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Employment discrimination:  A Title VII retaliation claim must allege objectively deterrent action
In Cook v. Billington, 2011 U.S. Dist. Lexis 88284 (D.D.C. Aug. 9, 2011), the United States District Court for the District of Columbia emphasized that to successfully state a claim for retaliation under Title VII, an employee must allege that when he or she engaged in, or attempted to engage in, a protected activity, his or her employer responded in a materially adverse, or objectively deterrent, manner.

The Howard R.L. Cook & Tommy Shaw Foundation ("the Foundation") is a nonprofit organization comprised of employees of the Library of Congress ("the Library"). The Foundation's activities include assisting Library employees bring employment discrimination suits against the Library. The Foundation repeatedly requested formal recognition by the Library on the basis that such recognition would permit the Foundation to hold meetings at Library facilities and distribute materials to Library employees. The Library repeatedly denied the Foundation's requests.

Ultimately, the Foundation filed a lawsuit against the Library, alleging that the Library's failure to formally recognize the Foundation was a direct response to the Foundation's opposition to employment discrimination at the Library, and thus, constituted unlawful retaliation in violation of Title VII. The Foundation posited that the Library's refusal to recognize the Foundation constituted a materially adverse action because the Foundation's lack of formal recognition could potentially dissuade a Library worker from filing suit against the Library. The Library submitted a motion to dismiss the suit for failure to state a claim upon which relief could be granted, arguing that the denial of recognition did not constitute a materially adverse action because it did not prohibit the Foundation and its members from operating and associating.

Upon consideration of the Library's motion to dismiss, the U.S. District Court instructed that both parties had failed to properly apply the materially adverse standard as articulated by the Supreme Court in Burlington N. & Santa Fe Ry. Co. v. White, 548 U.S. 53, 68 (2006). The court reminded that pursuant to this standard, the appropriate legal question is not whether a plaintiff subjectively found an action materially adverse, but rather, whether the action would dissuade the objective, reasonable worker from making or supporting a complaint. It further reminded that a materially adverse action includes not only employer conduct that bars an employee from making, or supporting, a charge of discrimination, but also conduct that could deter a reasonable employee from engaging in these activities. Applying the standard to the facts alleged, the court concluded that the Plaintiff had failed to state a claim upon which relief could be granted because the purported benefits of formal recognition by the Library (i.e., the ability to hold meetings on Library premises and distribute literature to Library employees), were simply not significant enough to deter a reasonable employee from complaining of discrimination for fear of jeopardizing his or her employment.

Posted by Mandy M. Wolfe, Esq. on 09/23/2011 at 02:17 PM
Employment DiscriminationPermalink

Legal malpractice decision explores roles of judge, jury, and expert in District of Columbia

In a legal malpractice case, Hickey v. Scott, No. 07-1866 (D.D.C. July 11, 2011), the District Court explored the respective roles of the judge, jury, and expert under D.C. law.  (An earlier decision in this case was previously discussed here.) 

The claim discussed in this ruling was the plaintiff's allegation that the lawyer violated the applicable standard of care by failing to request Laffey Matrix hourly rates in his petition for attorney's fees in the underlying action before the EEOC.  Before the District Court was the issue of the permissible scope of expert testimony with regard to that claim.  Should the parties' experts be permitted to testify on whether it is a breach of the appropriate standard of care for an eligible attorney not to request Laffey rates in his fee petition before the EEOC, and instead request only his lower, contractual rates?  Second, should the experts be permitted to testify whether the attorney met the legal criteria for an award of Laffey rates?  Third, should the experts be permitted to testify whether the attorney's failure to petition for Laffey rates was the proximate cause of any injury to the former client?

Each of these questions implicated the respective roles of the Court, the jury, and the experts at trial.

The Court ruled that whether it is a breach of the applicable standard of care for an eligible attorney not to file a fee petition for Laffey rates before the EEOC is a question that the jury must decide.

However, expert testimony as to the applicable standard of care is appropriate and necessary, unless the attorney's lack of care and skill is so obvious that the trier of fact can find negligence as a matter of common knowledge.

The Court also ruled that the experts would be allowed to opine on whether it is a breach of the standard of care for an attorney in the same circumstances not to petition for Laffey rates.

On the other hand, the legal criteria for an award of Laffey rates was ruled to be a matter of law, within the sole province of the Court, and upon which the experts were not permitted to testify.  Surprisingly, the District Court cited an Illinois decision on this point.

