Opinion
Civil Action No. 03-5260.
July 8, 2004
MEMORANDUM AND OPINION
In this insurance coverage dispute, the plaintiffs Markel Insurance Company and the Insurance Company of Evanston (collectively referred to as "Markel") request a declaration that the liability policy they had issued to defendant Woodrock, Inc. ("Woodrock") is void because Woodrock had materially misrepresented the scope and the extent of its business operations, and failed to disclose its relationship to defendant Delaware County Children's Camp Association, which operated under the name Camp Sunshine ("Camp Sunshine"). Markel seeks to avoid defending and indemnifying Woodrock in a wrongful death and survival action pending in the state court. The underlying action arose out of the drowning death of eight year old Anthony Slaughter at Camp Sunshine which was under the management and supervision of Woodrock employees.
James H. Gorbey, Jr., Administrator of the Estate of Anthony Slaughter v. Delaware County Children's Camp Association, Inc., a/k/a Camp Sunshine, and Woodrock, Inc., No. 0209-0944 (Philadelphia Ct. Com . Pl. Filed September, 2002). The administrator of the decedent's estate, James H. Gorbey, Jr. ("Gorbey"), is also named as a defendant in this case. Markel is presently providing a defense in the state action under a reservation of rights.
Default has been entered against Woodrock. Despite the entry of default against Woodrock, Gorbey and Camp Sunshine, as parties in the underlying action, still have standing to defend this declaratory judgment action. See Fed. Kemper Ins. Co. v. Rauscher, 807 F.2d 345, 353-54 (3d Cir. 1987) (citing Md. Cas. Co. v. Pac. Coal Oil Co., 312 U.S. 270 (1941) and Allstate Ins. Co. v. Stinger, 163 A.2d 74 (Pa. 1960)).
The parties have filed cross motions for summary judgment. Markel argues that incorrect statements and omissions in Woodrock's application for insurance render the policy void under Pennsylvania law. Gorbey and Camp Sunshine, conceding that the application contained incomplete and incorrect statements, contend that they were immaterial because Woodrock had already advised Markel of its relationship with Camp Sunshine. They further argue that Markel cannot demonstrate that Woodrock had the requisite intent to deceive when filling out the application and that Markel relied on the misstatements.
Standard of Review
Summary judgment is appropriate only when there are no genuine issues of material fact in dispute. FED. R. CIV. P. 56(c). A dispute is genuine if the jury could return a verdict for the nonmovant, and a fact is material when its resolution could affect the outcome of the case. Justofin v. Metro. Life Ins. Co., ___ F.3d ___, 2004 WL 1416949, at *2 (3d Cir. June 25, 2004).
Summary judgment is "inappropriate when a case will turn on credibility determinations, and . . . on state of mind." Coolspring Stone Supply, Inc. v. Am. States Life Ins. Co., 10 F.3d 144, 148 (3d Cir. 1993). Nor is it proper at the summary judgment stage to draw inferences from facts or to weigh evidence. Anderson v. Liberty Lobby, 477 U.S. 242, 255 (1986). That is the role of the factfinder.
Analysis
To establish that the insurance policy is void as a matter of law, Markel must prove by clear and convincing evidence that: (1) Woodrock, in its insurance application, made a false representation or failed to disclose information; (2) Woodrock knew that the representation was false or was made in bad faith, or knowingly failed to disclose information; (3) the false representation or the withheld information was material to the risk being insured; and, (4) Markel relied upon the false information or the absence of information in providing coverage to the insured. See Matincheck v. John Alden Life Ins. Co., 93 F.3d 96, 102-03 (3d Cir. 1996); Rohm Haas Co. v. Continental Cas. Co., 781 A.2d 1172, 1179-80 (Pa. 2001).
False representation includes the intentional omission of material information. Justofin v. Metro. Life Ins. Co., ___ F.3d ___, 2004 WL 1416949, at *3 (3d Cir. June 25, 2004).
The clear and convincing standard of proof applies where an insurer seeks rescission of the policy based upon material misrepresentations in the insurance application. Tudor Ins. Co. v. Township of Stowe, 697 A.2d 1010, 1015-16 (Pa.Super. 1997); see also Batka v. Liberty Mut. Fire Ins. Co., 704 F.2d 684, 687 (3d Cir. 1983). Clear and convincing evidence is testimony 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." In re Cicchetti, 743 A.2d 431, 443 (Pa. 2000) (citations and internal quotations omitted). Although the standard does not rise to beyond a reasonable doubt, it is higher than a mere preponderance of the evidence. Commonwealth v. Maldonado, 838 A.2d 710, 715 (Pa. 2003). Courts must take this heightened burden of proof into consideration when deciding whether summary judgment is appropriate in an insurance case where the issue is fraud in the application. Justofin v. Metro. Life Ins. Co., ___ F.3d ___, 2004 WL 1416949, at *3 (3d Cir. June 25, 2004).
The parties agree that Pennsylvania law controls.
Gorbey and Camp Sunshine agree that the Woodrock insurance application contained incorrect facts and did not disclose the relationship between Woodrock and Camp Sunshine. They dispute, however, whether Woodrock made the representations or omitted facts in bad faith or knowingly, and whether Markel had already known of the relationship between Woodrock and Camp Sunshine.
