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Pennsylvania Supreme Court Formally Adopts “Gist of the Action” Doctrine

On January 6, 2015 by Schnader in Finance

By Stephen J. Shapiro

Pennsylvania’s “gist of the action” doctrine prohibits plaintiffs from pursuing tort claims for what are, in actuality, breach of contract claims.  A variety of defendants, including those in the financial services industry, regularly have invoked the doctrine to seek dismissal of contract-based claims that are “dressed up” as tort claims in an effort to pursue damages – such as consequential and punitive damages – that might not be available under a breach of contract claim.

Although the Pennsylvania Supreme Court had never formally recognized the doctrine, the intermediate appellate courts in Pennsylvania, as well as the Third Circuit, had applied the doctrine for years, predicting that the Supreme Court would adopt the doctrine if given the opportunity.  In the recent case Bruno v. Erie Insurance Company, the Pennsylvania Supreme Court confirmed the accuracy of those predictions.

In Bruno, the plaintiff homeowners purchased an insurance policy from the defendant insurer that, among other things, insured the homeowners against physical loss to the property caused by mold.  While renovating their home, the homeowners discovered mold growing on their basement walls.  Agents of the insurer told the homeowners that the mold was harmless and that they should continue with the renovations, which they did.  When the homeowners began to suffer from severe respiratory ailments, they had the mold tested and learned that it was toxic.  One of the homeowners later developed cancer, which her physician believed was caused by the toxic mold.  Unable to remove the mold, the homeowners eventually were forced to demolish the house.

The homeowners sued the insurance company for, among other causes of action, negligence, alleging that the insurer negligently misled them about the health risks posed by the mold.  The insurer filed preliminary objections to the negligence claim, arguing that it was barred by the gist of the action doctrine.  The trial court sustained the preliminary objections and, on an interlocutory appeal, the Superior Court affirmed the dismissal of the negligence claim, holding that “the gravamen of [the homeowners’] action . . . sounds in contract – not in tort.”

On appeal, the Pennsylvania Supreme Court formally adopted the gist of the action doctrine.  The Court explained that a claim can be categorized as a contract claim or a tort claim as follows:

“If the facts of a particular claim establish that the duty breached is one created by the parties by the terms of their contract – i.e., a specific promise to do something that a party would not ordinarily have been obligated to do but for the existence of the contract – then the claim is to be viewed as one for breach of contract.  If however, the facts establish that the claim involved the defendants’ violation of a broader social duty owed to all individuals, which is imposed by the law of torts and, hence, exists regardless of the contract, then it must be regarded as a tort.”

The Court went on to specify that:

“[A] negligence claim based on the actions of a contracting party in performing contractual obligations is not viewed as an action on the underlying contract itself, since it is not founded on the breach of any of the specific executory promises which comprise the contract.  Instead, the contract is regarded merely as the vehicle, or mechanism, which established the relationship between the parties, during which the tort of negligence was committed.”

The Court cautioned that, when applying the gist of the action doctrine, the substance of the plaintiff’s allegations, not the label placed on the claim, governs:  “[T]he substance of the allegations comprising a claim in a plaintiff’s complaint are of paramount importance, and, thus, the mere labeling by the plaintiff of a claim as being in tort, e.g., for negligence, is not controlling.”

Applying the gist of the action doctrine to the facts before it, the Court held that the homeowners’ negligence claim was “not based on [the insurer’s] violation of any . . . contractual commitments.”  Rather, the homeowners alleged that the insurer’s agents acted negligently “while they were performing [the insurer’s] contractual obligation to investigate the claim made by the [homeowners] under their policy.”  Because, the Court explained, “[t]he policy in this instance merely served as the vehicle which established the relationship between the [parties], during the existence of which [the insurer] allegedly committed a tort,” the gist of the action doctrine did not bar the homeowners’ negligence claim.  Therefore, the Court reversed and remanded for further proceedings.

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