THE ROLE OF BAD FAITH IN AN EQUITABLE SUBROGATION CASE (Third Circuit – Pennsylvania Law)

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In this case, the Third Circuit addresses the elements of equitable subrogation between insurers, a useful opinion for coverage counsel dealing with insurer vs. insurer disputes.  Here, we only mention the role bad faith played in the court’s analysis.

This case involves the tragic Salvation Army building collapse in Philadelphia, where six people died and thirteen others were injured.  The neighboring property owner had hired a contractor to do construction work on its property. The improperly carried out work ultimately caused the building to collapse onto the neighboring Salvation Army building.

The property owner had a commercial general liability (CGL) policy on which it was a named insured.  The contractor also had its own insurance policy. This policy appeared to provide coverage to the property owner as an additional insured.

Over time, the CGL carrier, through counsel, repeatedly demanded that the contractor’s insurer provide a defense to the property owner as an additional insured.  The CGL carrier stated in one communication that a defense was due to the property owner as an additional insured, and that failure to provide such a defense was bad faith.

The contractor’s carrier eventually agreed to provide a defense to the property owner as an additional insured, under a reservation of rights. Eventually, the additional insured carrier withdrew its defense, and obtained a judgment rescinding its policy based on material misrepresentations the contractor made in the insurance application.

A court eventually found the contractor’s policy void ab initio. The contractor’s carrier, however, already had paid over $667,000 in defense costs for the property owner as an additional insured. The additional insurer brought the present claims for equitable subrogation and unjust enrichment against the property owner’s CGL carrier.

The district court rule in favor of the additional insurer, and had awarded almost all of the damages sought. The Third Circuit affirmed.

On the bad faith related issues, the Third Circuit found the following.

First, an insurer seeking equitable subrogation against another insurer has to show that in providing a defense and coverage, it acted to protect its own interest, and that it did not act as a volunteer.  In this case, while the contractor’s insurer might have believed the policy should have been rescinded, it did not have any judgment to that effect. Moreover, it had been threatened with a bad faith claim by the CGL carrier’s counsel.  The Third Circuit found this sufficient to establish that the contractor’s carrier acted in its own interest, and not as a volunteer, in providing a defense.

Second, the CGL carrier argued that the contractor’s carrier had unclean hands, and therefore could not obtain equitable relief. The Third Circuit rejected this argument. The panel observed that the unclean hands doctrine requires proof of fraud, unconscionable conduct, or bad faith affecting the balance of equities. The court could not find that the carrier’s conduct was unconscionable or affected the balance of equities between the two carriers.

Date of Decision:  April 27, 2021

Berkley Assurance Co. v. Colony Insurance Co., U.S. Court of Appeals for the Third Circuit No. 20-2673, 2021 WL 1625521 (3d Cir. Apr. 27, 2021) (Ambro, Rendell, Restrepo, JJ.)

“LEGAL THEORIES ALONE ARE NOT ENOUGH TO SUSTAIN LITIGATION. A PLAINTIFF MUST ALSO PLEAD FACTUAL ALLEGATIONS TO SUPPORT HIS LEGAL THEORIES.”

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Legal theories alone are not enough to sustain litigation. A plaintiff must also plead factual allegations to support his legal theories.

The Honorable Joshua D. Wolson, May 6, 2021

In this breach of contract and bad faith case, Eastern District Judge Wolson dismissed all claims.

As to the alleged breach of contract, the insured made conclusory allegations about failures to pay sums due. He did not plead any facts as to what sums were due that the insurer failed to pay, or what provisions in the insurance contract were breached.  Further, he admitted that certain sums asserted as allegedly due were paid.

Finally, even when payment is delayed, there is still payment.  The delay does not create a breach of the insurance agreement when payment is eventually made.  Thus, delay is really an issue of bad faith, not breach of contract.

Moving on to the bad fad faith claim, the insured argued that the delayed payment, “in and of itself” established bad faith.  Judge Wolson disagreed, observing that “a delay in payment is not a per se violation of 42 Pa. C.S.A. § 8371. Although an unreasonable delay can be considered a bad faith insurance practice under the statute, ‘a long period of delay between demand and settlement does not, on its own, necessarily constitute bad faith.’”

