections were generated for the express purpose of providing investors with current information about potential returns on the project. As the CESI representative responsible for marketing the Embarcadero limited partnership, defendant provided Gross with projections to distribute to potential investors generally, and to plaintiffs in particular. Defendant testified at trial that he expected plaintiffs to rely on these projections. Defendant also met with each plaintiff, and personally represented that the Embarcadero project would generate some income. Defendant further urged plaintiffs to review and rely on the projections. Indeed, defendant informed Kimmell that he could provide “hot comfort” should plaintiff entertain any reservations about investing.
Most tellingly, defendant personally requested “updated” projections, which he represented were reasonable and generated after a “thorough discussion with our West Coast administrator,” even though they were not based on the utility rate structure in effect at the time. The revised projections were sent to Gross with the expectation that they would be routed to plaintiffs. Plaintiffs duly received and reviewed these projections. Finally, defendant personally received a $20,000 commission for his efforts on behalf of the Embarcadero project. We conclude that under these circumstances, the record contains an adequate basis for the finding that defendant owed a duty of care to plaintiffs here.
And the Court of Appeals concluded that:
Defendant’s attempt to escape liability for negligent misrepresentation by relying on the Business Corporation Law is unpersuasive. Although sections 715 and 717 of the Business Corporation Law provide that corporate officers and directors may rely on information and opinions provided by corporate employees, they further provide that such reliance is justified only when the officer or director believes those employees to be reliable and competent in the matters presented.
Supreme Court found that the employees in CESI’s San Diego office were “woefully negligent and abysmally uniformed”. Given the widespread publicity surrounding the local utility’s application for a rate change in 1987, and the failure to use current rate structures in the January 1988 projections, the record contains support for this factual finding. Supreme Court further found that defendant had little or no personal dealings with the staff in the San Diego office, had no basis for assessing their competence, and failed to make any inquiry into the basis or methodology of the projections. As chief financial officer and chairman of CESI, Supreme Court concluded that defendant’s failure to make any inquiry as to these matters constituted negligence. As these findings are supported by the record, defendant was properly held liable for negligent misrepresentation.
In Murphy v. Kuhn, 90 N.Y.2d 266, 682 N.E.2d 972, 660 N.Y.S.2d 371 (1997) the issue before the Court of Appeals:
[W]as whether an insurance agent should be liable to a former customer for tortious misrepresentation and breach of implied contract. The alleged wrongdoing [was] a failure of the defendant insurance agent to advise plaintiff Thomas Murphy as to possible additional insurance coverage needs. The theory of the lawsuit, and the asserted duty is a special relationship and special level of advisory responsibility”.
The Court of Appeals, as follows, applied the facts to the law:
Supreme Court concluded that, absent a request by the customer, an insurance agent “owes no continuing duty to advise, guide or direct the customer to obtain additional coverage”. Therefore, acknowledging that on this record plaintiffs never specifically requested defendants to increase the liability limits on the commercial automobile policy, the court held that defendants owed no special duty of affirmative advisement to plaintiffs. The court also declined to adopt plaintiffs’ “special relationship” theory.
Plaintiffs propose that insurance agents can assume or acquire legal duties not existing at common law by entering into a special relationship of trust and confidence with their customers. Specifically, plaintiffs contend that a special relationship developed from a long, continuing course of business between plaintiffs and defendant insurance agent, generating special reliance and an affirmative duty to advise with regard to appropriate or additional coverage.
Insurance agents have a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage…Notably, no New York court has applied plaintiffs’ proffered “special relationship” analysis to add such continuing duties to the agent-insured relationship…
Recently, however, this Court recognized a special relationship in a commercial controversy, involving no generally recognized professional relationship…We held that the relationship between the parties “under the circumstances [there] required defendant to speak with care”…Kimmell cautions, however, that “liability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified”…For example, professionals, such as lawyers and engineers, by virtue of their training and expertise, may have special relationship of confidence and trust with their clients, and in certain situations we have imposed liability for negligent misrepresentation when they have failed to speak with care”.
The Court concluded that given “the absence of obligations arising from the speaker’s professional status” in the commercial context, “there must be some identifiable source of a special duty of care” in order to impose tort liability…”The existence of such a special relationship may give rise to an exceptional duty regarding commercial speech and justifiable reliance on such speech”… We determined, to be sure, that “[w]hether the nature and caliber of the relationship between the parties is such that the injured party’s reliance on a negligent misrepresentation is justified generally raises an issue of fact”…It is important to note that Kimmell is significantly distinguishable from the instant case, which involves an insurance agent-insured relationship and an alleged failure to speak. We therefore allude to Kimmell for its general relevance and disclaim any implication of a direct, precedential applicability in the insurance relationship context.
And the Court of Appeals concluded that:
Even assuming the general applicability of the “special relationship” theory in the customer-agent automobile insurance coverage setting, we conclude that the relationship between these parties was insufficiently established to warrant or justify this case surviving a defense summary judgment motion. As a matter of law, this record does not rise to the high level required to recognize the special relationship threshold that might superimpose on the defendants the initiatory advisement duty, beyond the ordinary placement of requested insurance responsibilities. Rather, the record in the instant case presents only the standard consumer-agent insurance placement relationship, albeit over an extended period of time. Plaintiffs’ plight does not warrant transforming his difficulty into a new, expanded tort opportunity for peripheral redress. The record does not support plaintiffs’ effort in this manner to shift to defendant insurance agent the customer’s personal responsibility for initiating, seeking and obtaining appropriate coverage, without something more than is presented here.
We note in this respect that Murphy never asked Kuhn to increase the liability limits on the Webster Golf Course commercial automobile policy. In fact, there is no indication that Murphy ever inquired or discussed with Kuhn any issues involving the liability limits of the automobile policy. Such lack of initiative or personal indifference cannot qualify as legally recognizable or justifiable reliance. Therefore, there was no evidence of reliance on the defendant agent’s expertise, as sharply distinguished from Kimmell…
In addition, the Court of Appeals admonished that:
Insurance agents or brokers are not personal financial counselors and risk managers, approaching guarantor status…Insureds are in a better position to know their personal assets and abilities to protect themselves more so than general insurance agents or brokers, unless the latter are informed and asked to advise and act …Furthermore, permitting insureds to add such parties to the liability chain might well open flood gates to even more complicated and undesirable litigation. Notably, in a different context, but with resonant relevance, it has been observed that “[u]nlike a recipient of the services of a doctor, attorney or architect…the recipient of the services of an insurance broker is not at a substantial disadvantage to question the actions of the provider of services”.
The “Citadel” at the Crossroads
As the Twentieth Century came to an end, the Court of Appeals still based its “privity” jurisprudence on a continuum that began with the Cardozo “quartet” of Glanzer, MacPherson, H.R. Moch and Ultrameres and continued through Ossining, Credit Alliance, European American Bank and Security Pacific.
The Credit Alliance “trifecta” of “awareness”, “reliance” and “linking conduct” formed the basis of determining the liability of accountants, attorneys and other professionals to third-parties not in direct privity.
The requirement of direct “privity” was being superseded by “a nexus” that “sufficiently approached” or was “sufficiently close” to privity. And the Court of Appeals continued to adjudicate the “privity”/”near privity” issues on a fact-specific case-by-case basis.
In Part 3 we will examine the “privity” jurisprudence of the Court of Appeals in the Twenty-First Century.
Victor M Metsch is a Senior Litigation/A.D.R Partner at Hartman & Craven LLP.
