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IN THE UNITED STATES DISTRICT COURT FOR THE

NORTHERN DISTRICT OF FLORIDA

PENSACOLA DIVISION

PAYROLL MANAGEMENT

INC., et al.

Plaintiffs,

v. CASE NO.: 3:10cv471/MCR/CJK

LEXINGTON INSURANCE

COMPANY,

Defendant.

O R D E R

Before the court for resolution is defendant’s EmergencyMotion for Protective

Order (doc. 9), filed on April 8, 2011, and Plaintiff’s Response (doc. 12) filed on

April12, 2011. Plaintiffs Payroll Management, Inc. and Payroll Management Inc. of

Delaware (PMI) are employee leasing companies conducting businessin Fort Walton

Beach, Florida. Plaintiff Yoohoo Capital, LLC (Yoohoo) is a Georgia company that

has recently purchased PMI. Defendant Lexington Insurance Company (Lexington)

is an insurance company that issued a “PEO Plus” Employment Practices Liability

Insurance policy, no. 020432538 to PMI for coverage during the policy period of

January 28, 2010 through January 26, 2011.

The Blue Cross/Blue Shield Matter 

 As set out in the complaint (doc. 1-1), PMI had, at an earlier date, contracted

with Blue Cross/Blue Shield of Florida for health insurance for PMI’s clients. Lisa

Burrows, the former owner of PMI, had involvement in the transaction with Blue
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Cross/Blue Shield, and in September 2009, Ms. Burrows stopped making payments

ofregularly scheduled premiums toBlueCross/Blue Shield. BlueCross/Blue Shield,

having received no payments for several months, cancelled its policy as of January

31, 2010. Blue Cross/Blue Shield then filed a state court action against PMI for the

unpaid premiums. Once served with the Blue Cross/Blue Shield law suit, PMI

informed Lexington that Lexington had coverage for Ms. Burrows’ actions under the

Lexington policy that had been issued to Payroll. Payroll asserts that coverage is

due under Coverage B of Lexington’s policy entitled “Professional/Employment

Practices Liability.” The coverage language upon which Payroll relies reads:

“We will pay on behalf of the Insured all sums which the Insured shall

become legally obligated to pay as Loss Amounts resulting from any

Claim first made against an Insured and reported to Us in writing during

the Policy Period (or any applicable extended reporting period) for any

Wrongful Professional Act, or Wrongful Employment Practice Act,

which takes place anywhere and on or after the applicable retroactive

date as Indicated in the Declarations next to the type of Wrongful Act

involved and before the end of the Policy Period.”

Also, and during the pendency of the Blue Cross/Blue Shield lawsuit,

prospective buyers were considering the purchase of PMI. In the course of due

diligence, plaintiff Yoohoo, a prospective purchaser,wanted assurance that Lexington

would provide insurance coverage with regard to the Blue Cross/Blue Shield law suit

and, therefore, requested that PMI obtain some sort of assurance from Lexington as

to that matter. 

PMI’s complaint alleges with some specificity that one of its employees

contacted Stephen D. Burwell, an employee of Lexington, and explained the need for

reassurance to a prospective purchaser. According to the allegations, Mr. Burwell

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was informed of an upcoming closing date, and also informed that Yoohoo would be

the purchaser. PMI and Yoohoo allege that Mr. Burwell stated in both an e-mail and

a telephone call that “there appeared to be coverage under the policy.” The complaint

further alleges that Mr. Burwell worked with PMI in order to identify counsel who

would represent PMI in the Blue Cross/Blue Shield lawsuit. One month after Mr.

Burwell’s alleged representations, however, Lexington denied coverage for PMI’s

claim under the policy.