The Court also ruled that once it had instructed the jury as to the law on an attorney's eligibility for Laffey rates, the question of whether the attorney satisfied these legal criteria was one for the jury to decide.

Finally, the Court considered the issue of who would decide whether the attorney's failure to petition for Laffey rates was the proximate cause of injury?  In other words, whether such a petition for Laffey rates, if made, would have been successful?  The District Court characterized this as a variety of the "case-within-a-case" issues typical of legal malpractice cases.  Here, the issue was whether a reasonable Administrative Law Judge would have awarded fees at the higher Laffey rates if the attorney had sought them.

Adopting the approach of a number of non-District of Columbia precedents, the District Court ruled that the jury should perform its traditional function of applying law to facts, even when the earlier factfinder was a judge -- as long as it only involves an application of law to facts, not a decision on a disputed issue of law.  Under this approach, the Court simply instructs the jury on the legal aspects of the case, and then leaves it to the jury to decide what a reasonable fact-finder would have concluded if the attorney had not been negligent.

Finally, the Court considered whether the jury may be assisted by expert testimony in making that assessment.  Citing precedent from the Second Circuit, Virginia, and California, the District Court ruled that no, the parties experts would not be permitted to testify on this, and invade the jury's function by reaching the ultimate question of whether a petition for Laffey rates before a reasonable ALJ would have been successful.

The District Court acknowledged that there is a fine line between an expert's testimony on why an attorney's failure to petition for Laffey rates constituted a breach of the standard of care, and expert testimony on whether a reasonable ALJ would have awarded Laffey rates, however "[a]lthough the distinction may be subtle, it is one that must be drawn." 

This decision provides a framework for future legal malpractice cases to help properly delimit the respective roles of the parties' experts, the jury, and the Court.

Posted by David B. Stratton on 09/15/2011 at 03:13 AM
District of ColumbiaExpert Witness IssuesLegal MalpracticePermalink

Impeachment with a prior conviction of an infamous crime, in Maryland

In Deltavia Cure v. State of Maryland, No. 135 Sept. Term 2010 (Md., Aug. 16, 2011), the Court of Appeals discussed the process by which a trial court evaluates whether to allow a witness’s prior conviction for an infamous crime to be used against him for impeachment purposes. 

The trial court must first look to Maryland Rule 5-609.  The initial considerations for admissibility are clear.  There are two categories for what convictions may be used to impeach a witness’s credibility (1) “infamous crimes” and (2) “other crimes relevant to the witness’s credibility.”  Infamous crimes include treason, common law felonies, and other offenses classified as crimen falsi.  If the crime does not fall within one of these two categories, then it is inadmissible and the analysis ends.  If the conviction falls within one of these two categories then the second step for the proponent is to establish that the conviction is not more than 15 year old, that it was not reversed on appeal, and that it was not subject to a pardon or pending appeal. 

Once these factors are satisfied, it is then for the court to determine that the probative value of the prior conviction outweighs the prejudicial impact it may have on the fact-finder against the witness or objecting party.  See State v. Westpoint, 404 Md. 455, 477-78, 947 A.2d 519, 532-33 (2008) (quoting State v. Giddens, 335 Md. 205, 213-14, 642 A.2d 870, 874 (1994), by applying the five prongs set forth in Jackson v. State, 340 Md. 705, 668 A.2d 8 (1995).  It is reversible error if the trial court does not apply the balancing test.  Md. Rule 5-609(a)(2). 

The five factors the court must consider include: (1) the impeachment value of the prior crime; (2) the point in time of the conviction and the defendant’s subsequent history; (3) the similarity between the past crime and the current charged crime; (4) the importance of the defendant’s testimony; and (5) the centrality of the defendant’s credibility.  Jackson, 340 Md. at 717, 668 A.2d at 14.

If a crime is “infamous” or “relevant to the witness?s credibility” it has impeachment valued because the says as much.  Second, the more recent a conviction, the more probative value it has for impeachment purposes.  Conversely, the further in the past the crime is the weaker its relevance.  However, in a case where the conviction is equally as recent as it is old, time is weighed to be neutral.  Third, the closer the similarity between the past crime and the current crime/conduct at issue weighs in favor of admissibility.  The fourth and fifth prongs as to the importance of the witness’s testimony and the centrality of the witness’s credibility are considered jointly.  Where the credibility of the witness is the central issue, the probative value of the impeachment is great, and thus weighs heavily against the danger of unfair prejudice and in favor of admissibility of the prior conviction.

