Federal District Court Denies Insurer’s Motion to Dismiss Coverage Claim Based on Intentional Mispresentation

| Aug 5, 2013 | Firm News

Rhode Island’s federal district court has denied an insurer’s motion to dismiss claims against it by plaintiff alleging that a defunct corporation’s insurance policy covers plaintiff’s intentional misrepresentation claims against the corporation.

Plaintiff sued the insured, a Rhode Island corporation, in Delaware for breach of contract and intentional misrepresentation, among other claims.  It recovered a jury verdict for $500,000 based on the contractual and intentional mispresentation claims to which the trial court added costs and over $170,000 in pre-judgment interest.  The insurer had defended the suit but disclaimed an a duty to indemnify based on exclusions in the policy for claims for breach of contract and fraud.  The insured failed to satisfy the judgment and became defunct.  Plaintiff filed a “direct action” suit in Rhode Island seeking declaratory judgment that the insurer pay the verdict amount.

The Court initially rejected plaintiff’s argument that the insurer could not defend the suit against its insured and then refuse to indemnify.  It noted that under Rhode Island law the duty to defend is broader than the duty to indemnify.

The Court said it was undisputed the policy did not cover the breach of contract claims.  It also excludes claims “based upon, arising from or in consequence of the any actual or alleged liability…under any written or oral contract…[unless the insured] would have been liable in the absence of the contract or agreement…”  Accordingly, the issue is whether the insured could be liable for the intentional misreprentation in the absence of the contract with the plaintiff.  The insurer argued that this exclusion should be read broadly.

The Court said the complaint’s allegations support an inference that that at least some of the alleged misrepresentations occurred before plaintiff and the insured entered into their contract.  Plaintiff said it relied upon these mispresentations in entering into the contract.  The Court held this meant that the exclusion for contract claims did not apply to the intentional misrepresentation claims.

The court also rejected the insurer’s argument that the fraud exclusion applied.  This exclusion denied coverage for any deliberately fraudulent act or omission…”  However, the exclusion only applied to intentional mispresentations by the insured’s CFO, President, CEO or Chairperson.  The complaint alleged mispresentations by the insured’s vice-president and chief technology officer so the “fraud” exclusion was not applicable.

The court rejected the insurer’s motion to dismiss plaintiff’s “bad faith” claims pursuant to R.I.G.L. 9-1-33 where the insured had not assigned its rights to the plaintiff.  Plaintiff argued that the Court could stay its bad faith claim and only address it if plaintiff prevailed on its coverage claims.  Moreover, plaintiff argued Rhode Island law was unclear as to whether there could be an “equitable” assignment of the bad faith rights and it may ask the Court to certify the issue to the Rhode Island Supreme Court.  The Court agreed with this course of action.

Transched Systems Limited v. Federal Insurance Co., C.A. 2-939-M, slip op., (D.R.I. Aug. 2, 2013).

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