Recommendation to Deny Agent’s Motion for Summary Judgment on Fraudulent Misrepresentation
The magistrate judge recommended that the agent's motion for summary judgment to defeat the insured's claim for fraudulent misrepresentation be denied. SCHST, Inc. v. Arthur J. Gallagher & Co., 2023 U.S. Dist. LEXIS 229058 (S.D. Texas Nov. 22, 2023).
SCHST, Inc. d/b/a Space City Service, suffered property loss from Hurricane Harvey on August 29, 2017. Lloyd's refused to cover some of the claims. The policy covered vehicles and equipment that were "specified in the Schedule herein." An endorsement required SCHST to "report all Additions/Deletions" to Lloyd's, complete with the "total values . . . on the last business day of the preceding month," and to provide this information "within 30 days of date of attachment/deletion." The changes would affect the annual premium for the policy.
Gallagher advised and assisted in SCHST's procurement of the policy. Gallagher also served as an intermediary between SCHST and Lloyd's by communicating with other entities involved with administering the policy. Gallagher's employee, Kevin Gregory, allegedly told SCHST that "everything was good. We've got what we need. That's all we need." Soon thereafter, Gallagher received a copy of the policy by email. The cover letter asked Gallagher to "review and advise if there are any discrepancies or corrections needed." It cautioned Gallagher to "make note" of the monthly reporting requirement, emphasising that reports must be submitted "by the 5th of the month."
There is no dispute that Gallagher failed to timely provide SCHST both the policy documents and the information detailed in the email. Gallagher also failed to submit a proposed updated list of equipment known as the "Latest and Greatest List."
After Hurricane Harvey damaged SCHST's equipment, a claim was filed with Lloyd's. SCHST became frustrated with Gallagher's delayed communications and fired Gallagher. SCHST's appraiser assessed the total loss as $1,218,750. Lloyd's asserted that $481,000 involved "vehicles that were not scheduled on the policy as of the date of loss" and therefore not covered. Lloyd's further reduced the award by $71,007.99 to claw back prior payments for vehicles not scheduled on the policy on the date of loss. After a further reduction of $10,000 for the deductible, Lloyd's paid $655,992.01 of the appraisal award.
Among the vehicles not covered by Lloyd's was a Western Star tanker truck. The Western Star was included in the Latest and Greatest List not submitted by Gallagher.
SCHST sued Gallagher, who filed a motion for summary judgment on the fraudulent misrepresentation claim. The magistrate judge determined that SCHST had presented sufficient evidence supporting the elements of fraudulent misrepresentation – but only based on a fraud by nondisclosure theory which the court granted SCHST leave to add in an amended complaint.
The statement made by Mr. Gregory went beyond merely describing everything as good. He allegedly represented that "we've got what we need, equipmentwise, valuwise. That's all we need." This became an actionable misrepresentation when Gallagher later learned and failed to disclose new information to SCHST. Gallagher acquired information warning of the need for further information. The policy alerted Gallagher that coverage was limited to equipment listed in the attached schedule and included in monthly reports. The insurer's email to Gallagher emphasised that changes to SCHST's list of equipment must be submitted in reports by the 5th of each month. Despite these warnings, Gallagher did not convey these important details to SCHST. This after-acquired information was enough to trigger Gallagher's duty to correct Mr. Gregory's prior misleading statement that nothing else was needed to obtain coverage.
Further, the dynamics of the parties' business relationship indicated that SCHST neither knew of nor had an equal opportunity to discover the facts that led Lloyd's to deny coverage. SCHST had to rely on Gallagher's representations that coverge was secured because Gallagher failed to deliver the policy to SCHST.
Therefore, it was recommended that Gallagher's motion for summary judgment be denied.