Rather, a plaintiff alleging delay based bad faith “must plead facts sufficient to demonstrate that (1) the defendant had no reasonable basis for the actions it undertook, which resulted in the delay, and (2) that the defendant knew or recklessly disregarded the fact that it had no reasonable basis to deny payment. … If the delay is attributable to a need for further investigation or even to simple negligence, there is no bad faith.”

Judge Wolson found nothing in the complaint suggesting the insurer knew or recklessly disregarded the lack of a reasonable basis to delay payment. “On the contrary, according to the Complaint, after [the insured] filed suit, ‘the matter was looked at with greater scrutiny,’ and [the insurer] sent him an additional check … eight to nine months after denying him additional benefits.”

Judge Wolson observed that, taken as true, the Complaint asserts facts that might show negligence. However, the plaintiff did not “attribute this delay to [the insurer’s] knowledge or recklessness that it had no basis for the delay.” The court could not “infer recklessness based only on a nine-month delay of an additional payment.”

Interestingly, while Judge Wolson would not grant leave to file a new amended complaint, he did grant plaintiff an opportunity to correct deficiencies in the existing complaint.

Date of Decision: May 6, 2021

Elansari v. The First Liberty Insurance Corporation, U.S. District Court Eastern District of Pennsylvania No. 2:20-CV-5901-JDW, 2021 WL 1814980 (E.D. Pa. May 6, 2021) (Wolson, J.)

“EXPECTING AN INSURER TO BOTH INVESTIGATE CLAIMS PLACED AT ISSUE BY THE INSURED AND TO DO SO ONLY IN A MANNER THAT IS ACCEPTABLE TO THE INSURED, IS UNTENABLE” (Western District)

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Western District Judge Horan previously dismissed breach of contract and bad faith claims in this case, with leave to amend.  A copy of our earlier summary can be found here.  The insured cured the defects in its contract claim, but once again failed to set out a plausible bad faith claim.  This time, however, Judge Horan dismissed the bad faith claim with prejudice, as any future attempt to amend would be futile.

The claim centered on a dispute over actual cash value losses for damaged equipment, and documents the insurer requested as part of an examination under oath (EUO). The insured failed to produce those documents, deeming them irrelevant, and the insurer would not proceed without those documents.

The complaint pleads that the carrier’s actual cash value calculation was fundamentally flawed, and that the carrier sought documents for the EUO that had nothing to do with coverage.

Judge Horan carefully reviewed the second amended complaint, finding plaintiff still failed to state a statutory bad faith claim for the same reasons set forth in her original March 4, 2021 opinion. Rather than overcoming the bad faith claim’s flaws, the new allegations in the second amended complaint “regarding Defendants’ pre-litigation investigation and document requests further buttress[ed] the Court’s prior decision.”

Judge Horan states:

“Defendants undertook an investigation upon the initial loss of the [damaged equipment] and made an offer. [The insured] rejected that offer and made its own claim of value for payment. … In response, Defendants continued the investigation by seeking documents and an examination under oath, as permitted by the Policy. Such conduct is not bad faith.”

Further, in once again rejecting the insured’s complaint over the document requests’ relevance, Judge Horan reiterates that “[e]xpecting an insurer to both investigate claims placed at issue by the insured and to do so only in a manner that is acceptable to the insured, is untenable.”

“Finally, as to the remaining allegations, they speak to a general disagreement over Defendants’ estimate of … damages. The Second Amended Complaint continues to support that an offer was made and that further effort at investigation was attempted by Defendants. These allegations of valuation and investigation disagreements do not support that Defendants engaged in bad faith.”

Date of Decision: April 30, 2021

Integral Scrap & Recycling, Inc. v. Conifer Holdings, Inc., U.S. District Court Western District of Pennsylvania No. 2:20-CV-00871-MJH, 2021 WL 1720713 (W.D. Pa. Apr. 30, 2021) (Horan, J.)

INSURER’S FAILURE TO FOLLOW UP ON ITS OWN INVESTIGATION IDENTIFYING AN ACTUAL LOSS, AND THEN REFUSING TO MAKE ANY PAYMENT, PLAUSIBLY ALLEGES BAD FAITH (Philadelphia Federal)

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Eastern District Judge Padova permitted this first party property damage bad faith claim to proceed, finding the complaint’s allegations were not merely conclusory.

