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Westchester Surplus Lines Insurance Co. v. Safe Auto Insurance Group

June 30, 2010

WESTCHESTER SURPLUS LINES INSURANCE CO. PLAINTIFF
v.
SAFE AUTO INSURANCE GROUP, INC. DEFENDANT



The opinion of the court was delivered by: J. Rambo

MEMORANDUM

Before the court is Defendant Safe Auto Insurance Group's ("Safe Auto") motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12 (b)(6). (Doc. 25.) In addition, before the court is Plaintiff Westchester Surplus Lines Insurance Company's ("WSLIC") motion to file a Second Amended Complaint. (Doc. 34.) For the reasons that follow, Safe Auto's motion to dismiss will be granted, and WSLIC's motion to file a Second Amended Complaint will be denied.

I. BACKGROUND

A. Facts*fn1

WSLIC is the liability insurance company for Safe Auto, an automobile insurance company based out of Ohio. WSLIC claims that Safe Auto made material misrepresentations when it filled out an application for insurance coverage with WSLIC. Specifically, WSLIC alleges that Safe Auto failed to disclose information about pending litigation involving Safe Auto and one of its insureds, Jay R. Robinson.

A. Robinson v. White

The underlying case surrounded a traffic accident between Robinson, an individual insured by Safe Auto, and Cindy and David White, which occurred in 2001. In 2002, the Whites offered to settle the matter with Safe Auto for Robinson's policy limit of $15,000. Safe Auto rejected this offer and instead asked for various medical documents from the Whites. Counsel for the Whites responded by accusing Safe Auto of using bad faith and delay tactics. Two months later, the Whites filed a complaint against Robinson in the Wyoming County, Pennsylvania, Court of Common Pleas. Thereafter, Safe Auto retained counsel for Robinson. This counsel recommended to Safe Auto in February of 2003, that they settle for the policy limit of $15,000. This same counsel filed a cross-claim against Mr. White for negligence for causing the car crash. This cross-claim allegedly angered the Whites, who no longer wanted to resolve the case by settlement. However, in July of 2003, Safe Auto offered to settle for $15,000.

On July 29, 2003, Counsel for the Whites sent a letter rejecting Safe Auto's offer, the letter stated it was abundantly clear that your insurance carrier never discussed with the insured, Mr. Robinson, the fact we had offered to settle the case for policy limits of $15,000 which offer was rejected in the face of overwhelming evidence that the case had a value in excess of $100,000 thereby deliberately exposing him to the excess verdict.

(Doc. 18-3, Ex. E, Ltr. from Thomas J. Foley, Esq. to John Reed Evans, Esq., July 29, 2003.)

In October of 2005, Safe Auto again made a settlement offer, this time in the amount of $50,000. The Whites rejected this offer stating that they would accept no less than $200,000. Having reached an impasse, the case proceeded to trial on November 14, 2005, where after a jury awarded a $3.25 million verdict- $2.5 million for the injuries sustained by Ms. White and $750,000 for Mr. White's loss of consortium.

As a result of the verdict, Mr. Robinson retained private counsel because he was concerned that Safe Auto had exposed him to an excess verdict. In late November, Safe Auto filed post-trial motions on Mr. Robinson's behalf, including a motion for new trial, motion for remittitur, and a supplemental motion for post-trial relief.

After the verdict, but sometime before December 1, 2005, Mr. Robinson advised Safe Auto that he intended on filing a bad faith claim against it because it exposed him to an excess verdict. In addition, on February 15, 2006, Mr. Robinson, through his counsel, demanded that Safe Auto settle both the White v. Robinson matter and Mr. Robinson's own bad faith claim.

On April 20, 2006, a mediation was held on the White v. Robinson case which resulted in a settlement for $2.5 million. WSLIC, as Safe Auto's insurance carrier, contributed $2.25 million to the settlement. This contribution was subject to a non-waiver agreement entered into by the parties.

Subsequently, on June 26, 2006, another mediation was held on the pending bad faith claims by Mr. Robinson against Safe Auto. The parties agreed to settle for $289,000. WSLIC contributed $75,000 to this settlement which was also subject to a non-waiver agreement.

B. Safe Auto's Application for Insurance with WSLIC

On July 28, 2005, in the midst of the Robinson litigation, Safe Auto applied for a Management Protection Insurance Policy from WSLIC. WSLIC claims that Safe Auto made the following representations in the application and that it breached these representations by not disclosing the pending White v. Robinson matter (answers in bold):

23. c. Are there established procedures for handling claims or suits against Applicant for errors and omissions, extra contractual liability or punitive or exemplary damages? "Yes" with attached sheet explaining the following- On a monthly basis, the Litigation Supervisors are required to report all formalized "bad faith allegations" and/or extra-contractual demands to the Vice President- Litigation, and to the Insurance Broker who issued the Company its Professional Liability Policy. Further, as required by the Liability Insurance Carrier, the Company makes all files available for inspection and copying by the Insurance Broker. This procedure was implemented in January, 2003. Beyond this, the Company complies with any and all requests from the Liability Insurance Carrier and/or its Insurance Broker, as required by the terms and conditions of the Professional Liability Policy. Internally, because a substantial extra-contractual verdict could affect the Company's surplus, the Litigation Unit is required to keep the Executive Staff apprised of any and all significant developments in an action claiming extra-contractual damages by way of status reports and internal memoranda.

25. Please provide the following information on the applicant's procedures for the handling, assessment and monitoring of all actual lawsuits against the applicant, its directors, officers or employees for Wrongful Acts in the performance of Professional Services (as defined in the Policy), including, but not limited to, lawsuits alleging errors or omissions or seeking extra-contractual, punitive or bad faith damages.

a. Does the applicant have established procedures?

Yes [describing that] Office of General Counsel is directly responsible for assessing such lawsuits, hiring and directing outside counsel and reporting to and advising the Senior Executives and Board.

b. Is a written applicant directive for these ...


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