Dana A. Gittleman

In Palek v. State Farm Fire & Cas. Co., 535 F. Supp. 3d 382 (W.D. Pa. Apr. 21, 2021), the court granted the defendant insurer’s motion to dismiss claims for equitable reformation of contract, bad faith insurance practices under 42 P.S. § 8371 and unfair trade practices under 73 P.S. § 201 et seq. 

The genesis of the plaintiffs’ claims was an alleged misrepresentation at policy inception that their homeowner’s policy would cover their in-ground pool for damage arising from foreseeable types of harm. The plaintiffs claimed to have relied upon the insurance agent’s representation that the policy “covered their swimming pool” and were unaware that a potential “common risk” of damage arising from earth movement or subsurface water was excluded. The plaintiffs suffered a loss resulting from hydrostatic pressure in their pool (pool pop), which was denied under the aforementioned exclusion. Following the denial, the plaintiffs claimed that, had they known of the risk of pool pops (which they contended are common risks known in the insurance and swimming pool industries), they would have selected another policy, an additional rider or sought coverage elsewhere. 

When damage occurs for which coverage is denied, insureds often look for a source of blame. In such cases, the blame is frequently directed toward the insurance agent who procured the policy, irrespective of the nuances of the policy or the insureds’ failure to appreciate the scope of the coverages afforded. Insurance agents are certainly not clairvoyants, able to predict all hypothetical consequences of their customers’ insurance elections or whether their insurance customer understands the limitations of these elections. Thus, this decision is favorable for insurance agents, as it constrains claims for alleged “misrepresentation” (including negligent misrepresentation and fraud) where, as here, the agent has no knowledge of an insured’s mistaken belief and makes no affirmative representation regarding coverage. Vague representations as to “foreseeable” types of harm are distinguishable from affirmative assurances of coverage. 

The Palek decision is also a lesson in what not to do with respect to foreseeable risks of coverage, as it is possible that extrication from the litigation would have been complicated had the insurance agent attempted to categorize foreseeable vs. non-foreseeable events. Had the agent specifically delineated foreseeable risks, and either failed to mention or mischaracterized pool pops as an excluded risk of harm, the court may not have dismissed the plaintiffs’ claims arising from justifiable reliance. Insurance agents should always be wary of providing coverage opinions or analyses, but particularly in preemptively attempting to exhaust all possible risks and their coverage implications. 

The Court's Evaluation
In evaluating the reformation argument, the court examined whether there was evidence of a unilateral or mutual mistake justifying equitable reformation. In light of the language of the operative complaint— alleging the defendant had superior knowledge about pool pops and had denied such claims—the court concluded that the plaintiffs must establish that the defendant knew of and exploited their mistaken belief as to the coverages afforded. Importantly, the court concluded that the plaintiffs failed to show that the defendant knew of their ignorance of the subject exclusion or that the defendant unilaterally limited the policy beyond the “usual incident” of coverage. Indeed, the plaintiffs neither alleged that the water damage exclusion was unusual in a policy covering swimming pools or that it “changed the basic nature of the homeowners’ policy,” nor did they specifically request a coverage that the defendant unilaterally excluded. 

The court considered similar factors in rejecting the plaintiffs’ unfair trade practices claim in the absence of justifiable reliance. While Pennsylvania courts do not require an insured to “pore over their written policies to discover fraudulent misrepresentations,” there is a general duty to read the policy if it would be unreasonable under the circumstances not to do so. See Toy v. Metro. Life Ins. Co., 928 A.2d 186, 207 (Pa. 2007); Rempel v. Nationwide Life Ins. Co., 370 A.2d 366, 369 (Pa. 1977). The plaintiffs based their UTPCPL claim on an allegedly misleading statement by the defendant’s agent, that the policy would cover their pool from damage arising from foreseeable types of harm, yet the coverage did not include the (per the plaintiffs) common and foreseeable harm of pool pops. 

The court held that the defendant’s representation regarding the scope of coverage was too vague for reliance on it to be reasonable. It also found no allegation that the defendant made affirmative representations about coverage for pool pops or that the policy covered “all” foreseeable harms or “reasonably” foreseeable harms. In the absence of a specific representation about the policy at issue, i.e., what was or was not foreseeable, the court found that the plaintiffs were unreasonable to rely on a vague representation of coverage for “foreseeable” damage without further inquiry. 

The allegations in Palek were made against the insurer directly, with the agent not named individually, and the complaint asserted claims not generally made against an insurance agent (reformation, bad faith and unfair trade practices). However, the implications for insurance agents, both independent and captive, are readily foreseeable as the heart of the issue was an alleged misrepresentation about coverage terms and exclusions, a claim ripe for litigation against insurance agents.
 

^{Legal Update for Insurance Agents & Brokers – February 3, 2022, has been prepared for our readers by Marshall Dennehey Warner Coleman & Goggin. It is solely intended to provide information on recent legal developments, and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. We welcome the opportunity to provide such legal assistance as you require on this and other subjects. If you receive the alerts in error, please send a note tgventura@mdwcg.com. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2022 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved.}