This Action

PMI has now brought a claim for breach of contract and declaratory action

against Lexington, alleging that coverage existsfor the Blue Cross/Blue Shield claim

and that the court should decree such coverage and also decree that Lexington has

violated the contract of insurance. Yoohoo, also as a plaintiff in this matter, has

brought a claim against Lexington for negligent misrepresentation, alleging that it

reasonably relied upon the representations made by Lexington’s agent, Burwell, to

the effect that the Blue Cross/Blue Shield claim would be covered under the

Lexington policy.

The Present Discovery Dispute. 

Lexington has now filed its Emergency Motion for Protective Order (doc. 9). 

Lexington represents that the plaintiffs have scheduled the depositions of Stephen

Burwell and, pursuant to Rule 30(b)(6), Fed. R. Civ. P., a corporate representative of

Lexington. Notices of deposition asto both Burwell and the corporate representative

set forth the following areas of inquiry:

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1. Lexington Insurance Company’s usual insurance coverage

practices regarding Professional Employment Organizations (PEO’s).

2. Lexington Insurance Company’s usual insurance coverage

practices regarding their Directors and Officers Insurance (D&O)

policies.

3. Lexington Insurance Company’s usual insurance coverage

practices regarding Employment Practices Liability Insurance (EPLI)

policies.

4. Payroll Management Inc.’s specific insurance coverage with

Lexington.

Lexington now asks the court to issue a protective order prohibiting entirely

the deposition of a 30(b)(6) representative, and limiting the deposition of Burwell to

factual issues regarding the negligent misrepresentation claim. According to

Lexington, any other testimony would not be relevant to the subject matter of the

pending action and not reasonably calculated to lead to the discovery of admissible

evidence. Lexington argues that, under Florida law, a coverage dispute such as that

now before the court, is resolved entirely upon the court’s construction of the policy

language. Accordingly, says Lexington, no testimony that could be provided by its

corporate representative could be discoverable. As to Mr. Burwell, Lexington agrees

that plaintiffs are entitled to take his deposition regarding the conversations he had

with Payroll, but asserts that the court should limit the Burwell deposition to factual

issues related to the claim of misrepresentation. 

Plaintiffs have responded noting that the scope of discovery would be limited

were this strictly a declaratory judgment action seeking to establish coverage under

the Lexington policy. Plaintiffs argue, however, that the inclusion of a negligent

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misrepresentation claim, by which Yoohoo seeks damagesfor its reasonable reliance,

expands the scope of discovery beyond that which would ordinarily obtain in a

declaratory judgment action for insurance coverage. 

Finally, and before going into analysis of the issue, the court notes the

following factual allegations made by plaintiffs in their complaint (doc. 1-1):

An employee of the insured, D.C. Mickle, contacted Stephen D.

Burwell, an employee of insurer, and explained that prospective

purchasers of Payroll Management, inc., needed reassurance that there

would be insurance coverage from insurer regarding the BCBS lawsuit

in order to proceed with the prospective sale. Furthermore, Mr. Burwell

wasinformed of the pending closing date ofJune 15, 2010 regarding the

sale of the insured to Yoohoo.

On or about June 15, 2010, Mr. Burwell stated in a phone conversation

with DC Mickle, that by the terms of the policy there would be coverage

for the BCBS lawsuit.

In a follow-up e-mail dated June 15, 2010, a copy of which is attached

hereto as PLAINTIFFS’ EXHIBIT “C”, Stephen D. Burwell indicated

that there appeared to be coverage under the Policy.

Mr. Burwell then contacted the insured regarding selection of counsel

to represent the insured in the BCBS lawsuit.

The insured asked that a Tallahassee law firm represent them.

Mr. Burwell called back a few days later and stated that the insured’s

first choice of counsel was not on the insurer’s list of approved counsel. 

The insured responded that anyone on this list was fine.

The statement made by insurer’s agent, Stephen D. Burwell, concerning

insurance coverage for the BCBS lawsuit on or about June 15, 2010 was

false.

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Insurer did not exercise reasonable ordinary care in representing that

there would be insurance coverage for the BCBS lawsuit, since the

insurer should have known that this representation was false.

