NOVEMBER 2012 BAD FAITH CASES:COURT GRANTS SUMMARY JUDGMENT TO CARRIER BECAUSE INSURED WAS ALLEGEDLY INVOLVED IN FRAUDULENT ACTIVITIES AND INSURER COULD PROPERLY INVESTIGATE THAT ALLEGATION (New Jersey Federal)
In Walsh Secs., Inc. v. Cristo Prop. Mgmt., the court heard cross-summary judgment motions in an insurance coverage dispute stemming from a title insurer’s denial of its insured’s claim for benefits. The situation arose from a mortgage fraud scheme that impacted the insured’s mortgage lending business.
The insured was a lender who would package mortgage loans for use as securities in secured transactions, or resell the loans to whole loan purchasers. The insured would purchase mortgage loans by funding them at the time of their closing, a process called table funding. At closing, the insured would “purchase title insurance to protect against losses arising from defects in, or encumbrances on, the title to the real property subject to the mortgage loans that it was table funding.”
However, the insured fell victim to a fraudulent scheme carried out by another individual that would purchase property through a company that he owned and sell it for an inflated value. This individual would locate a straw buyer and arrange for the property to be appraised at an inflated price. The insured issued mortgage loans that were impacted by this fraudulent activity, causing its company to lose money.
After the fraud came to light, the insured put the carrier on notice of coverage claims for one hundred and thirteen mortgage loans it had provided to properties involved in the scheme. The carrier responded that it needed information regarding the insured’s knowledge of, and participation in, the scheme that gave rise to these insurance claims. The insured never provided this information and instead sued the carrier for coverage.
After the carrier refused to cover the losses, the insured filed an amended complaint alleging that the carrier acted in bad faith. The carrier moved to summary judgment and the court granted the motion, reasoning that the carrier “had ample reason to delay processing [the insured’s] coverage claims.” Around the time that the insured made a claim for benefits under its title insurance policies, several newspaper articles came out suggesting that the insured had knowledge of, and participated in, the fraud. A number of parties involved in the fraud also indicated that the insured had knowledge of the scheme. Moreover, the insured sued for coverage as soon as the carrier asked for further information regarding the coverage claim. Therefore, the carrier justified to delay its processing of the insured’s claims.
Date of Decision: April 17, 2012
Walsh Secs., Inc. v. Cristo Prop. Mgmt., Ltd., 858 F. Supp. 2d 402, U.S. District Court for the District of New Jersey (D.N.J. 2012) (Debevoise, J.)
