POLICY VOIDED FOR MATERIAL MISREPRESENTATIONS; INSURED VIOLATED INSURANCE FRAUD ACT; COMMON LAW FRAUD NOT ACTIONABLE ABSENT RELIANCE (Philadelphia Federal)
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:
“[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.”
“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.’”
“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.