JANUARY 2014 BAD FAITH CASES: INSURER’S SUMMARY JUDGMENT AFFIRMED ON EQUITABLE FRAUD COUNT AND POLICY RESCINDED (New Jersey Appellate Division)

In Those Certain Underwriters at Lloyd’s, London Subscribing to Policy No. Buy1780 v. Cleopatra, LLC, the insurer brought suit against its insured seeking declaratory judgment and rescission of the policy for material misrepresentation by the client on the insurance application. In November of 2009 defendant-hotel suffered severe damage caused by high winds and rain associated with Hurricane Ida. Three months later, defendant submitted a claim to the insurer alleging a loss caused by heavy winds, which damaged the roof causing a water loss to the building and property. The insurer reserved the right to deny coverage due to any failures by defendant, and later exercised that right finding the damage was not caused by the Hurricane, and was actually the result of wear and tear and seepage over a period of time that caused the losses. The insurer then filed a declaratory judgment action against defendant, and defendant filed counterclaims alleging breach of contract and bad faith.

After filing its declaratory judgment action, the insurer discovered defendant had, in fact, sustained losses on the property while insured by another company despite its opposite representation in its insurance application. The insurer provided policies based on its belief defendant’s property had not sustained any previous losses, and required defendant’s signature attesting that the insurance application contained no efforts to defraud the insurance company. Defendant separately signed a ‘no-loss-letter’ certifying she suffered no loss or claim on the property. At her deposition, defendant testified she was never presented with completed documents. Rather, she signed and dated blank pieces of paper and provided them to the insurance broker.

Upon discovering the misrepresentation, the insurer amended its complaint to add counts of legal fraud, equitable fraud, and violations of the NJ Insurance Fraud Prevention Act. The insurer sought summary judgment on the equitable fraud issue in an effort to have the policy voided. Equitable fraud consists of 1) a material misrepresentation of a presently existing or past fact; 2) the maker’s intent that the other party rely on it; and 3) detrimental reliance by the other party, all proven by a preponderance of the evidence. The court granted summary judgment finding the insurer definitely proved all elements of equitable fraud. Furthermore, the insurer was able to demonstrate the misrepresentation was untruthful, material to the particular risk assumed by the insurer, and actually and reasonably relied upon by the insurer in the issuance of the policy thereby causing the misrepresentation to constitute equitable fraud and allowing for the rescission of the policy. The court found the insurance application and no-loss-letter contained material misrepresentations, and affirmed the lower court’s grant of summary judgment in favor of the insurer.

Date of Decision: Nov. 20, 2013

Those Certain Underwriters at Lloyd’s, London Subscribing to Policy No. Buy1780 v. Cleopatra, LLC, 2013 N.J. Super. Unpub. LEXIS 2797 (App. Div. Nov. 20, 2013) (Parrillo, Harris, and Guadagno).