Federal Insurance Co v. HPSC, Inc., No. 06-1050. This is one of those insurance coverage declaratory judgment actions, where the defendant and plaintiff get mixed up. There is something for everyone, not just insurance practitioners.
The Insured, HPSC, wants payment to recover an embezzlement loss under an executive protection insurance policy. They also argued “unfair and deceptive trade practices” based on Federal's delay in investigating and paying the claim. (These are sometimes called “extra-contractual” damages, and insurance companies don’t like them, especially as state law usually provides for double damages.)
The Insurer (Federal) made the first move (as is customary) and brought a declaratory judgment seeking “rescission of the policy based on a misrepresentation made by HPSC in its 2001 insurance renewal application.”
Keep reading. A great case.
HPSC won at trial. They had a lot of nice evidence, namely a PwC report detailing how he embezzled.
Federal had taken the position the embezzler “both reconciled bank statements and signed checks on the same ... accounts, which contradicted information provided by HPSC on its ... renewal application.” But HPSC had raised a good issue of fact, namely that the embezzler’s subordinate did the reconciling. The District Court had found that HPSC was slightly wrong about one small account, i.e. the “petty cash” account.
So, the case went to jury trial on the contract claim. This is a rarity in insurance coverage litigation. “The district court instructed the jury that Federal was not obligated to pay HPSC's claim if HPSC's misrepresentation was material, meaning that if Federal had known the truth, it would have declined to issue the policy or charged a higher rate or premium in light of the increased risk.”
The case went to a bench trial on the unfair trade practices claim. Federal Lost. The Judge found that their decision not to pay was not informed by a serious inquiry into the facts or rather, “and that Federal's conduct after learning of its flawed assumptions was a breach of its duty of good faith, which merited doubling the damages incurred thereafter.” Hence, they violated Mass. Gen. Laws ch. 176D, § 3(9). On appeal, Federal argues that it had a “reasonable, plausible basis for denying HPSC's claim, even after it learned of its original mistaken conclusion.” But the First points to the record and notes that, “Instead of admitting its error and making a settlement offer, however, Federal changed its legal theory, and when that one failed, Federal again shifted its position, finally settling on the theory that HPSC's misrepresentation regarding the petty cash account was material enough to warrant denying the claim.” Moreover, since the District Court held that the Federal’s decision was wilful (though not motivated by spite) the doubling provision properly kicked in.
I really like this case. Also, I like the subject matter. A lot.
Anyway, “Federal failed to renew its Rule 50(a) motion after the jury's verdict, and accordingly we have no power to review the district court's denial of judgment as a matter of law on the rescission claim.” Unitherm Food Systems, Inc. v. Swift-Eckrich, Inc raises its head! But, the First notes that FRCP 50(a) really doesn’t apply to bench trials! In Bench trials FRCP 50(a) motions are treated as motions for judgment as a matter of law made during bench trials as motions for judgment on partial findings under Rule 52(c). Therefore, since “Federal made such a motion at the close of HPSC's case, but then proceeded to put on evidence, thus [it waived] its right to appeal the denial of that motion.” Therefore, regarding the bench trial, the First treats the motion as a challenge to the “factual and legal sufficiency of the district court's determinations based on all the evidence.”
As to motions in limine, however, once the District Court makes a final ruling, there is no need to further preserve them. In particular:
Federal objects to the district court's admission of evidence concerning Federal's past underwriting of HPSC's policies on the ground that such evidence permits a subjective inquiry into what the underwriter would have done had she known the truth, which is irrelevant to the objective standard of whether the misrepresentation increased the insurer's risk of loss.
But the First finds that it is relevant because “If Federal could present evidence of its own past underwriting practices to establish materiality, it follows that HPSC could do the same to establish immateriality.” (Come on, who are they kidding. In these case, courts admit just about any kind of evidence that goes to procedures and course of dealings.)
Finally, as to attorneys fees, the First finds that since state law providers for attorneys fees cases in unfair trade practices cases, and "to the extent that the attorneys' fees incurred in successfully defending the chapter 93A claim cannot be excised with any certainty from those related to HPSC's breach of contract defense, HPSC is entitled to the fees common to both claims, since the two are based on the same core of facts."
Barry Barnett comments here.
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