The insureds pleaded the following facts. They reported property damage to their insurer. The carrier hired a construction company to inspect the property, determine needed repairs, and calculate the loss.  The contractor found the property’s foundation and structure were damaged, but “did not calculate the amount of the loss because [the insurer] needed to first determine ‘the extent of the corrective work conducted at or related to [a] neighboring property.’”

The insurer allegedly never made that determination, however, and then refused to pay for the plaintiffs’ known damages. The insureds retained their own expert who valued repairs at over $211,000.

Judge Padova found these allegations went beyond the kind of conclusory pleadings rejected by other courts.

He recognized the principle that: “Implicit in section 8371 is the requirement that the insurer properly investigate claims prior to refusing to pay the proceeds of the policy to its insured.”

Here, the insurer allegedly “acted in bad faith by failing to investigate in good faith and disregarding its own expert’s determination that the structure and foundation of the property were damaged.” Specifically, the complaint alleged the insurer retained an expert to investigate the property damage and then disregarded that expert’s damage assessment, “failed to determine the extent of the corrective work conducted at the neighboring property, refused to investigate the loss to determine what it would cost to repair the foundation and building structure of Plaintiffs’ property, failed to ascertain the amount of the loss, and failed to pay Plaintiffs for the damage to the exterior, foundation, and building structure of their property.”

These factual allegations plausibly stated “a claim for bad faith stemming from [a] failure to properly investigate the damage to Plaintiffs’ property prior to denying coverage.”

Date of Decision:  April 22, 2021

Procoppio v. Foremost Insurance Co., U.S. District Court Eastern District of Pennsylvania No. CV 20-5184, 2021 WL 1581487 (E.D. Pa. Apr. 22, 2021) (Padova, J.)

NO BAD FAITH CLAIM STATED WHERE ONLY ALLEGATION IS THAT INSURER FAILED TO EXPLAIN ITS VALUATION IN OFFERING CLAIM PAYMENT BELOW POLICY LIMITS (Western District)

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The insureds valued their UIM claim at $215,000, and settled with the tortfeasor’s insurer for $15,000.  They demanded $200,000 policy limits from the UIM carrier, and transmitted a police report and medical records in support of their demand.  The insurer offered $15,000 in response, and the insureds sued for breach of contract and bad faith.

The insurer successfully moved to dismiss the bad faith claim, but the insured was given leave to amend.

Western District Judge Horan found the insureds’ complaint failed to “provide any factual support regarding their bad faith claim, other than their allegations that [the] offer of $15,000 failed to cite any reasons for such offer. The [insureds] did not cite any other facts to support their allegation that [the insurer] acted in bad faith. These bare factual assertions, without more, do not state a plausible claim for which relief can be granted.”

Date of Decision: April 20, 2021

Long v. USAA Casualty Insurance Company, U.S. District Court Western District of Pennsylvania No. CV 20-2017, 2021 WL 1550094 (W.D. Pa. Apr. 20, 2021) (Horan, J.)

 

WESTERN DISTRICT JUDGE WIEGAND ISSUES TWO BAD FAITH OPINIONS: (1) BAD FAITH CLAIM PLAUSIBLE WHERE COVERAGE ISSUES REMAIN OPEN (2) NO BAD FAITH FOR PRE-CONTRACT CONDUCT (Western District)

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On April 16 and 21, 2021, Western District Judge Wiegand issued bad faith opinions.  In the first case, she allowed the claim to proceed, denying a motion to dismiss. In the second, the conduct at issue did not involve any benefit denial, but only alleged pre-contract deception, which is not subject to Pennsylvania’s bad faith statute, 42 Pa.C.S. § 8371.

CASE 1: BAD FAITH CLAIM STATED

In Maronda Homes, LLC v. Motorists Mutual Insurance Company, Judge Wiegand allowed an additional insured’s statutory bad faith claim to proceed, denying the insurer’s motion to dismiss.

The insurer rejected additional insured coverage, asserting (1) that the additional insured endorsement was not triggered through any alleged conduct of the named insured, and (2) that even if triggered, an exclusion applied. The additional insured raised claims for breach of contract, contractual bad faith, and statutory bad faith. The insurer moved to dismiss all claims.