Insurer was aware of the prospective purchase of Payroll Management,

Inc., and that DC Mickle would communicate Stephen D. Burwell’s

representation as to coverage to the prospective purchasers, including

Yoohoo.

Insurer intended that the prospective purchasers would rely on the

representation communicated by Stephen D. Burwell to DC Mickle via

the phone conversation and e-mail of June 15, 2010.

Analysis.

Both sides rely upon Diamond State Insurance Company v. His House, Inc.,

2011 WL 146837 (S.D. Fla.) In Diamond State, a thoroughly done analysis by

Magistrate Judge Simonton in the Southern District of Florida, the court held that in

a declaratory judgment action over insurance coverage the insured would not be

allowed to conduct a Rule 30(b)(6) deposition inquiring into the following matters:

(1) policies at issue in this clause; (2) the issuance and procurement of

the policies; including Diamond State’s underwriting considerations in

issuing the policies and setting the premiums; (3) Diamond State’s

interpretation of the policies, which interpretations their declaratory

action is based on; (4) His House’s application for the insurance policies

and all information disclosed therein and in the overall application

process, including the potential liability for the claim giving rise to this

action; and (5) Diamond state’s handling of His House’s claim and

ultimate denial thereof.

Digesting Florida law concerning insurance coverage disputes, the Diamond

State court explained why the extrinsic evidence sought from a corporate

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representative could not be relevant in a pure coverage dispute based upon the

language of the policy at hand:

“First, if the court determines that the language of the professional

liability policy and the commercial general liability policy are

unambiguous, then the court will resolve the dispute about coverage

based upon the plain language of those policies without resort to

extrinsic language, including any interpretation byDiamond’s corporate

representative regarding the language or terms of the policies. Second,

in the event that the court determines the policy language is ambiguous,

defendants will automatically prevail in the instant declaratory action.”

2011 WL 146837, *4.

PMI acknowledges the rule set out in Diamond State, but urges the court’s

attention to additional language in that decision:

In addition, His House correctly notes that there has been no bad-faith

claim raised in the instant action, nor are there allegations related to

misrepresentation or fraud either of which might well necessitate

deposing Diamond’s corporate representative. Rather, in this action the

only issue is whether there is coverage under the relevant policies or if,

based upon the plain language of those policies, coverage, in the form

of defending or indemnifying the insured, exists.

2011 WL 146837, *4.

The tort of negligent misrepresentation is well-recognized in Florida. See

Gilchrist Timber Co. v. ITT Rayonier, Inc., 696 So. 2d 334 (Fla. 1997). Under

Florida law, a party who transmits false information which that party did not know

was false, may be held liable for negligent misrepresentation when the recipient of

the information relied on the information’s truthfulness. Id. In confirming that

Florida recognizesthe tort of negligent misrepresentation, the Florida Supreme Court

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found guidance in §552, Restatement (Second) of Torts:

“(1) one who, in the course of his business, professional or employment,

or in any other transaction in which he has a pecuniary interest, supplies

false information for the guidance of others in their business

transactions, is subject to liability for pecuniary loss caused to them by

their justifiable reliance upon the information, if he fails to exercise

reasonable care or competence in obtaining or communicating the

information.”

Id.

The elements of the tort are well-known:

“to establish negligent misrepresentation, a plaintiff must establish (1)

misrepresentation of a material fact; (2) the representor knew of the

misrepresentation, made the misrepresentation without knowledge asto

its truth or falsity, or made the representation under circumstances in

which he ought to have known of its falsity; (3) the representor intended

that the representation induce another to act on it; and (4) injury

resulting to the party acting in good justifiable reliance.” 

Birdsong v. Ehlke, 2010 WL 5141774 (N.D.Fla. 2010).

The parties, referring to Joint Report of Parties’ Planning meeting (doc. 6),

agree that two issues remain for determination in this case: 

“Principle factual issues:

Whether Lexington made a misrepresentation regarding coverage upon

which Yoohoo reasonably relied.

