Chapter 12

• Jurisdiction: United States

Chapter 12

Loss Control Services

§ 12.01 Overview

Insurance companies routinely perform loss control services in conjunction with the sale and service of commercial insurance policies.¹ Often, the companies attempt to limit the use of these services solely to themselves, to help assess the risk and accurately price the subject they are contemplating to insure.² Other times, the services are provided for a fee or as an inducement to policyholders who purchase the insurance being offered.³

Loss control services might be very important for all types of businesses, as they can help them assess risks involved in their businesses. Irrespective of the circumstances surrounding the provision of the services, policyholders have used and should continue to consider using the information gathered from these services creatively in litigation. This chapter discusses current issues in the litigation of loss control services. In particular, policyholders or their employees, customers, or invitees may initiate litigation for negligent provision of loss control services to recover for losses not ordinarily covered by insurance.⁴ Additionally, to the extent insurance companies attempt to deny coverage based on the policyholder’s knowledge, such as with regard to construction liabilities, loss control information becomes relevant as a defense.⁵

§ 12.02 Offensive Use of Loss Control: Assertion of Claim

As stated above, loss control services help an insurance company and its policyholder understand and evaluate risks, and they can be used to limit or eliminate such risks through recommendations and loss mitigations activites.⁶ When a loss occurs that is either incompletely or not covered by insurance, a policyholder may institute a suit against its insurance company/loss control service provider for the negligent provision of loss control services. In this vein, insurance companies face suits asserted by their policyholders and suits asserted by third parties.

[1]—Restatement (Second) of Torts and the “Good Samaritan” Rule

The Restatement (Second) of Torts (“Restatement”) sets forth the general “Good Samaritan” rule,⁷ which courts recognize as applicable to both policyholder and third party claims for negligent provision of loss control services.⁸ The Restatement provision applicable to policyholder claims provides:

“One who undertakes, gratuitously or for consideration, to render services to another which he should recognize as necessary for the protection of the other’s person or things, is subject to liability to the other for physical harm resulting from his failure to exercise reasonable care to perform his undertaking, if:

(a) his failure to exercise reasonable care increases the risk of such harm, or

(b) the harm is suffered because of the other’s reliance upon the undertaking.” ⁹

A similarly worded Restatement provision sets forth the general rule that applies to claims by third parties:

“One who undertakes, gratuitously or for consideration, to render services to another which he should recognize as necessary for the protection of a third person or his things, is subject to liability to the third person for physical harm resulting from his failure to exercise reasonable care to protect his undertaking, if:

(a) his failure to exercise reasonable care increases the risk of such harm, or

(b) he has undertaken to perform a duty owed by the other to the third person, or

(c) the harm is suffered because of reliance of the other or the third person upon the undertaking. ¹⁰

Thus, the elements that a plaintiff needs to prove to prevail on a claim for negligent provision of loss control services are:

(1) a legal duty owed by defendant to plaintiff; ¹¹

(2) a breach of that duty; ¹²

(3) damages suffered by the plaintiff that are proximately caused by defendant’s breach of duty; ¹³ and

(4) special circumstances under the “Good Samaritan” rule. ¹⁴

In addition, a policyholder will need to be aware of any statutory immunity in the particular jurisdictions.¹⁵

[2]—Duty

[a]—Existence: Contract or Conduct

The first issue is whether the insurance company/loss control provider owes the policyholder a duty of care with respect to the provision of loss control services. The case law uniformly holds that the duty exists if:

(a) there is a contract that specifically requires the insurance company to undertake loss control services; or

(b) the insurance company actually performs loss control services.¹⁶

[b]—Effect of Disclaimer

Insurance policies or loss control service agreements often contain disclaimers stating that the insurance company has the right, but not the obligation, to perform inspections and other loss control services, and that such inspections and other loss control services, to the extent they are performed, are done for the sole benefit of the insurance company. For example, in one case, the insurance policy contained the following disclaimer:

