Defense Digest

Clarification: A Party To A Settlement Agreement May Seek Damages, Not Just Rescission Of The Agreement, When Fraudulently Induced Into The Agreement

A three-judge Pennsylvania Superior Court panel ruled in Eigen v. Textron Lycoming Reciprocating Engine Div., 205 Pa. Super. 141 (Pa. Super. 2005), that the victim of fraud in the inducement has two options: (1) rescind the contract; or (2) affirm the contract and sue for damages.

This holding clarifies a conflict between Pennsylvania and Federal Third Circuit case law. The trial court in Eigen relied on Dempsey v. Associated Aviation Underwriters, 977 F.2d 567 (3d Cir. 1992), which holds in relevant part that the victim of fraud in the inducement does not have the option of affirming the contract and seeking consequential damages. The Superior Court panel plainly stated that Dempsey does not accurately reflect Pennsylvania law and noted that it is not bound by decisions from federal courts other than the United States Supreme Court.

Eigen is an action for damages arising out of an airplane crash where all occupants perished. The pilot was flying a rented Piper aircraft and had two passengers: his wife and mother. The pilot's brother, Albert D. Eigen, was the executor and administrator of the various estates and sued the manufacturer of the plane, the organization that maintained and rented the plane, and the manufacturer, overhauler, and installer of the carburetor for the plane.

During discovery, the carburetor manufacturer, Precision Airmotive Corporation, requested "all insurance policies applicable to the accident aircraft or its occupants at the time of the accident." Eigen responded to this discovery request by stating that no coverage existed.

Trial commenced, but before the case went to the jury for deliberation, the parties entered into a global settlement agreement for a total sum between $4 and $4.3 million. Precision's contribution was approximately $1.3 million. However, Precision later refused to honor the agreement, claiming that it was fraudulently induced into the settlement by Eigen. After the settlement was reached, Precision learned that the deceased pilot had an insurance policy on his personal plane, which might have provided as much as $2 million in coverage for his passengers, regardless of which plane he piloted.

Furthermore, on the day settlement was reached, counsel for Eigen sent a letter to the pilot's insurance carrier notifying it that he intended to file a claim for the $2 million limits on the policy on behalf of the passengers in the plane. The letter specifically stated that the pilot may have been responsible, in part, for the accident, a position that Eigen denied before the settlement when Precision alleged that the pilot contributed to the cause of the accident.

Accordingly, Eigen filed a petition to enforce the settlement. Similarly, Precision filed a petition for relief, seeking to affirm the settlement and requesting damages arising from Eigen's alleged fraud in not producing the pilot's insurance policy. After oral argument, but without an evidentiary hearing on Precision's petition, the Philadelphia County Court of Common Pleas entered an order granting Eigen's petition and denying Precision's petition. Precision appealed the trial court's decision to the Superior Court.

The Superior Court specifically held that Precision had the option to seek the rescission of the contract or affirm the contract and sue for damages. Furthermore, it explained that the affirmance of a settlement agreement induced by the fraud of a plaintiff does not extinguish the right of a defendant and party to the agreement to recover damages for the fraud.

Accordingly, Superior Court affirmed the trial court's portion of the order granting the petition to enforce the settlement, but reversed that portion of the order denying Precision's petition for relief. The case was remanded for an evidentiary hearing on the fraud allegation. The court analyzed the six elements for a fraud claim in light of the facts plead and determined that Precision had shown sufficient evidence to warrant a hearing.

The Eigen decision has an important application to an insurance defense practice as it provides the victim of fraud the option of either a shield (rescission of the settlement agreement) or a sword (suit for monetary damages). Also, the choice presumptively will have some modicum of deterrence.

*Don is an associate in our Harrisburg, PA office. He can be reached at (717) 651-3504 or dcarmelite@mdwcg.com.