This dispute is pivotal because Pennsylvania requires the insurer to demonstrate "a deliberate intent to deceive." Rohm Haas, 781 A.2d 1172, 1179 (Pa. 2001). "[E]valuating state of mind often requires the drawing of inferences from the conduct of the parties about which reasonable persons might differ," making state of mind particularly inappropriate for summary judgment. Justofin, 2004 WL 1416949, at *4; Riehl v. Travelers Ins. Co., 772 F.2d 19, 24 (3d Cir. 1985).
The conflicting testimony of Richard Garrett, the former executive director of Camp Sunshine and current Vice President of the Woodrock Board of Directors, and Michael Maier, a Markel employee and Woodrock's former account representative, illustrates the contradictory positions of the parties on the issues of knowledge and intent. Maier claims that he never had any discussions with Garrett prior to the accident about Woodrock's involvement with Camp Sunshine. Maier Dep. at 53:8-20; 56:3-6 ( Def. James H. Gorbey's Mot. for Summ. J. Ex. D). He testified that he first became aware of the relationship between Camp Sunshine and Woodrock after the claim was filed. Id. at 53:11-16; 54:11-16; 87:19 to 88:12.
In direct contradiction, Garrett claims that before the renewal application was submitted, Maier had been aware of Woodrock's relationship with Camp Sunshine and had recommended that the two entities obtain certificates of insurance "back and forth, holding everybody harmless and naming each other as — and all that." Garrett Statement at 31:9-19 ( Def. James H. Gorbey's Mot. for Summ. J. Ex. J). Garrett testified that he mentioned the "Program Proposal, Woodrock, Inc. And Camp Sunshine Partnership" during a discussion with Maier. Id. at 40:10-24; see Program Proposal ( Def. James H. Gorbey's Mot. for Summ. J. Ex. K). He stated that while he was not sure whether Maier had a copy of the document, he remembers that Maier had suggested reciprocal certificates of insurance after discussing the proposal. Garrett Statement at 40:10-24 ( Def. James H. Gorbey's Mot. for Summ. J. Ex. J).
An insurer which knows the actual facts before issuing a policy cannot later deny coverage based on a misrepresentation of those facts. See Headley's Express Storage Co. v. Pa. Indem. Corp., 178 A. 816, 818-19 (Pa. 1935). If the factfinder determines that Markel knew of the actual relationship between Woodrock and Camp Sunshine when it agreed to insure Woodrock, Markel may not disclaim coverage. To make this determination, the factfinder must evaluate the credibility of the witnesses.
The materiality of the misrepresentations is also disputed. To meet the materiality burden, Markel submitted an affidavit attesting that the alleged misrepresentation was material to the risk. It stated that if it had known of the relationship between Woodrock and Camp Sunshine, Markel would have taken a different course of action, either declining to insure Woodrock or charging a higher premium. Markel's affidavit shifted the burden to the defendants to come forward with evidence creating a genuine issue of material fact. See Gans v. Mundy, 762 F.2d 338, 343 (3d Cir. 1985); Old Colonial Hotel, Inc. v. Assicurazioni Generali S.P.A., No. 92-6530, 1994 WL 34193, at *2 (E.D. Pa. Feb. 7, 1994) (Buckwalter, J.). The defendants have done so.
In response to Markel's affidavit, Gorbey and Camp Sunshine argue that contrary to the statements in the affidavit, Markel could not have considered Woodrock's involvement in Camp Sunshine's operation material because it had prior knowledge of Woodrock's role at Camp Sunshine. They point to Garrett's statement that Markel's agent had known of the relationship.
An insurer cannot avoid its obligations under an insurance policy unless it establishes that it relied upon the misstatements when it issued the policy. Piccinini v. Teachers Protective Mut. Life Ins. Co., 463 A.2d 1017, 1024 (Pa.Super. 1983) (citing Lynch v. Metro. Life Ins. Co., 235 A.2d 406, 409 (Pa. 1967)). Issuing a policy with knowledge of the misrepresentations belies detrimental reliance upon them. Gorbey and Camp Sunshine cite to the testimony of Markel's underwriter, Andi Silver, as evidence that Markel never read the Woodrock application. Consequently, so they argue, Markel could not have relied upon the misstatements contained in the application when it decided to insure Woodrock. Although Silver's deposition testimony is not as clear as the defendants contend, it is inconsistent. See Silver Dep. at 63:11-14 ( Def. James H. Gorbey's Mot. for Summ. J. Ex. C) (stating that if she had reviewed Woodrock's application, she "should have made a note" in her file); 64:3-5 (acknowledging that there is no note in her file indicating that she reviewed the application); 87:25 to 88:8 ("Q: And is there any reason to believe that you did not review [the insurance application] shortly after it came in on June 10th? . . . A: No. There's no reason."); 88:22-25 ("Q. But it is your custom and practice that when you receive things, and you are in charge of that account as the underwriter, that you review them? A: Yes.").
One could infer that Silver did not know of the misrepresentations, or that she did and decided to insure anyway. Thus, the conflicting evidence and the possible inferences create genuine issues about whether Markel relied upon Woodrock's statements and omissions in its insurance application and whether it considered Woodrock's involvement with Camp Sunshine material.
Conclusion
The presence of disputed issues of material fact regarding the essential elements necessary to void an insurance policy on the basis of misrepresentation precludes summary judgment and requires resolution by a factfinder. Accordingly, we shall deny the cross motions for summary judgment.