Applying the above analysis, the Court determined that arson is an infamous crime, that the conviction was eight years old, and that the arson conviction was wholly dissimilar to the drug charge he was on trial for, thereby reducing its prejudicial impact.  Once of the critical considerations was that the jury had to determine whom to believe as there was conflicting testimony from the defendant and witnesses.  Thus, the defendant’s testimony and his credibility were a central issue, such that factors four and five weight heavily in favor of admissibility.  The Court of Appeals affirmed the ruling of the trial court finding that it was proper to admit the criminal defendant’s prior arson conviction for impeachment purposes.

Posted by Robert D. Anderson, Esq. on 09/13/2011 at 01:57 AM

Innocent Insureds provision held not to save coverage for accounting firm for employee theft

In Bryan Brothers Inc. v. Continental Casualty Co., No. 10-1439 (4th Cir. March 24, 2011)(published per order filed Sept. 6, 2011), the Court held that the prior knowledge provision in an accounting firm’s professional liability policy was a clear and unambiguous condition precedent to recovery under the policy for thefts from client accounts by a former employee of the accounting firm.  Because the former employee had prior knowledge of her thefts, a condition precedent was unfulfilled, and the coverage agreement was not triggered.  In addition, the 4th Circuit held that exclusions and exceptions in the policy cannot provide coverage that is precluded by the prior knowledge exception.  Thus, the Court affirmed Bryan Brothers v Continental in favor of the insurer.

Significantly, the accounting firm’s professional liability policy with Continental included the following Innocent Insureds provision under the Policy conditions:

If coverage under this Policy would be excluded as a result of any criminal, dishonest, illegal, fraudulent, or malicious acts of any of you, we agree that the insurance coverage that would otherwise be afforded under this Policy will continue to apply to any of you who did not personally commit, have knowledge of, or participate in such criminal, dishonest, illegal, fraudulent or malicious acts or in the concealment thereof from us.

The accounting firm argued that since the former employee who committed the thefts was the only person with prior knowledge of her thefts, the innocent insureds provision saved coverage for any insured other than her.  Continental Casualty argued, on the other hand, that the prior knowledge provision in the main insuring clause was a condition precedent that precluded coverage if unfulfilled. 

Applying Virginia law, the 4th Circuit agreed with the insurer.  The Court agreed that based on the plain language and structure of the policy, the prior knowledge provision in the main insuring clause was a condition precedent to coverage.  Thus, the accounting firm’s lack of prior knowledge was a condition of the insurer’s agreement to cover the accounting firm’s liability from acts predating the policy.  The knowledge of the former employee breached that condition.  The Court found that the Innocent Insureds provision was inapplicable, because the insurer did not deny coverage under the bad acts exclusion.  The Court stated that the Innocent Insureds provision “appears to be an exception to the bad acts exclusion”, which was not implicated.

In any event, the Court found that it is elemental that exclusions and exceptions in an insurance policy cannot expand the scope of agreed coverage.

Accounting and law firms should be aware of this decision when negotiating the renewals of their professional liability policies.  The Innocent Insureds provision does not trump the provisions of the main insuring clause.

Posted by

David B. Stratton

on 09/12/2011 at 01:57 PM

Employment discrimination action dismissed in favor of arbitration under employment agreement
In Ratliff v. Costar Realty Information, Inc., No. 11-0813 (D. Md. July 7, 2011), the U.S. District Court for the District of Maryland granted a motion to compel arbitration of an employment discrimination action. At the time she was hired, the plaintiff signed an employment agreement with Costar, which included an arbitration clause. The arbitration clause expressly included that obligation to arbitrate employment disputes concerning claims for discrimination or harassment.

Nine months after she was hired, the plaintiff was terminated. He later filed suit, alleging racial discrimination and retaliation in violation of federal and state laws. After removing the action to federal court, Costar filed an answer and then three days later, filed its motion to compel arbitration.

The plaintiff opposed the motion to compel arbitration on the grounds that (1) the arbitration agreement was illusory; (2) the arbitration agreement was unsconsionable; and (3) Costar waived its right to arbitrate due to delay in demanding arbitration. The district court rejected all three arguments.

The district court ruled that the arbitration agreement was not illusory, notwithstanding that the employee handbook stated that the employer had the right to change any of its guidelines, policies, practices, working conditions, or benefits at any time, because the arbitration agreement was a separate document from the employee handbook. The agreement to arbitrate was not a policy or benefit contained in the employee handbook. Further, the arbitration agreement contained mutual promises, so it was supported by consideration.

