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In Central Flying Service, Inc. v. StarNet Ins. Co., et al., 2015 WL 7854316 (E.D. Ark. 2015), StarNet Insurance Company (StarNet) prevailed on a motion to dismiss claims for breach of fiduciary duty and negligence in connection with its denial of coverage for the defense of wrongful death lawsuits arising out of an airplane crash.

Central Flying Service (CFS) was the owner and operator of a 1998 Beech Bonanza A36 aircraft (Aircraft) that crashed in Louisiana, resulting in four fatalities. CFS tendered the defense of three wrongful death suits to StarNet under its aircraft policy. StarNet denied coverage. CFS retained its own attorney to investigate and defend the wrongful death suits. CFS invited StarNet to participate in the settlement negotiations, but StarNet refused. CFS subsequently settled the suits.

CFS filed suit against StarNet, asserting claims for breach of contract, breach of fiduciary duty, bad faith and negligence. StarNet brought a motion to dismiss the claims for breach of fiduciary duty and negligence.

CFS argued that StarNet had breached its fiduciary duty by failing to defend and settle the claims against CFS and by failing to put CFS’ interests before its own. CFS relied on Southern Farm Bureau Cas. Ins. Co. v. Parker, 341 S.W. 3d 26 (Ark. 1960) for the proposition that an insurer owes a fiduciary duty to the insured. However, the court rejected the application of Parker on the grounds that the insurer’s fiduciary duty only arises when the insurer accepts coverage and takes control of the defense of the insured, thus requiring the insurer to put the insured’s interests before its own. In contrast, where the insurer denies coverage and the insured controls its own defense, there is no fiduciary duty. Therefore, because it had not assumed the defense and taken control of settlement negotiations, the court held that StarNet was not in a fiduciary relationship with CFS.

StarNet filed its motion to dismiss the negligence claim on the grounds that Arkansas does not recognize a tort for
nonperformance of a contract by an insurance carrier. CFS argued that StarNet committed misfeasance because it was negligent in its investigation of the claim. However, the court rejected the argument because the negligence claim was based on StarNet’s alleged failure to exercise its contractual duties, which was nonfeasance. Since contractual nonfeasance does not give rise to claims for negligence in tort under Arkansas law, the court dismissed the negligence claim against StarNet.

Tressler Comments

This case makes an important distinction between an insurer that defends and an insurer that denies coverage under Arkansas law. Here, StarNet disclaimed coverage, therefore, it did not have a fiduciary relationship with the insured. Further, CFS’ so-called negligence claim is premised on a failure to perform its alleged obligations under the insurance contract, which is simply nonfeasance. An insured cannot re-characterize a breach of contract claim as a negligence claim.