2011 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

3-31-2011

Hered, LLC v. Seneca Ins Co

Precedential or Non-Precedential: Non-Precedential

Docket No. 10-2026

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Recommended Citation

"Hered, LLC v. Seneca Ins Co" (2011). 2011 Decisions. Paper 1560.

http://digitalcommons.law.villanova.edu/thirdcircuit_2011/1560
*Honorable Louis H. Pollak, Senior District Judge for the U.S. District Court for the Eastern District of 

Pennsylvania, sitting by designation.

NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

 

No. 10-2026

_____________

HERED LLC,

 Appellant

 

v.

SENECA INSURANCE COMPANY, INC.

 

On Appeal from the United States District Court for the Middle District of Pennsylvania 

District Court No. 06-cv-00255 

District Judge: The Honorable Thomas I. Vanaskie

 

Submitted Pursuant to Third Circuit L.A.R. 34.1(a)

January 24, 2011

Before: FUENTES and CHAGARES, Circuit Judges, and POLLAK*, District Judge

(Filed: March 31, 2011)

_____________

OPINION

_____________

FUENTES, Circuit Judge.

Hered LLC is the owner of a 175,000 square foot building that includes a storage 

facility and a convention center located at 601 S. Poplar Street, Hazleton, Pennsylvania. 
2

On February 5, 2005, a fire occurred at these premises. Hered then filed a claim with its 

insurance provider, Seneca Insurance Company, for approximately $3,462,179. For 

nearly a year, the parties disputed the amount of the damages, and on February 2, 2006, 

Hered filed a two-count complaint in the District Court. Count One alleged that Seneca 

breached the terms of the insurance policy by failing to fully pay out Hered’s claim. In 

Count Two, Hered alleged that Seneca’s decision to deny Hered’s full claim was made in 

bad faith and sought damages pursuant to 42 Pa. Cons. Stat. Ann. § 8371. On February 

16, 2006, Seneca issued a final denial of Hered’s claim, citing three reasons: Hered had 

made misrepresentations during the application process; the automatic sprinkler system 

was not operating at the time of the fire in violation of the Protective Safeguard 

Endorsement provision; and the building fire loss claim was grossly, unreasonably and 

intentionally overstated. The parties proceeded to trial and on July 23, 2009, a jury found 

in favor of Seneca. 

On appeal, Hered argues that the District Court erred by: (1) denying Hered’s 

motion for judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50 

and motion for a new trial pursuant to Rule 59; (2) inaccurately responding to a jury 

question; and (3) admitting prejudicial evidence.

I.

Because we write solely for the parties, we will discuss only the facts and 

proceedings to the extent necessary for resolution of this case.1

 1

 The District Court had subject matter jurisdiction pursuant to 28 U.S.C. § 1332. We 

have jurisdiction over this appeal pursuant to 28 U.S.C. § 1291 and § 1294(a). 

 The issues in this case 
3

relate to Hered’s application for insurance coverage, and thus we begin by setting forth 

those circumstances. 

Hered’s first insurance policy was issued by Peerless Insurance Company 

(“Peerless”) in March 2004. In October of 2004, Peerless cancelled Hered’s insurance, 

citing nonpayment of the premiums and Hered’s failure to update Peerless on repairs to 

the building’s sprinkler system. This led Hered to seek new insurance coverage through 

its insurance broker, Collins Insurance, Inc. On November 8, 2004, Collins, on behalf of 

Hered, submitted an insurance application to W.N. Tuscano Agency, Inc. (“Tuscano”), an 

insurance wholesaler that represented Seneca. Hered’s application for insurance stated 

only that Hered’s prior insurance coverage had been terminated for non-payment. In 

addition, Hered left blank the part of the application that inquired about the building’s 

sprinkler system. The application was signed by Roger Soler, Hered’s principal. After 

receiving the application, a Tuscano agent spoke with an agent at Collins regarding the 

blank portion of the application. The Collins agent informed the Tuscano agent that the 

building was “sprinklered.” Tuscano then submitted Hered’s application to Seneca via an 

email stating that the property was “a sprinklered building used as a flea market.” 

Seneca responded by sending Tuscano a quote for insurance. The quote stated that 

it was conditioned upon the submission of a “NEW & COMPLETE” application and a 

satisfactory inspection. On November 10, 2004, Tuscano submitted that quote to Collins. 

On November 12, 2004, Soler signed and accepted the Seneca quote on behalf of Hered. 

Seneca bound coverage as agreed, and issued a policy that was effective as of November 

 
4

12, 2004, (Policy No. ESP15001558, providing up to $6.5 million in coverage). On 

November 29, 2004, Tuscano forwarded a copy of the insurance policy to Collins. 

