Lawyers Title Insurance Corporation v. Rex Title Corporation

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 LAWYERS TITLE INSURANCE
CORPORATION,
Plaintiff-Appellant,
No. 01-2011 v.
REX TITLE CORPORATION,
Defendant-Appellee. 
Appeal from the United States District Court
for the District of Maryland, at Greenbelt.
William G. Connelly, Magistrate Judge.
(CA-99-3517-AW)
Argued: January 23, 2002
Decided: February 26, 2002
Before WIDENER, WILLIAMS, and MOTZ, Circuit Judges.
Reversed and remanded by published opinion. Judge Motz wrote the
opinion, in which Judge Widener and Judge Williams joined.
COUNSEL
ARGUED: Griffin Vann Canada, Jr., MILES & STOCKBRIDGE,
P.C., Rockville, Maryland, for Appellant. Larry I. Gramovot, Tampa,
Florida, for Appellee. ON BRIEF: Irwin E. Weiss, Baltimore, Mary-
land, for Appellee.

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OPINION
DIANA GRIBBON MOTZ, Circuit Judge:
Lawyers Title Insurance Corporation, a provider of title insurance,
initiated this diversity action for negligence against its agent, Rex
Title Corporation. The magistrate judge granted summary judgment
to Rex, reasoning that Maryland law does not permit an insurance
company that has entered into an agency contract with an insurance
agent to assert a claim of negligence against the agent. Because Mary-
land recognizes an independent duty of care owed by an insurance
agent to its principal, the breach of which gives rise to a cause of
action for negligence, we must reverse and remand for further pro-
ceedings.
I.
A written agency agreement governed the relationship between
Lawyers and Rex, its agent. For purposes of summary judgment and
this appeal, the parties agree that Rex violated that agreement by issu-
ing a title insurance policy without obtaining the release of a lien on
the covered title. They further agree for present purposes that Rex had
issued a letter on behalf of Lawyers, requiring release of all liens
before the policy issued, and that Rex’s issuance of the policy also
failed to comply with the letter’s express terms.
After these errors caused Lawyers to make a substantial payment
to the insured under the policy, Lawyers filed this action against Rex.
Initially, Lawyers alleged a breach of contract claim as well as a tort
claim against Rex. Later, however, Lawyers chose to dismiss its con-
tract claim and pursue only a negligence claim. The parties agree that
Maryland law governs that claim.
The magistrate judge granted summary judgment to Rex, holding
that because "negligent breach of contract" is "a cause of action which
is not recognized in Maryland," Lawyers could not pursue a negli-
gence action against Rex. This appeal followed.
II.
In general, the magistrate judge was correct — Maryland does not
recognize a cause of action for negligence arising solely from a con-
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tractual relationship between two parties. See, e.g., Heckrotte v. Rid-
dle, 168 A.2d 879, 882 (Md. 1961) ("The mere negligent breach of
a contract, absent a duty or obligation imposed by law independent
of that arising out of the contract itself, is not enough to sustain an
action sounding in tort.").
The state has approved a few narrow exceptions to this general
rule, one of which permits negligence claims arising from a contrac-
tual relationship in circumstances involving a vulnerable party. See
Jacques v. First Nat’l Bank of Md., 515 A.2d 756 (Md. 1986) (impos-
ing a tort duty on a bank processing a loan application for a vulnera-
ble customer). That exception has not been available in litigation
between "‘[e]qually sophisticated parties.’" Martin Marietta Corp. v.
Int’l Telecomms. Satellite Org., 991 F.2d 94, 98 (4th Cir. 1993) (cita-
tion omitted); accord Silver Hill Station Ltd. P’ship v. HSA/Wexford
Bancgroup, LLC, 158 F. Supp. 2d 631, 636-41 (D. Md. 2001); G &
M Oil Co. v. Glenfed Fin. Corp., 782 F. Supp. 1078, 1084 (D. Md.
1989). Accordingly, it certainly does not apply here.
That the Jacques exception to the general rule does not apply, how-
ever, does not mean, as Lawyers suggests, that Rex’s negligence
claim fails. Rather, the general rule itself only bars a negligence
action between contracting parties that rests solely on the contract. A
contractual obligation — in and of itself — generally does not create
a tort duty. But when an independent duty accompanies a contractual
obligation, that independent duty may give rise to a tort action. See
Jones v. Hyatt Ins. Agency, Inc., 741 A.2d 1099, 1107 (Md. 1999).
"[W]hen a breach of contract is also a violation of a duty imposed by
law . . . the injured party has a choice of remedies." Heckrotte, 168
A.2d at 882.
