The negligent premises liability inspection: Potential liability for the insurer?

People are always on the search for the “deep pocket” and insurers are very often the target of such searches. A common fixture of the underwriting process for many insurers is the inspection of an insured’s premises to adequately evaluate loss exposures.

In the action filed in connection with the fatal fire at The Station nightclub in West Warwick, R.I., the plaintiffs asserted that an insurer and two other companies should be found liable for negligently conducting an inspection of the premises. See Albert L. Gray, et al. v. Jeffrey Derderian, et al., 2005 WL 3369604, Nos. 04-312L, 03-483L, 20-7 Mealeys Litig. Rep. Ins. 8, No. 20 (D.R.I. 1995).

A large fire destroyed The Station nightclub on Feb. 20, 2003, after a rock band, Great White, ignited pyrotechnic devices on stage as they began to perform. The insulating foam lining in the walls and ceiling caught fire, causing the building to be engulfed by fire. More than 100 people were killed and more than 200 other people were injured as a result of the fire.

Approximately 250 plaintiffs filed an action naming over 50 parties as defendants. The plaintiffs sought damages from Essex Insurance Company, Multi-State Inspections and High Caliber inspections in connection with alleged negligent inspections of the subject premises. Specifically, the plaintiffs alleged that the inspections were performed in a negligent manner; those conducting the inspections should have recognized that the competent performance of the inspections was necessary for the protection of third persons; the insured relied upon the results and recommendations of the negligently performed inspections; and the negligence was a proximate cause of plaintiffs’ deaths and injuries. Essex, Multi-State and Caliber moved to dismiss the allegations against them for failing to state a cause of action.

In evaluating the negligent inspection claims, the court noted that in order to properly present a case for negligence under Rhode Island law, the plaintiffs needed to show: (1) the defendant owed them a legal duty to refrain from negligent activities; (2) the defendant breached that duty; (3) the breach proximately caused the plaintiffs’ injuries; and (4) actual loss or damage resulted. As part of its review to determine if a legal duty existed, the Court found that the insurer had clearly performed the inspection for its own benefit to evaluate the risks, determine the amount of insurance to issue and what premiums to charge. Finding that the insurer could not have anticipated that its inspection would create a risk of harm toward any member of the general public, including unidentifiable customers at the nightclub, the court found the insurer had neither a duty to inspect the premises or to conduct the inspection in any particular manner.

Further, the court held that a fundamental aspect of the insurance system is agreement between the parties on the amount an insurer will pay if there is a loss. The judge stated that the insurer should only be required to pay the amount previously agreed to as the insured amount.

Motion to dismiss

The Court also rejected the plaintiffs’ two other proffered reasons as to why the court should deny the insurer’s attempt to have the plaintiffs’ complaint dismissed.

First, the judge rejected the applicability of the Restatement (Second) of Torts Section 324A. The Court reasoned that the underlying premise of Section 324A was inapplicable, as the insurer did not undertake a service for any other person or entity. Instead, the insurer undertook the inspections for its own benefit and to promote its business interests.

Second, the court rejected the concept that the insurer should be subject to liability because a Rhode Island Statute cited by the plaintiffs failed to specifically identify liability insurers as being immune from potential liability for conducting inadequate inspections. Having already determined that the insurer chose to inspect the subject premises for its own purposes, the court determined that it would be consistent with this underlying purpose to grant the insurer immunity from liability in the circumstance. Thus, the court granted the defendants’ motion to dismiss.

This case represents an important concept that claimants seem to constantly challenge. An insurer’s liability for individuals unknown to it (i.e. not its insured) is limited to the amount of insurance it provides to its insured. While this case stands for that proposition, plaintiffs will continue to seek to expand the nature and amount of liability in the pursuit of the “deep pocket.”

Andrew S. Boris is a partner in the Chicago office of Tressler Soderstrom Maloney & Priess, LLP. He can be reached at: aboris@tsmp.com.

Topics Carriers