Judge Wiegand first rejected the insurer’s argument that the complaint did not allege any wrongdoing by the named insured that could trigger coverage under the additional insured endorsement.  She also found factual issues remained open as to whether coverage was excluded because the work was (1) completed or (2) put to its intended use. This could not be decided at the motion to dismiss state.

Judge Wiegand did dismiss the breach of the implied covenant of good faith and fair dealing count. “[U]nder Pennsylvania law, a ‘claim for breach of the implied covenant of good faith and fair dealing is subsumed in a breach of contract claim.’” Thus, “a claim for breach of the implied covenant of good faith and fair dealing ‘separate and distinct from a breach of contract claim’ cannot be maintained because ‘the covenant does nothing more than imply certain obligations into the contract itself.’”

By contrast, Judge Wiegand allowed the statutory bad faith claim to proceed. First, she observed that the policy exclusion at issue remained open and undecided, so the insurer could not argue the coverage denial was per se reasonable based on the policy exclusion language.  She then found the insured’s allegations that the insurer “failed to investigate Plaintiff’s tender of the claims, denied coverage despite cooperatively participating in attempts to settle the Underlying Actions, and rejected settlement offers … within the limits of the Policy … are sufficient at this stage to survive Defendant’s Motion.”

Date of Decision:  April 16, 2021

Maronda Homes, LLC v. Motorists Mutual Insurance Company, U.S. District Court Western District of Pennsylvania No. 2:20-CV-01526-CCW, 2021 WL 1518009 (W.D. Pa. Apr. 16, 2021) (Wiegand, J.)

CASE 2: NO STATUTORY BAD FAITH POSSIBLE FOR PRE-POLICY CONDUCT

The second case involved a first party property damage claim, where a swimming pool popped out of the ground due to subsurface water pressure. A policy exclusion clearly excluded coverage for subsurface water pressure causing damages, but the insureds still pursued the claim.  They alleged that prior to purchasing the policy, the insurer’s agent led them to believe the policy would cover them for damages to in-ground pools “from foreseeable types of harm,” which equated to a promise concerning subsurface water pressure damage being covered.

After the coverage denial, the insureds brought claims to reform the policy to cover “pool popping,” for statutory bad faith, and for violation of the Unfair Trade Practices and Consumer Protection Law (UTPCPL). The insurer successfully moved to dismiss all claims.

First, Judge Wiegand found that the policy could not be reformed based on mutual mistake, unilateral mistake, or fraud.  She further found that this was not a case where the reasonable expectations doctrine would permit reformation of clear policy language.

Second, she dismissed the statutory bad faith claim.  As the Pennsylvania Supreme Court made clear in Toy v. Metropolitan Life, the bad faith statute only applies when the insurer had denied a policy benefit.  Deceptive practices used to induce an insured to enter an unfavorable insurance policy do not fall within the bad faith statute’s ambit.

Finally, because the insureds did not plead justifiable reliance, there could be no UTPCPL claim.

Date of Decision: April 21, 2021

Palek v. State Farm Fire & Casualty Company, U.S. District Court Western District of Pennsylvania No. 2:20-CV-00170-CCW, 2021 WL 1561507 (W.D. Pa. Apr. 21, 2021) (Wiegand, J.)

BANKRUPTCY COURT PERMITS BAD FAITH CLAIM TO PROCEED, EVEN AFTER BREACH OF CONTRACT CLAIM DISMISSED (Philadelphia Bankruptcy Court)

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This is a rare bad faith case raised before a Bankruptcy Court in the context of an adversary proceeding.

The bankrupt/insureds brought a first party property damage claim against an excess insurer.  It is not fully clear from the record if the insureds were parties to the excess insurance agreement, which appears to be designed to protect a mortgage holder.  In any event, the court held there was nothing in the record that could establish excess coverage was triggered.  Thus, the court granted summary judgment on the breach of contract claim, finding no excess coverage possibly due that could have invoked the insurance contract’s coverage obligations.

The absence of any benefits being due, however, did not stop the court from analyzing the bad faith claim, and ultimately allowing that claim to proceed.

