A property insurer that refused to make advance payments after a devastating fire at a seafood processing plant and allegedly coerced the claimant into cooperating with an investigation into third parties can be sued for fraud.
In Sustainable Sea Products International LLC, et al. v. American Empire Surplus Lines Ins. Co. and Great American Ins. Co. (VLW 022-3-371), Judge John A. Gibney Jr. of the Eastern District of Virginia said the plaintiff had adequately pled that the insurer made false representations amounting to fraud.
“The court finds it plausible that GA made these false representations to coerce SSPI’s cooperation in GA’s pursuit of third parties that it already knew were responsible for the fire,” Gibney wrote. “By making these allegations, SSPI adequately pleads that GA made these false representations intentionally and knowingly and with the intent to mislead.”
Further, the judge agreed with the plaintiff that the “made whole doctrine” was applicable here.
“Although Virginia courts seem not to refer to the made whole doctrine by name, the doctrine is alive and well in the Commonwealth and bars AESCLIC from subrogation until SSPI is fully compensated for its losses.”
Sustainable Sea Products International, or SSPI, operated a seafood processing plant in Richmond. SSPI entered a contract for property insurance with American Empire Surplus Lines Insurance Company which contained a protective safeguards provision.
In June 2020, a fire destroyed SSPI’s plant. SSPI reported the loss to American as well as to the insurer’s claim handler, Great American Insurance Company, or GA.
Within days, GA requested that SSPI identify how much money was initially needed and provide wiring instructions for advance payments. Over the next week, SSPI complied with GA’s requests for extensive documentation.
SSPI grew worried about the claim when the promised advance hadn’t arrived within a week, so it contacted its insurance broker. The broker advised SSPI that American and GA were now refusing to pay anything until after SSPI submitted a fully assessed claim.
SSPI retained counsel. The next day, GA told SSPI that the requested advance was under consideration. SSPI noted its prior production of information, offered to produce additional documents and requested that the insurers keep its information confidential.
The defendants responded after business hours with an email that quoted the contract’s protective safeguard and cooperation provisions. The response offered no context for quoting the provisions and didn’t address SSPI’s request for confidentiality. Later that evening, correspondence from the defendants’ attorney accused SSPI of failing to cooperate with a pending site inspection.
SSPI believed it was being accused of bearing some responsibility for the fire.
A joint investigation of the fire site subsequently took place and the defendants invited third parties with potential liability to participate. By the end of June, GA indicated to SSPI’s broker that it had obtained evidence that exculpated SSPI from liability.
Nonetheless, the defendants continued to deny coverage until late August 2020.
SSPI filed suit, alleging fraud and contract claims against the defendants. SSPI also requested a declaration that it could recover all uninsured losses before American could recover anything in subrogation.
SSPI asserted that the defendants used the documents it produced to identify and pursue third parties suspected of causing or contributing to the fire. It claimed that it incurred legal fees and document production costs, as well as additional losses in addressing the defendants’ arguments, including losing employees.
The defendants moved to dismiss.
“The Court finds it plausible that GA made these false representations to coerce SSPI’s cooperation in GA’s pursuit of third parties that it already knew were responsible for the fire. The threat of receiving nothing on the claim placed pressure on SSPI to produce documents it otherwise would not have had to produce.”
– Judge John A. Gibney Jr.
‘Thinly veiled threat’
SSPI alleged that GA made material misrepresentations amounting to fraud when it asserted the protective safeguards defense while processing the fire claim.
“[GA’s] two messages, sent after business hours on the day before the scheduled site inspection, constituted a thinly veiled threat to SSPI: GA suspects that SSPI may bear some responsibility for the fire; SSPI must prove its innocence by complying with GA’s demands, or SSPI risks not collecting on its insurance claim,” he pointed out.
The judge also found that GA’s continued assertion of the protective safeguards defense and requests for SSPI’s cooperation after having internally concluded that SSPI wasn’t liable constituted additional misrepresentations of fact.
“The Court finds it plausible that GA made these false representations to coerce SSPI’s cooperation in GA’s pursuit of third parties that it already knew were responsible for the fire,” Gibney wrote. “The threat of receiving nothing on the claim placed pressure on SSPI to produce documents it otherwise would not have had to produce.”
Gibney said the misrepresentations became material because “[w]ithout the insurance money, SSPI’s business risked failure.”
He also found it reasonable to infer that SSPI believed its compliance with GA’s requests made a payout more likely and that SSPI was damaged by the costs of additional document production and attorneys’ fees.
‘Made whole doctrine’
SSPI asked the court to declare that the “made whole doctrine” was applicable here.
American argued that the doctrine wasn’t recognized in Virginia and that, even if was, the contract precluded its application.
But Gibney disagreed, concluding that although the Virginia Supreme Court has never adopted the doctrine by name, state law recognized the basic equitable principal that “‘absent an agreement to the contrary, an insurance company may not enforce a right to subrogation until the insured has been full compensated for her injuries, that is, has been made whole.’”
The judge also said that the contract here didn’t abrogate the doctrine, because it simply stated the general right of insurers to subrogation.
“Boilerplate subrogation clauses incorporate default common law subrogation rules, and do not modify or abrogate them. … The Contract does not opt out of the made whole doctrine because the subrogation clause contained therein is boilerplate.”
The judge noted a decision from the Western District of Virginia which found an identical provision to be simply boilerplate language.