In the insurance context, Maryland courts have indicated for some
time that an insurance agent owes precisely such an independent duty
to his principal, the insurance company, and so the insurer can sue the
agent not only for breach of contract, but also negligent breach of that
independent duty. See Popham v. State Farm Mut. Ins. Co., 634 A.2d
28, 36 (Md. 1993) (stating in dictum that an insurance agent "may
become liable in fact to the principal who suffers a loss" because of
the agent’s "failure to use" the proper care) (internal quotation marks
omitted); Bogley v. Middleton Tavern, Inc., 421 A.2d 571, 573-74
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(Md. 1980) (permitting, without analysis, a negligence claim by an
insurer against an individual agent).1 Moreover, recently in Insurance
Co. of North America v. Miller, 765 A.2d 587 (Md. 2001), the Court
of Appeals of Maryland expressly so held.
In Miller, the Insurance Company of North America ("INA") con-
tracted with J.L. Hickman & Company, a Texas insurance brokerage
that employed William Miller, an insurance agent licensed in Mary-
land. Pursuant to the contract, Hickman agreed to act as INA’s agent.
Id. at 589. After Hickman went out of business and INA discovered
that Hickman and Miller had been temporarily retaining rather than
immediately forwarding to INA certain insurance premiums, INA
sued Miller personally for negligence. Id. at 589-90, 592-93.
Maryland’s highest court ruled that such a claim was viable, and
that Miller, as INA’s agent, owed a duty to INA and could be sued
for negligent performance of that duty. Id. at 601. The court reasoned
that Miller’s status as INA’s agent was established by the agency con-
tract between Hickman and INA, Miller’s admission that he was an
agent of INA, the statutory definition of an insurance "agent,"2 state
regulations governing the duties of insurance agents, and common-
law principles governing an agent’s duty to his or her principal. Id.
1Mesmer v. Maryland Automobile Insurance Fund, 725 A.2d 1053,
1058-60 (Md. 1999), on which the magistrate judge relied, held that an
insured could pursue only a contract claim (not a tort claim) against an
insurer for failure to defend. Mesmer did not involve a claim by an
insurer against its agent or otherwise touch on agency principles.
2We note that in April 2001, the Maryland General Assembly amended
the insurance code in accordance with federal requirements designed to
encourage the states to adopt uniform national standards. See 15
U.S.C.A. § 6751(a) (West Supp. 2001). The state legislature deleted the
term "agent" from the insurance code, effective July 2001. 2001 Md.
Laws ch. 731, §§ 1, 2, & 9, deleting Md. Code Ann., Ins. § 1-101(c)
(1997) (defining "agent"). Eliminating the previous legal category of an
"agent," the legislature created and defined an "insurance producer."
Compare Md. Code Ann., Ins. § 1-101(c) (1997) (defining "agent"), with
Md. Code Ann., Ins. § 1-101(u) (Supp. 2001) (defining "insurance pro-
ducer"). See also 2001 Md. Laws ch. 731, §§ 1, 4-9. Because the prior
statute governed Rex’s actions, we need not address the question of the
duty of care of an "insurance producer."
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at 594-600, 601. The Miller court permitted INA to pursue its negli-
gence claim because Miller "was under a duty, as an agent and fidu-
ciary, to act in INA’s interest," under principles "specific to insurance
agents in a negligence claim" and because of "a special relationship
that, itself, imposed such a duty." Id. at 600-01.
To be sure, in Miller, the agent was an individual, not a corpora-
tion, and the alleged negligence was both deliberate and self-serving.
But the Miller court did not limit its rationale to individual (rather
than corporate) agents or to cases involving knowing and self-serving
mishandling of funds. Rather, the Court of Appeals stated the princi-
ple broadly: "specific to insurance agents in a negligence claim, . . .
‘an insurance agent must exercise reasonable care and skill in per-
forming his duties [and] . . . may become liable to those, including
his principal, who are caused a loss by his failure to use standard
care.’" Id. at 600, quoting Bogley, 421 A.2d at 573. Moreover, given
the well-established nature of this principle, we see no reason to
believe that the Miller court intended its broad statements to apply
narrowly. See, e.g., 4 Lee R. Russ, Couch on Insurance, § 54:6 (3d
ed. 2000) ("An agent who negligently induces the insurer to issue a
policy in consequence of which the insurer sustains a loss is himself
or herself liable to the insurer for such wrongful conduct."). Miller’s
approval of a negligence claim by an insurer against its agent there-
fore governs the case at bar.
Given Miller, the magistrate judge erred in ruling that Lawyers
could not pursue a negligence claim against Rex. Of course, we
address only the existence of a cause of action sounding in negligence
and governed by general principles of agency law, and we leave other
necessary questions, including whether Rex breached its duty to Law-
yers, to be determined on remand.
III.
For the reasons stated above, the grant of summary judgment to
Rex is reversed, and the case is remanded for further proceedings in
accordance with this opinion.
REVERSED AND REMANDED
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