Fraud claim not barred by source of duty rule

The source of duty rule does not bar plaintiff’s fraud in the inducement claim against defendants arising from business insurance coverage. Plaintiff specifically pleaded that this occurred when plaintiff renewed its insurance coverage. The trial court erred by looking to the parties’ prior insurance contract to determine when the statute of limitations began to run.

The circuit court’s order sustaining defendants’ demurrers, and a plea in bar, is reversed. The matter is remanded for further proceedings.

Facts

The parties in this case are plaintiff S. Wallace Edwards and Sons and defendants, Selective Way, Ins. Co., Manry-Rawls (Manry) and Middle Peninsula Ins. Agency (MidPen).

In 2012, Edwards contracted with MidPen for business insurance coverage. In 2015, the parties contracted again for business insurance for 2015-16. In May 2016, Edwards filed a multi-count complaint against defendants arising from alleged inadequacies in the insurance coverage for its various businesses.

At issue are Count VII, a constructive fraud claim against Selective, Count VIII, breach of oral contract against MidPen, and Counts XII and XIII, fraud and constructive fraud against Manry and Selective.

Selective and Manry demurred on the basis that Counts VII, XII and XII were barred by the economic loss doctrine because these were tort claims based on alleged contractual duties. Edwards replied that the tort claims were independent of any contractual duties. And, Edwards claimed that the alleged fraud induced it to contract with Manry and Selective.

The trial court sustained the demurrers, ruling the claims were contractual and “governed by the Source of Duty Rule as an extension of the Economic Loss Doctrine.”

MidPen answered Edwards’ complaint, admitted there was an oral contract in 2015 to renew insurance coverage “subject to any changes [Edwards] requested.”

In response to MidPen’s interrogatories, Edwards provided the history of the parties’ contractual relations, focusing primarily on the original 2012 contract while mentioning an inquiry on Feb. 5, 2015 about the need for additional cold storage coverage and MidPen’s recommendation to add spoilage coverage.

MidPen then moved for summary judgment, arguing that Edwards had abandoned any claims regarding the 2015 contract, and that allowing an amended complaint to sue on the 2012 contract was futile because the statute of limitations had expired. In the alternative, MidPen filed a plea in bar, “expressly contingent” on the circuit court allowing Edwards to amend its complaint. Edwards noted that Mid Pen admitted the parties had entered an oral contract in 2015.

The circuit court granted the plea in bar. The court said that while Edwards was resting its claims on the 2015 renewal, it also complained of inadequate coverage beginning with the 2012 contract. The court ruled that the statute of limitations began to run then, granted the plea in bar and dismissed the case.

Demurrers

“Under the source of duty rule, if the duty that was allegedly violated arises out of a contract, the action sounds in contract; if the duty arises irrespective of a contract, i.e., at common law, the action sounds in tort. … The source of duty rule, however, has no application to a claim of fraudulent inducement of a contract. …

“To survive a demurrer, Edwards was required to plead that Manry and Selective made false statements of material fact for the purpose of procuring the contract, that it relied on those statements and was induced by the statements to enter into the contract. …

“With regard to both Selective and Manry, Edwards specifically alleged that they had ‘falsely represented the material fact of the amount of property and business income necessary for Edwards.’ Edwards further asserted that Selective and Manry intended for it to ‘rely on these false representations,’ which it did, to its detriment.

“Therefore, Edwards’ complaint contains sufficient allegations regarding each required element of its claim.”

Plea in bar

“Edwards next argues that the circuit court erred in granting MidPen’s plea in bar on its breach of oral contract claim. … “[T]he circuit court ruled that the statute of limitations began to run when MidPen delivered the first deficient policy to Edwards in 2012. …

“In its complaint, Edwards specifically alleged that, in 2015, the parties formed a contract for the limited purpose of renewing Edwards’ insurance policy with Selective for 2015-16. The 2015 contract was admittedly similar to the previous contracts between the parties[.] …

“However, the complaint specifically alleges that the 2015 contract was distinct from the previous contracts between the parties as the 2015 contract was the only contract between the parties whereby Edwards sought, and MidPen agreed to procure, insurance coverage for 2015-16. …

“Where parties have a continuous contractual relationship made up of separate and distinct contracts dealing with the same subject matter, it does not change the fact that the specific date the parties entered into the contract at issue governs the running of the statute of limitations, not the date that the relationship began. …

“[B]ased on Edwards’ allegations that the parties had a contractual relationship made up of separate and distinct contracts and that it was the 2015 contract that was breached, the circuit court’s focus on the deficiencies in the 2012 contract was misplaced.”

Reversed.

S. Wallace Edwards and Sons v. Selective Way Ins. Co., et al. Record No. 188902 (Order) Nov. 14, 2019 (Surry Cir. Ct.). Walter Joseph Andrews, Michael Scott Levine, Stuart Alan Raphael, David Mitchell Parker, Robert Martin Tata for Appellant, Calvin Wooding Fowler Jr., Harold Edward Johnson, Erica Brittany Zhang, Jeffrey Hugh Gray, Daniel Tennyson Berger, Douglas Michael Palais, Ashley Goin Moss for Appellee. VLW 019-6-084, 7 pp.