The Concept of a Negligent Breach of Contract Can Be a Source of Confusion

The law makes a distinction between contracts and torts, or civil wrongs. Contract actions are created to enforce the intentions of the parties to the agreement, while tort law is primarily designed to vindicate "social policy".

There is also a difference in the measure of damages for breach of contract actions and actions in tort like a lawsuit seeking damages for negligence. Contract damages are generally limited to those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by them at that time; consequential damages beyond the expectation of the parties are not recoverable. By contrast, tort damages allow for compensation for all injuries flowing and as a direct result of the negligence or other tort. Consequently tort damages are far broader and more extensive than contract damages.

Because tort damages exceed what is allowed under a breach of contract, we often see parties filing lawsuits seeking damages for a negligent breach of contract. The concept of a negligent performance or negligent breach of contract is not new.

In a case called Stop Loss Insurance Brokers, Inc. v. Brown & Toland Medical Group (2006) 143 Cal. App.4th 1036, Stop Loss, an insurance broker, issued an insurance policy to the Regents of the University of California that required Stop Loss to work with the Regents to provide information on a monthly basis of any actual or potential claims and then send that claim information to the insurance company.

Stop Loss procured expressly precluded coverage of any preexisting claim not disclosed by Regents. The Regents signed a binder that purported to disclose all reportable claims, but unbeknownst to them the binder did not include a disclosure of the claim made by a plan member. When the patient had his claim rejected, Regents sued Stop Loss for breach of contract and negligence. The complaint alleged that Stop Loss breached its contractual agreement with Regents and also breached its professional duty of care as the insurance broker, causing Regents to suffer an economic loss of over $1 million in unreimbursed expenses for the claim. By adding a cause of action for professional negligence in performing the contractual obligations, Regents sought to increase the amount of damages it could recover.

Stop Loss recognized that if every negligent breach of a contract gives rise to tort damages the limitation would be meaningless, as would the statutory distinction between tort and contract remedies.

That does not mean that one can never recover tort damages that arise from a contractual relationship. The courts have held that contractual obligation may create a legal duty and the breach of that duty may support an action in tort. Conduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law. An omission to perform a contract obligation is never a tort, unless that omission is also an omission of a legal duty.

Tort damages have been permitted in contract cases where a breach of duty directly causes physical injury; for breach of the covenant of good faith and fair dealing in insurance contracts; for wrongful discharge in violation of fundamental public policy; or where the contract was fraudulently induced. In each of these cases, the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to harm.

When confronted with issues involving breach of contract it is wise to see what type of damages are alleged. If the party is seeking emotional distress damages you can challenge those damages.

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