As discussed many times in this blog, there is a serious issue about whether a statutory bad faith claim can proceed if the insurer has not denied any benefit under an insurance policy, i.e., payment of a first party claim or defense and indemnification under a liability insurance policy. This limitation appears to be the required by the Pennsylvania Supreme Court’s 2007 decision in Toy v. Metropolitan Life.  An article addressing this issue can be found here.  See also this January 2020 post, this March 2021 post, and this January 2021 post questioning whether the non-precedential Third Circuit decision in Gallatin Fuels failed to consider Toy in reaching the conclusion that it was possible to pursue a bad faith claim when no policy was even in effect at the time of the loss.

In the present adversary proceeding, the court chiefly relied on Gallatin Fuels for the proposition that statutory bad faith claims can be pursued even where no benefits are due because there is no enforceable insurance contract, solely based on claims of poor investigation practices and possible misrepresentations during the investigation.

The court also relied on Pennsylvania’s Unfair Insurance Practices Act and Unfair Claim Settlement Practices regulations in finding a potential basis for bad faith. In particular, the court cites, 31 Pa. Code § 146.6 (providing “that every insurer shall complete investigation of a claim within thirty days after notification of the claim unless it cannot reasonably be completed in that time. It further provides that if the investigation cannot be completed within that timeframe, every forty-five days thereafter, the insurer shall provide the claimant with a reasonable explanation for the delay and state when a decision on the claim may be expected.”)

Courts approach violations of the UIPA and UCSP regulations differently, ranging from a complete prohibition on considering their violation in proving statutory bad faith cases, to using those violations as evidence of bad faith.  Our May 2, 2019 post summarizes different approaches courts take in considering UIPA and Unfair Claim Settlement Practices regulations.

Most recently on this Blog, we summarized Western District Magistrate Judge Dodge’s December 2020 Kleinz v. Unitrin opinion. Magistrate Judge Dodge found that since the seminal Terletsky opinion in 1994, “federal courts have uniformly rejected plaintiffs’ attempt to rely on UIPA violations to support bad faith claims.” She found that contrary to the insured’s arguments that some federal cases hold otherwise, “for the past 26 years, case law in federal courts on this issue has been consistent.”  Magistrate Judge Dodge cites, among other cases, the Third Circuit’s opinion in Leach, Judge Gibson’s 2019 Horvath opinion, Judge Fisher’s 2014 Kelman decision (while sitting by designation in the Western District), Judge Kosik’s 2007 Oehlmann decision, and Judge Conti’s 2007 Loos opinion.

Some other recent opinions look unfavorably toward using UIPA and UCSP violations to make the statutory bad faith case. See, e.g., Judge Quiñones Alejandro’s December 2020 White Opinion, and Judge Wolson’s April 2020 Live Face decision. In his March 2020 Clapps decision, Judge Darnell Jones notes that while there is no private right of action under the UIPA or UCSP regulations, there might be some circumstances where their violation might be the premise for a bad faith case.

All that being said, the bad faith claim was allowed to proceed in this case, in light of claim handling conduct that clearly troubled the court.

Date of Decision:  April 15, 2021

In Re Lena D. Lewis, Debtor, Lewis v. U.S. Bank National Association, U.S. Bankruptcy Court for the Eastern District of Pennsylvania No. AP 18-00240-AMC, 2021 WL 1424721 (Bankr. E.D. Pa. Apr. 15, 2021) (Chan, J.)

BAD FAITH CLAIM PLAUSIBLE BASED ON UNREASONABLY LOW SETTLEMENT OFFER MADE AFTER LONG DELAY (Philadelphia Federal)

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This UIM bad faith claim was allowed to proceed, after Eastern District Judge Pratter denied the insurer’s motion to dismiss.

The plaintiff pleaded that he suffered serious and permanent injuries, including severe disc injuries, post-concussion syndrome and traumatic brain injury.  The insured provided the carrier notice of these injuries and his intent to pursue underinsured motorist coverage.

The policy provided $900,000 in UIM benefits, which the court described as “heightened coverage in exchange for which [the insured] paid increased premiums.”

The complaint alleges the initial demand came in October 2018, accompanied by relevant medical records and reports. The insured alleged he later sent the carrier supplemental records and expert reports on the extent of his injuries, costs of care (nearly $290,000), and estimated lost earnings ($854,000).

The insurer allegedly promised to evaluate the claim by the end of May 2020, and to make an offer at that time.  The insured alleges, however, that “[n]either were provided to him despite repeated follow-ups. Instead, in September 2020—roughly 20 months after the initial demand—[the insurer] offered … $75,000.”