Seneca never asked Hered to complete a new application.

Following Hered’s acceptance of the policy, two inspections of the property were 

conducted. The first inspection was undertaken on November 24, 2004, by ISI Insurance 

Services on behalf of Hered’s liability carrier, Essex Insurance Company. During the 

inspection, Soler represented that an outside company had conducted a flow test of the 

sprinkler system within the previous ninety days. Soler also stated that the sprinkler 

heads were scheduled to be changed within the next sixty days. The final ISI report 

contained the following information: 

There is a dry sprinkler system that protects the entire 

building. There are approximately 1,100 sprinkler heads. All 

sprinkler heads are scheduled to be changed, within the next 

60 days. An outside company has most recently conducted a 

flow test of the sprinkler system within the past 90 days and 

will continue to do so on an annual basis. The post indicator 

valve of the sprinkler system was not accessible to inspector. 

Seneca received the ISI report on January 10, 2005. 

On January 21, 2005, the Hered property was inspected by Thomas Czarnowski, a 

representative from H & S Technical Services, on behalf of Seneca. The inspection

yielded the following information: (1) tags indicating that the sprinkler system had last 

been inspected in the 1990s; (2) no pressure in the sprinkler system; and (3) evidence that 

the sprinkler heads had been painted over. When Czarnowski asked Soler, who was 

present, about the absence of pressure in the sprinkler system, Soler stated that the fire 

marshal had recently inspected the building. Czarnowski drafted a report recommending 
5

that an expert be hired to determine whether the sprinkler system was operational. 

Seneca received the H & S report on February 7, 2005. 

Also on February 7, 2005, Seneca received a Property Loss Notice from Hered 

notifying it that on February 5, 2005, a fire had damaged the insured property. For 

several months, the parties disputed the amount and value of the damages.

2

On May 24, 2006, Seneca filed an Answer and Counterclaim. On November 29, 

2007, Hered filed a motion for summary judgment. Seneca filed its cross-motion for 

summary judgment the following day. On September 9, 2008, the Magistrate Judge 

issued a 73-page report and recommendation. On February 13, 2009, the District Court

denied Hered’s motion for summary judgment and Seneca’s motion for summary 

 On February 

2, 2006, Hered filed a complaint alleging non-payment of the insurance coverage and 

asking for damages in excess of $3.4 million. 

On February 16, 2006, Seneca denied Hered’s claim in its entirety, demanded 

return of the advance payments, and asserted that the policy was void ab initio. Seneca 

based its denial of coverage on three reasons: (1) Hered and its representatives made 

misrepresentations during the application process relating to the status of the sprinkler 

system; (2) the fact that the sprinkler system was not functional at the time of the fire 

constituted a violation of the policy’s Protective Safeguard Endorsement provision and 

thus insurance coverage was suspended at the time of the loss; and (3) Hered’s loss claim 

was grossly, unreasonably, and intentionally overstated. 

 2

 Hered submitted its final claim for damages on October 10, 2005 asking for 

$3,416,179. Seneca estimated that the loss amount was $168,543.
6

judgment was granted with regard to Hered’s allegation of bad faith, but denied in all 

other respects. 

A jury trial commenced on July 14, 2009. On July 19, 2009, Seneca filed a 

motion for judgment as a matter of law. On July 21, 2009, Hered also filed a motion for 

judgment as a matter of law, raising essentially the same arguments contained in its 

motion for summary judgment. The District Court refrained from ruling on the motions

until after the close of trial. On July 23, 2009, the jury issued a verdict in favor of

Seneca. The jury found the following: (1) Seneca had proven by clear and convincing 

evidence that Hered made material misrepresentations of fact in the process of applying 

for insurance coverage with Seneca and (2) Hered had failed to prove by a preponderance 

of the evidence that Seneca waived its right to deny coverage on the basis of material 

misrepresentations in the application process. 

A number of post-trial motions were filed. On March 18, 2010, the District Court 

heard oral argument on Seneca’s motion to alter judgment pursuant to Rule 59(e) and 

Hered’s motions for a new trial pursuant to Rule 59 and for judgment as a matter of law 

pursuant to Rule 50. That same day Judge Vanaskie issued a written order denying both 

Hered’s motions and Seneca’s motion to amend the judgment. Hered filed this timely 

appeal.

II.

A. 