“The [insurance] company shall be permitted but is not obligated to inspect the named insured’s property and operations at anytime. Neither the company’s right to make inspections nor the making thereof nor any report thereon shall constitute any undertaking on behalf of, or for this benefit of, the named insured or others, to determine or warrant that such property or operations are safe or healthful or are in compliance with any law, rule or regulation.”¹⁷

The interesting issue is whether such disclaimers eliminate the duty of care with respect to loss control services. Although courts have split on the issue, the majority has held that although the disclaimer is effective to eliminate a duty that arises by contract, it does not eliminate the duty created by conduct.¹⁸ One court aptly noted that with such a disclaimer, evidence “is insufficient to create a duty to inspect . . . [, but] a contractual waiver is ineffective to negate a duty to inspect which has arisen through an insurer’s conduct.”¹⁹ A few courts have held that the disclaimer effectively eliminates any duty, even one arising by conduct.²⁰

[3]—Breach of Duty

If a duty of care exists, the issue arises as to whether the duty has been breached by the insurance company/loss control provider. This issue can be divided into two subissues:

(a) the level of proof necessary to prove breach;²¹ and

(b) whether the failure to inspect amounts to a breach.²²

[a]—Proof

Whether a breach has occurred requires proof that the actor did something erroneously or failed to do something that he should have done. The Restatement (Second) of Torts (“Restatement”) provides that “[o]ne who undertakes . . . to render services to another . . . is subject to liability to the other for physical harm resulting from his failure to exercise reasonable care to perform his undertaking.”²³ Usually, the resolution of whether the duty of care was breached—i.e., whether the loss control provider failed “to exercise reasonable care” in the performance of “his undertaking”—is fact intensive, and no hard and fast rules can be discerned from the case law.²⁴

[b]—Misfeasance/Malfeasance versus Nonfeasance

The more interesting issue is whether the failure to inspect can amount to a breach of duty of care. In determining if the duty of care was breached the question arises as to whether “misfeasance,” “malfeasance,” or “nonfeasance” may be used to prove negligence. “Misfeasance,” “malfeasance,” and “nonfeasance” are ancient terms of art in the law.

• “Misfeasance” means “the improper performance of some act which a man may lawfully do.” ²⁵

• “Malfeasance” means “the doing of an act which a person ought not to do at all.” ²⁶

• “Nonfeasance” means “the omission of an act which a person ought to do.” ²⁷

Thus, “misfeasance” and “malfeasance” refer to negligence through affirmative acts, such as the alteration of a boiler that later explodes because of the actor’s negligent alterations.²⁸ “Nonfeasance,” on the other hand, is negligence by omission or failure to act, such as failing to discover a problem that reasonably should have been discovered in a boiler that later explodes.²⁹

The significance of the dichotomy between negligent acts and negligent omissions arises in loss control cases because the issue is whether a mere promise to perform loss control services or a representation that loss control services will be performed, without more, amounts to an “undertaking” leading to liability. If the mere promise or representation to perform loss control services is an undertaking, then nonfeasance or failure to fulfill that promise or representation can amount to a breach. On the other hand, if a mere promise or representation does not trigger the duty of care, a breach cannot occur until and unless the services are actually performed.³⁰

Case law is split on the issue of whether the mere promise or representation constitutes an “undertaking” under the Restatement.³¹ The modern view is that if the duty is based in contract, a loss control provider can be liable for failure to undertake the inspections, but if the duty depends on conduct, the undertaking that creates the duty is the actual performance of services, and the insurance company cannot be liable for negligently failing to inspect.³²

[4]—Damages and Proximate Causation

Once a breach of a duty of care has been established, the next determination is whether the injury was proximately caused by the breach of duty, i.e., whether there was a loss suffered by the policyholder, whether the loss would have occurred but for the loss control provider’s negligence, and whether the loss could have been avoided in the absence of negligence. As with cases determining whether there was a breach of the duty of care,³³ the determination of proximate causation and damages is fact intensive.³⁴

An important damages consideration concerns the appropriate theory of recovery—namely, does it resonate in contract or in tort? For example, if the policyholder or third party suffers a loss as a result of non-performance or poor...