Judge Pratter then states the “wide disparity between [the] demand and [the] offer prompted this case.”

Judge Pratter found “[t]he allegations as currently pled are at least sufficient to support a bad faith claim.” She recognized the many cases dismissing bad faith claims for only pleading bare bones allegations, “[b]ut the Complaint in its present iteration alleges more than boilerplate legal conclusions and a ‘normal dispute’ between insurer and insured.”

Judge Pratter observes there was no dispute that (1) the policy provided $900,000 in benefits, as a result of the insured’s paying heightened premiums; and (2) the insured was not at fault in causing the accident. Further, the complaint alleges the insured suffered significant permanent injuries, will suffer $850,000 in lost earnings, and the cost of care damages alone were five times the insurer’s offer.

Judge Pratter, then states:

“Construing these allegations as true, as the Court must, [the insured’s] estimated damages are many orders of magnitude greater than [the insurer’s] offer. Taken together, the Complaint plausibly establishes a bona fide claim that [the insurer] lacked a reasonable basis to deny benefits.” She relies here on Judge Stengel’s 2017 Davis decision, summarized here, for the proposition that an unreasonably low settlement offer compared to value of lost wages and treatment cost can make out a plausible bad faith claim.

Judge Pratter added the complaint alleged “enough facts to plausibly infer that [the insurer] knew or recklessly disregarded a lack of a reasonable basis to deny benefits.” “Chief among them is the delay between [the insured’s] initial demand and [the insurer’s] onetime offer.”

She cited Judge Stengel’s 2014 Padilla opinion, summarized here, for the point that “’[d]elay is a relevant factor in determining whether bad faith has occurred.’” The complaint alleges “a delay of nearly two years from the initial demand and over three years from the injury.” Moreover, the insurer failed to fulfil its alleged promise to finish its analysis and make an offer in May 2020, and failed to explain this “nonfeasance”.

Date of Decision:  April 15, 2021

Volgraf v. Garrison Property and Casualty Insurance Company, U.S. District Court Eastern District of Pennsylvania No. CV 21-1394, 2021 WL 1427337 (E.D. Pa. Apr. 15, 2021) (Pratter, J.)

NO BAD FAITH CLAIM WHERE NO COVERAGE DUE (New Jersey Federal)

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This is a New Jersey Covid-19 coverage case.  The insurer rejected business loss coverage for a law firm’s Covid-19 business interruption claims, arguing (1) there was no direct physical loss and (2) the virus exclusion applied.

The insured brought claims for declaratory relief, breach of contract, and breach of the covenant of good faith and fair dealing. New Jersey Federal Judge Bumb observed that “[a]ll the claims require as a threshold matter that Plaintiff is entitled to coverage under the Policy due to the circumstances outlined above, despite [the insurer’s] denial of Plaintiff’s insurance claim.”

Thus, the insured had to prove both “(1) that Plaintiff suffered “direct physical loss of or physical damage to Covered Property” and (2) that the Virus Exclusion does not apply.” The court assumed arguendo the direct physical loss element went in the insured’s favor, to solely address the virus exclusion.  Judge Bumb held the virus exclusion applied to preclude coverage for all of the insured’s claims, including allegedly breaching the duty of good faith and fair dealing.

“In sum, because (1) the Virus Exclusion is unambiguous, (2) the Virus Exclusion excludes from coverage any losses caused by a virus, (3) COVID-19 is a virus, and (4) the but for cause of Plaintiff’s alleged losses and this case is COVID-19, [the insurer’s] denial of Plaintiff’s insurance claim was appropriate. Therefore, Plaintiff’s claims in this action are legally insufficient.”

Date of Decision:  April 14, 2021

Stern & Eisenberg, P.C. v. Sentinel Insurance Company, Limited, U.S. District Court District of New Jersey No. 20-CV-11277RMBKMW, 2021 WL 1422860 (D.N.J. Apr. 14, 2021) (Bumb, J.)

POLICY VOIDED FOR MATERIAL MISREPRESENTATIONS; INSURED VIOLATED INSURANCE FRAUD ACT; COMMON LAW FRAUD NOT ACTIONABLE ABSENT RELIANCE (Philadelphia Federal)

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The insured admittedly altered vendor invoices that inflated the replacement value of damaged items in this first party property damage claim, and submitted those false invoices to the insurer in making its claim for property damage losses.