The court rejected the argument that the arbitration agreement was unconscionable, because the agreement did not deprive plaintiff of the right to raise any of the substantive claims she brought in her civil complaint. Further, not only did the arbitration agreement impose the same obligations on Costar, it provided that Costar would pay all costs of commencing arbitration and the remainder of the arbitration fees.

Finally, the court rejected the waiver argument, since Costar moved to arbitration just three days after it filed its answer.

Since all the issues presented in the lawsuit were arbitrable, the court dismissed the lawsuit, rather than stay the proceedings.

This opinion illustrates how an employer can draft an arbitration agreement for employment disputes that will pass muster with the courts.

Posted by David B. Stratton on 09/09/2011 at 06:04 PM
ArbitrationEmployment DiscriminationMarylandPermalink

John Tremain May selected for inclusion in the 2012 edition of The Best Lawyers in America
Congratulations to Partner John Tremain May, Esq. on having been selected by his peers for inclusion in the 2012 edition of The Best Lawyers in America (Registered) in the practice area of Legal Malpractice Law - Defendants. John May defends attorneys and accountants in professional malpractice actions in the District of Columbia and Maryland.

For nearly three decades, Best Lawyers has been regarded -- by both the profession and the public -- as the definitive guide to legal excellence in the United States.

Selection to Best Lawyers is based on an exhaustive and rigorous peer-review survey (comprising more than 3.9 million confidential evaluations by attorneys), and because no fee or purchase is required to be listed, inclusion in Best Lawyers is rightly considered a singular honor.

Posted by David B. Stratton on 09/09/2011 at 04:28 PM
Jordan Coyne LLP newsPermalink

Novel settlement coupled with assignment of contribution claim against co-defendant in D.C.
In Estate of Kurstin v. Lordan, No. 07-CV-1221 (D.C. July 21, 2011), the D.C. Court of Appeals approved an unusual settlement arrangement in a medical malpractice action, in which the settlement agreement preserved the settling anesthesiologist's claim of contribution from the non-settling surgeon, but solely for the purpose of assigning that claim back to the plaintiff for her ultimate benefit.

The surgeon, Dr. Kurstin, had performed abdominal hernia repair on the plaintiff, assisted by an anesthesiologist, Dr. Lordan. To avoid deep venous thrombosis to the patient, the surgeon directed the anesthesiologist to administer an anti-clotting drug during surgery. The anti-clotting drug caused spinal bleeding that brought paralysis to the plaintiff's right foot, impaired sensation and caused chronic pain in both legs, and brought loss of bowel control.

The plaintiff sued both the surgeon and the anesthesiologist for medical negligence as joint tortfeasors. On the first day of trial, plaintiff's counsel and counsel for the anesthesiologist disclosed the existence of an agreement by their clients providing for dismissal of "all claims" by the plaintiff against both the anesthesiologist and the surgeon. The agreement further provided an express reservation by the anesthesiologist of the right to pursue "contribution/indemnification" from the surgeon. Plaintiff's counsel announced that he would represent the anesthesiologist against the surgeon on a cross-claim for contribution. The jury trial for malpractice was therefore converted into a bench trial on the anesthesiologist's equitable cross-claim. Under the settlement agreement with plaintiff, the anesthesiologist had agreed to pay the plaintiff $2 million. The anesthesiologist agreed to fully cooperate with counsel in bringing the contribution claim against the surgeon, and retained no interest in any proceeds.

After the bench trial, the trial court issued findings of fact and conclusions of law, stating that the surgeon had breached the national standard of care and, as the proximate cause of the plaintiff's injuries, was a joint tortfeasor. The trial court awarded the anesthesiologist $1 million from the surgeon as a pro rata contribution on the cross-claim, i.e., half of the amount the anesthesiologist paid the plaintiff pursuant to their agreement. Thus, the plaintiff received the total amount of $3 million.

The surgeon appealed, arguing among other things that the explicit terms of the plaintiff's settlement agreement with the anesthesiologist released both doctors "from all claims and demands of whatever nature" without effectively reserving a claim for contribution. Essentially, the argument was that by releasing all claims against both defendants in the settlement agreement's release clause, the plaintiff left no liability on the part of the surgeon to which the anesthesiologist's right of contribution could attach. The reservation of the contribution claim was accomplished in a later paragraph of the settlement agreement, and the argument was that such a reservation was hollow.

The Court rejected that argument, finding that the parties intended only the release of all claims by the plaintiff against the anesthesiologist and the surgeon, leaving the anesthesiologist free to pursue his own, separate claim for contribution against the surgeon.

