MAY 2012 BAD FAITH CASES: THIRD CIRCUIT AFFIRMS RECISSION OF INSURANCE POLICY WHERE THE INSURED’S APPLICATION CONTAINED FRAUDULENT STATEMENTS, AND NO BAD FAITH IN CLAIMS HANDLING OR IN REASONABLENESS OF DENIAL (Third Circuit)

In Sadel v. Berkshire Life Insurance Company of America, the insured appealed a decision from the district court, which granted summary judgment to the carrier and rescinded the insured’s disability insurance policies. The original suit arose from bad faith allegations against the carrier stemming from its failure to pay benefits to the insured.

The insured is a pharmacist who owns two stores in Philadelphia. In 2002, he began to see a social worker to treat a prescription drug addiction. In 2005, the insured purchased disability insurance from the carrier, but failed to disclose to the carrier’s agent information about his treatments for drug use and various mental disorders.

In January 2007, the insured lost several fingers during a robbery of one of his pharmacies. While being treated for his injury, he expressed concern about taking pain medication because of his prior addiction problems. He returned to work for a short time, but eventually stopped working in August 2007. As a result, he filed a disability claim with the carrier, which obtained records from the hospital and physician that treated the insured.

This information revealed the insured’s statements regarding his addiction problem, prompting the carrier to deny coverage because of inconsistencies in the insured’s application. The insured sued for bad faith in Philadelphia’s Court of Common Pleas and the carrier removed to federal court and filed a rescission counterclaim. The district court granted the carrier’s motion for summary judgment, rescinding the policy and refunding the insured his initial premiums.

The insured subsequently filed this instant appeal.
The appellate court rejected the insured’s argument that an insurer contesting a disability insurance policy beyond the contestability period must satisfy a “higher burden” than ordinarily required in fraud cases. The contestability period, as contained in the policy, expired on February 5, 2007, over two years before Berkshire filed its rescission counterclaim.

Rejecting the insured’s argument, the court ruled that the carrier merely needed to prove that “(1) the insured made a false representation; (2) the insured knew the representation was false when it was made or the insured made the representation in bad faith; and (3) the representation was material to the risk being insured,” in order to rescind the policy. The court affirmed the district court’s ruling that the insured satisfied this standard.

The appellate court also ruled that the insured did not present any evidence that the carrier acted in bad faith when investigating his claims. His primary argument was that the insurer acted with unreasonable delay. However, the court ruled that the delay was actually caused by the insured himself, who failed to provide certain information to the carrier. The court also noted that, because the insured knowingly provided fraudulent misrepresentations on his insurance documents, he cannot establish bad faith on the grounds that the carrier lacked a reasonable basis to deny him benefits.

Date of Decision: March 19, 2012

Sadel v. Berkshire Life Ins. Co. of Am., No. 11-1350, 2012 U.S. App. LEXIS 6455, U.S. Court of Appeals for the Third Circuit (3rd Cir. March 30, 2012) (Rendell, J.).