The insurer brought a declaratory judgment action arguing there was no coverage due because of these misrepresentations, along with claims for “violations of Pennsylvania’s Insurance Fraud Act, common law fraud, and reverse bad faith.” The insured brought a statutory bad faith counterclaim, which the court earlier dismissed.

The parties cross-moved for summary judgment, and the insured asked Eastern District Judge Robreno to vacate his dismissal of its bad faith counterclaim.  Judge Robreno granted summary judgment to the insurer for declaratory relief and violation of the Insurance Fraud Act (IFA), and refused to vacate his dismissal of the bad faith counterclaim.

Fraud and concealment as a basis to void the policy and preclude recovery

The declaratory judgment count focused on the argument that the insured violated the Concealment, Misrepresentation or Fraud Condition in the policy.

Judge Robreno observed that:

  1.  “[T]o void an insurance policy under Pennsylvania law, an insurer must prove the following factors by clear and convincing evidence: “(1) the insured made a false representation; (2) the insured knew the representation was false when it was made or the insured made the representation in bad faith; and (3) the representation was material to the risk being insured.”

  2. “The clear and convincing evidence standard requires evidence that is ‘so clear, direct, weighty, and convincing as to enable the [trier of fact] to come to a clear conviction, without hesitancy, of the truth of the precise facts [in] issue.’”

  3. “Pennsylvania courts have long ruled that a violation of the fraud and concealment provision of an insurance policy … serves as a complete bar to the insured’s recovery under the policy.”

There was no question that the insured knowingly made misrepresentations to the insurer through the altered invoices.  The issue was whether these misrepresentations were material.

Misrepresentations are material “if a reasonable insurance company, in determining its course of action, would attach importance to the facts misrepresented.” Judge Robreno found the misrepresentations material. The false invoices were provided in direct response to the insurer’s requesting proof of the valuations the insured’s adjusters submitted. He accepted the insurer’s argument that the insured was aware the insurer “would use the invoices to determine and verify the amount of loss.”

Thus, Judge Robreno voided the policy, and found no coverage due.

Court grants insurer summary judgment under the Insurance Fraud Act

The insurer also sought relief under Pennsylvania’s Insurance Fraud Act, 18 Pa. Stat. and Cons. Stat. Ann § 4117(g). There are three elements to an IFA claim: “1) presenting false, incomplete, or misleading statements to [the insurer]; 2) that were material to the claim; and 3) which were knowingly made with an intent to defraud.” The courts are split on whether the burden of proof is clear and convincing evidence or preponderance of the evidence.

The court had just ruled, however, under the clear and convincing evidence standard, that the insured made material misrepresentations that voided the policy for fraud.  Thus, the only issue in obtaining civil relief under the IFA was whether the insurer court prove the insured’s actions were taken with an intent to defraud.  Judge Robreno adduced examples from the record demonstrating the insured’s conduct was intentional and knowing.  Thus, he granted the insurer summary judgment on this count as well.

Common law fraud not established without showing justifiable reliance

Unlike the other two fraud based counts, common law fraud requires proof of justifiable reliance on the misrepresentations.  The insurer did not provide evidence of record to meet that element, and summary judgment was denied.  Judge Robreno noted, that the insurer “could, of course, pursue this claim at a trial. However, it does not appear that [it] would be entitled to compensatory damages beyond the litigation and investigation costs it may seek to recover as a result of prevailing on [the Insurance Fraud Act claim], nor does it appear that punitive damages would be appropriate in this case.”

Finally, Judge Robreno denied the insured’s motion to vacate the order dismissing its bad faith claims against the insured.  Further, in light of its success on the first two counts, the reverse bad faith claim was dismissed without prejudice in light of the insurer’s position that it had no reason to proceed with that claim.

Date of Decision:  April 12, 2021

State Auto Property & Casualty Insurance Co. v. Sigismondi Foreign Car Specialists, Inc., U.S. District Court Eastern District of Pennsylvania No. CV 19-5578, 2021 WL 1343116 (E.D. Pa. Apr. 12, 2021) (Robreno, J.)