The Court also rejected the argument that this settlement arrangement was unlawful. Based on D.C. precedent, the Court confirmed the legality of the following arrangement:

(1) a plaintiff's complete release of two joint tortfeasors as consideration for payment of money damages by a settling defendant, (2) coupled with reservation of the settling defendant's claim for contribution (not just indemnification), (3) accompanied by assignment of the contribution claim back to the plaintiff as a way of, (4) achieving full consideration for the releases, that is, a package of money in hand plus a money claim calculated, in combination, to afford complete relief.

In addition, on appeal the surgeon challenged whether the settling anesthesiologist had been judicially determined or stipulated by all parties to be a tortfeasor. The Court of Appeals noted that the present case is the first to address the question whether something less than a judicial ruling or an all parties stipulation can serve to establish a settling defendant's join liability with the non-settling defendant for purposes of determining the settler's right of contribution against a joint tortfeasor.

In the present case, in his settlement agreement with the plaintiff, the anesthesiologist acknowledged that he was "a joint tortfeasor." The Court held that a settling defendant can establish a claim for contribution by acknowledging joint tortfeasor status in his settlement with the plaintiff, coupled with the establishment of the liability of the non-settling tortfeasor and the reasonableness of his settlement with the injured person.

The Court noted that in this cae, rather th erebut the anesthesiologist's stipulation that he was a joint tortfeasor, the surgeon took the position throughout the trial that the anesthesiologist was the sole responsible tortfeasor, a litigation strategy tantamount to stipulating the anesthesiologist's culpability.

The Court of Appeals also outlined for future cases a shifting burden of persuasion that will govern the analysis of the trial court:

First, because the settling defendant/cross-plaintiff must establish that he or she is a tortfeasor, the settler has the burden of persuasion to do so. Second, the admission of liability in a formal settlement agreement, coupled with valuable consideration payable to the injured plaintiff, establishes, as we have said, a prima facie showing we hold sufficient to shift the burden of production to the non-settler who would question the settler's status as a joint tortfeasor. Third, because the settler has the burden to prove reasonableness of the settlement (subject to reduction for failure of proof), the settler will present in court evidence which the non-settler may attack with a view to rebutting (if desired) the settler's prima facie showing of culpability, as well as the reasonableness of the settlement. Finally, the factfinder, properly informed about the parties' respective burdens of persuasion and production, can be asked to resolve separately, if contested, whether the settling defendant/cross-plaintiff was a joint tortfeasor.

The lesson this case teaches is that there is a new procedure for a joint tortfeasor to "settle around" a co-defendant who intends to go to trial. From the point of view of plaintiff's counsel, this mode of settlement prevents the remaining defendant from using the "empty chair" argument, by pointing to the absent defendant and attempting to shift all the blame to absent defendant. Under this arrangement, the settling defendant's liability is admitted and the issue is whether the remaining defendant is also liable. In addition, the contribution claim is an equitable claim, tried to the court, not a jury.

Posted by David B. Stratton on 09/06/2011 at 02:35 PM
ContributionDistrict of ColumbiaPermalink

Maryland federal court denies coverage under CGL policy for alleged theft of $1.5 million in goods
In IFCO Systems North America, Inc. v. American Home Assurance Company, No. 09-2874 (D. Md. June 23, 2011), the Court granted summary judgment to American Home Assurance Company, finding no coverage under the American Home policy for the insured's liability arising from alleged theft by the insured's employees of over $1.5 million of goods from a client's warehouse.

The insured, IFCO Systems North America, had contracted with Rite Aid of Maryland to provide pallet management and logistics support at Rite Aid's warehouse in Perryman, Maryland. Rite Aid notified IFCO that it believed that IFCO had stolen over $1.5 milling in Rite Aid goods from the Perryman facility. IFCO reported this claim to its insurer, American Home. American Home investigated the claim and disclaimed any duty to defend or indemnify. IFCO then filed a declaratory judgment action that the Policy covered the Rite Aid claim. The case is somewhat unusual in that in the declaratory judgment action, both IFCO and American Home are represented by insurance defense firms.

The Court agreed with American Home's argument based on a basic principle: the Policy defined an "occurrence" as "an accident", and theft is not an accident.

The Court rejected IFCO's argument that even though the IFCO employee who allegedly stole the Rite Aid goods did so intentionally, IFCO itself as a corporation was an innocent insured. The Court ruled that under the applicable law, the intentional acts of a corporation's employees do not constitute an "accident", even if the corporation did not foresee or intend the employee's actions.