Principal legal issues:

Whether the Lexington policy provides coverage for the Blue Cross

Blue Shield lawsuit filed against Payroll Management, Inc.”

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PMI, in its Response (doc. 12) to the Emergency Motion for Protective Order,

argues that discovery will be necessary to learn why Lexington took steps to lead PMI

to believe for several months that coverage existed. PMI urges that it must be

allowed, in order to make these determinations, to conduct full and complete

discovery of the facts surrounding the alleged misrepresentation of Lexington. PMI

also argues that even though this case does not involve a Directors and Officers

(D&O) policy, it should be allowed discovery into Lexington’s coverage practices

with regard to D&O policies because at a previous deposition Lexington made the

claim that if PMI had secured D&O coverage rather than Employment Practices

Liability Coverage, the Blue Cross/Blue Shield claim would have been covered . 

(doc. 12, §9).

Given the elements of negligent misrepresentation in Florida, and particularly

the requirement that plaintiff prove that the representor knew ofthe misrepresentation

or made the representation under circumstancesin which the representor should have

known of its falsity, I conclude that the allowable discovery in this matter is closer

to that characterized by plaintiffs than it is by Lexington. In particular, plaintiffs are

entitled to discover Burwell’s state of knowledge, and any communications he may

have had with others at Lexington in connection with the representations he is said

to have made to PMI. Burwell’s intent and knowledge (or lack of knowledge), as

well as the steps he made to determine whether coverage existed, are relevant to the

negligent misrepresentation claim. Accordingly, these considerations will form the

parameters of the allowed inquiry. 

The court does not agree with PMI’s’s rather cursory argument that it may

inquire into Lexington’s D&O coverage because a D&O policy may have provided

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coverage for the Blue Cross/Blue Shield suit. Accordingly, I will not allow inquiry

into D&O coverage. As an adjunct to thisruling, however, and although the question

is not before me, I would caution that Lexington would now appear to be estopped

from raising a raise a claim that plaintiffs were comparatively negligent in their

failure to purchase a D&O policy. 

Accordingly, it is

ORDERED AND ADJUDGED as follows:

1. Defendant’s Emergency Motion for Protective Order is DENIED IN

PART and GRANTED IN PART;

2. Solely within the parameters of Mr. Burwell’s actions, Lexington will

be required to produce a 30(b)(6) deponent concerning item 4, Payroll Management

Inc.’s specific insurance coverage with Lexington;

3. With regard to items 1 and 3 of the areas of inquiry, Plaintiffs will be

allowed to inquire into Lexington Insurance Company’s insurance coverage practices

regarding professional employment organizations and employer/employment

practices liability insurance, but only with regard to information known by or

conveyed to Stephen Burwell during the time he is alleged to have made the

representations germane to this case. The company’s general practices, if not

connected to Mr. Burwell’s representations, will not be an appropriate subject for

discovery in this case;

4. This order shall not be construed to allow discovery into matters that

occurred temporally after the last communication alleged by PMI to have occurred

between Mr. Burrell and representatives of PMI, nor into Lexington’s decision to

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deny coverage, as such inquiries would not be relevant to the misrepresentation

alleged to have injured Yoohoo.

5. PMI will not be allowed discovery concerning Lexington’s practices

regarding Directors and Officers’ insurance policies;

6. Lexington must designate a 30(b)(6) representative with knowledge

concerning the inquiries that will be allowed under this order;

7. PMI may inquire of Mr. Burwell, concerning his knowledge as to the

matters deemed discoverable by this order.

DONE AND ORDERED this 13 day of April, 2011.

th

s/ Charles J. Kahn, Jr.

CHARLES J. KAHN, JR.

UNITEDSTATESMAGISTRATEJUDGE

Case No: 3:10cv471/MCR/MD