United States District Court, E.D. Pennsylvania
MEMORANDUM AND ORDER
ELIZABETH T. HEY, District Judge.
After ruling on cross-motions for summary judgment in this insurance coverage/insurance fraud case, I directed counsel to provide briefing on the appropriate standards of proof applicable to Allstate's material misrepresentation defense and Allstate's counterclaim for statutory fraud. See Doc. 81. Defendant has provided the required briefing and Plaintiffs have filed a Motion for Reargument, incorporating the required briefing in their motion. See Docs. 84 & 85. In this memorandum, addressing the applicable burdens of proof, I find that Allstate's affirmative defense is governed by a preponderance of the evidence standard and its insurance fraud counterclaim is governed by the clear and convincing evidentiary standard. In a separate memorandum, I will address Plaintiffs' Motion for Reargument.
I. BURDEN OF PROOF
As explained in the Memorandum addressing the cross-motions for summary judgment, Pennsylvania law clearly applies the preponderance of the evidence standard to Plaintiffs' claim for a breach of contract. Pennsylvania law also clearly applies the higher clear and convincing standard to claims of common law fraud, see Doc. 82 at 25 (citing Royal Indem. Co. v. Deli By Foodarama, Inc., Civ. No. 97-1267, 1999 WL 178543, at *7 (E.D. Pa. Mar. 31, 1999)), and when the insurance company seeks to void an insurance policy ab initio based on material misrepresentations in the application. See id. at 25 (citing Bonsu v. Jackson Nat. Life Ins. Co., Civ. No. 05-2444, 2010 WL 55714, at *4 (M.D. Pa. Jan. 4, 2010); Tudor Ins. Co. v. Twp. of Stowe, 697 A.2d 1010, 1015 (Pa.Super. 1997)). What was unclear after the summary judgment briefing was the standard applicable to Allstate's material misrepresentation defense and its statutory counterclaim of insurance fraud under 18 Pa. C.S.A. § 4117.
A. Material Misrepresentation Defense
Relying on policy language, Allstate denied Plaintiffs' claims for a theft loss and a fire loss which both occurred in January 2012 at 2022 Stanwood Street.
We do not cover any loss or occurrence in which any insured person has concealed or misrepresented any material fact or circumstance.
Doc. 72-5 at 3. Allstate then set forth a litany of material misrepresentations allegedly made by Plaintiffs, including statements regarding ownership of and residency in the house, Plaintiffs' whereabouts at the time of the losses, how Plaintiffs were notified of the losses, and damage or losses as a result of the theft. Id. at 2.
In response to Allstate's summary judgment motion on Plaintiff's claim for failure to provide coverage for the losses, Plaintiffs argued that Allstate must establish its defense of material misrepresentations by clear and convincing evidence. See Doc. 76 at 4-5. For purposes of the summary judgment motion, I found no need to determine which of the two burdens applied as issues of material fact barred summary judgment. However, before proceeding to trial, the court must decide the applicable burden of proof.
In the additional briefing, Plaintiff continues to maintain that Allstate has to prove material misrepresentations by clear and convincing evidence, and Allstate maintains that the proper standard is a preponderance. Specifically, Plaintiff argues that "[t]here is no distinction to be drawn between fraud in an insurance application (such as in Tudor [Ins. Co. v. Twp. of Stowe, 697 A.2d 1010, 1015 (Pa.Super. 1997)]) and fraud in a claim for insurance benefits (as in the case instantly)." Doc. 85 at 7.
The problem with Plaintiffs' argument is that the courts, both federal and state, have drawn such a distinction. In Tudor, an insurer brought suit to declare a policy void based on material misrepresentations in the insurance application, and the Superior Court of Pennsylvania found that the insurance carrier had to prove such fraud by clear and convincing evidence. 697 A.2d 1010, 1016. The court compared the elements of common law fraud with fraud in an insurance application and concluded "we cannot agree that fraud in an insurance application is so intrinsically different from common law fraud that it warrants a lesser burden of proof: fraud is fraud." Id. at 1015. Plaintiff equates an insurance company's attempt to void a policy ab initio for fraud with the denial of coverage based on material misrepresentations made in the submission of the claim. However, both the federal and state courts require proof of the latter by a preponderance of the evidence.
In Ruttenberg v. Fire Ass'n of Philadelphia, the Superior Court concluded that an insurance company must prove the affirmative defense that the fire was caused directly or indirectly by the insured by a preponderance of the evidence. 186 A. 194, 195 (Pa.Super. 1936). Likewise, in Greenburg v. Aetna Ins. Co., 235 A.2d 582 (Pa. 1967), a case in which an insured sought insurance proceeds for a fire loss in his pharmacy, the insured was suspected of setting the fire that destroyed the pharmacy. The Supreme Court of Pennsylvania found that the trial court erred in instructing the jury that the insurance company had to prove that the plaintiff had presented a false claim by "evidence that is clear, precise and indubitable" to avoid liability on the policy. Id. at 583. The court concluded that "the verdict should follow the preponderance of the evidence" standard.
In a civil issue the life or liberty of the person whose act is sought to be proved, is not involved. Proof of the act is only pertinent because it is to sustain or defeat a claim for damages, or respecting the right of things.... The act affirmed is ...