IFCO next argued that that the Policy definition of "occurrence" is ambiguous and can be read to include even intentional acts by IFCO employees. The Court characterized this argument as absurd, noting that by IFCO's logic, repeated intentional acts would fall within the definition of "accident", even where an isolated intentional act may not. "Routinized theft cannot be accidental, even under insurance law."

IFCO also argued that the Policy provisions, read as a whole, imply that property losses due to theft will be covered by the Policy. The Court rejected this argument, noting that "The problem with this argument is that the "solitary provisions" of the Policy cited by [American Home] also happen to be the Policy's operative provisions establishing the scope of coverage."

Notwithstanding the Court's rejection of its arguments, IFCO filed a motion to alter or amend the Court's judgment, which is still pending.

Posted by David B. Stratton on 09/05/2011 at 05:56 PM

Suicide of another held not to support negligence action in District of Columbia
In Rollins v. Wackenhut Services, No. 10-00047 (D.D.C. Aug. 10, 2011), the court dismissed wrongful death and survival actions brought against an employer and a pharmaceutical company by the mother of a twenty-three year old man who was working as an armed security guard when he committed suicide with his work-issued pistol.

The plaintiff alleged that the employer was negligent for failing to do an adequate background check of the decedent before hiring him to a security guard position in which he would be entrusted with a firearm. The plaintiff also brought a wrongful death claim against a pharmaceutical company for manufacturing and distributing a drug that the decedent was taking for his mental issues, despite the drug's known risks of increasing suicidality in certain patients.

The employer first argued that the district court was without jurisdiction because the D.C. Worker's Compensation Act provided the exclusive remedy for injuries that occur during the course of a worker's employment. However, the Act does not apply "where injury to the employee was occasioned solely by his intoxication or by his willful intention to injury or kill himself or another." D.C. Code sec. 32-1503(d). The Court found that the exception set forth in D.C. Code sec. 32-1503(d) applies and the decedent's suicide was not covered by the Act.

Next, the employer argued that the plaintiff failed to state a claim against it, on the grounds that the general rule in the District of Columbia is that a plaintiff may not recover damages in negligence from the suicide of another. This is because suicide generally is considered to be a deliberate, intentional, and intervening act which precludes a finding that a given defendant is, in fact, responsible for the decedent's death. Or in other words, suicide is an intervening and independent cause of death which breaks the chain of causation. There are two recognized exceptions to this rule: (1) Where the actor's negligent conduct so brings about the delirium or insanity of another as to make the actor liable for it; and (2) where the defendant has a special relationship involving the treatment or custodial control over the deceased that imposes a duty to take reasonable steps to prevent a reasonably foreseeable suicide. Neither exception applied in this case.

The Court also dismissed the product liability claims against the manufacturers of Abilify on the grounds that the complaint failed to state any factual basis for a strict liability claim based on a defective product. The plaintiff did not meet her burden to allege facts showing that Abilify is defective or is not a reasonably safe product.

Posted by David B. Stratton on 09/04/2011 at 08:40 PM
DefensesDistrict of ColumbiaWorkers CompensationPermalink

Rescission action requires reasonable promptness by insurer
In The Charter Oak Fire Ins. Co. v. American Capital, Ltd., No. DKC 09-0100 (Aug. 9, 2011), the Court considered the issue of whether an insurer acted with reasonable promptness to rescind an insurance policy after learning of misrepresentations in the application for insurance. The district court denied the insured's motion to dismiss, finding that the facts alleged in the amended complaint that the element of reasonable promptness was adequately plead in the complaint.

In reaching that conclusion, the district court reviewed key points concerning an action for rescission of an insurance policy.

Because rescission is a "radical remedy", courts have long recognized that a party requesting it must move quickly. Courts have deemed the promptness requirement so important that they place the onus on the plaintiff insurer to show it.

The relevant trigger for rescission is when a plaintiff learns of "the facts that would justify rescission", not merely "facts that raise the mere potentiality for rescission." Also, when an insurer suspects that its policyholder may have made misrepresentations, it is entitled to a "reasonable time" within which to investigate the matter before it must rescind.

Even assuming that the insurer has not sought rescission with reasonable promptness, the policyholder would need to show actual prejudice because of the delay. Prejudice cannot be presumed from the mere fact of the delay. See North American Specialty Ins. Co. v. Savage, 977 F.Supp. 725 (D. Md. 1997).

Posted by David B. Stratton on 09/04/2011 at 07:54 PM

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