We begin with Hered’s appeal from the denial of its motion for judgment as a 

matter of law. Hered argues that the District Court erred in denying this motion, and that 
7

judgment as a matter of law is appropriate on three grounds: (1) Seneca could not meet 

its burden of proof of showing fraud or misrepresentation; (2) Seneca waived its right to 

assert the misrepresentation defense by accepting an incomplete application for 

insurance; and (3) Seneca waived its right to rescind the policy pursuant to the policy’s 

“Protective Safeguard Endorsement.” We address each of these arguments in turn. 

Under Rule 50, judgment as a matter of law is appropriate when: 

(1) In General. If a party has been fully heard on an issue 

during a jury trial and the court finds that a reasonable jury 

would not have a legally sufficient evidentiary basis to find 

for the party on that issue, the court may: 

(A) resolve the issue against the party; and 

(B) grant a motion for judgment as a matter of law 

against the party on a claim or defense that, under the 

controlling law, can be maintained or defeated only 

with a favorable finding on that issue. 

Fed. R. Civ. P. 50. “We exercise plenary review of the grant of a motion for judgment as 

a matter of law and apply the same standard as the district court.” Wittekamp v. Gulf & 

Western Inc., 991 F.2d 1137, 1141 (3d Cir. 1993). A Rule 50 motion “should be granted 

only if, viewing the evidence in the light most favorable to the nonmoving party, there is 

no question of material fact for the jury and any verdict other than the one directed would 

be erroneous under the governing law.” McGreevy v. Stroup, 413 F.3d 359, 364 (3d Cir. 

2005) (citing Beck v. City of Pittsburgh, 89 F.3d 966, 971 (3d Cir. 1996)). “[J]udgment 

as a matter of law should be granted sparingly.” Ambrose v. Twp. of Robinson, 303 F.3d 

488, 492 (3d Cir. 2002) (citations omitted). “[T]he question is not whether there is 

literally no evidence supporting the party against whom the motion is directed but 
8

whether there is evidence upon which the jury could properly find a verdict for that 

party.” Id. (citations omitted). 

To succeed on its claim of fraud or misrepresentation, Seneca needed to prove, by 

clear and convincing evidence, that: (1) Hered made a false statement; (2) the false 

statement was made knowingly or in bad faith; and (3) the subject matter of the statement 

was material to the insurance transaction. Tudor Ins. Co. v. Twp. of Stowe, 697 A.2d 

1010, 1016 (Pa. Super. Ct. 1997). Hered submits that there was no testimony or evidence 

presented at trial that it made “any verbal or written misrepresentation or false statement 

regarding the sprinkler system.” Appellant Br. 24. 

Viewing all of the facts in the light most favorable to Seneca, we conclude that the 

District Court correctly found that there was sufficient evidence of misrepresentation on 

the part of Hered for the jury to consider the issue. The evidence at trial showed the 

following: (1) Hered and its insurance broker, Collins, submitted an incomplete 

application for insurance that failed to answer a question about building protection; (2) 

the application was submitted to Debra Fleming at Tuscano, Seneca’s insurance broker; 

(3) after discovering the blank portion of the application, Fleming spoke with an agent at 

Collins who informed Fleming that the building was “sprinklered,” App. 1037; 1182; and 

(4) in conveying Hered’s insurance application to Seneca, Fleming advised Seneca that 

the building was “non-combustible and sprinklered.” App. 1036. Although there was 

some evidence supporting Hered’s argument that “sprinklered” referred only to a 

building containing a sprinkler system, there was also evidence that the term 

“sprinklered” is generally understood to refer to an operational sprinkler system. App. 
9

1182-83, 1420-21, 656-58. Thus, Seneca provided sufficient evidence for a reasonable 

jury to conclude that the statements made by Hered were false. 

Seneca also presented evidence dating to Hered’s relationship with its prior

insurance provider, Peerless, that satisfied the other two elements of this cause of action. 

That evidence consisted of the following: (1) in March of 2004, Soler hired Collins to 

obtain insurance coverage; (2) as part of that process, Collins submitted an application 

that contained the number “100” in the box marked “% SPRINK”; (3) Hered’s 

application included Soler’s signature; (4) Peerless discovered that the sprinkler system at 

the Hered building was not operational and thus refused to give Hered credit for a 

premium reduction ordinarily available for buildings containing operational sprinkler 

systems; (5) Soler had informed Peerless that it would endeavor to repair the system and 

to make it operational by June 22, 2004; and (6) Soler had contracted with G.C. Fire 

Protection Systems, Inc., to repair the sprinkler system. Peerless eventually cancelled 

Seneca’s insurance policy for failure to pay insurance premiums and failure to update 

Peerless on the operability of the sprinkler system. This evidence lends support to 

Seneca’s argument that Hered was aware that the sprinkler system did not work when it 

applied for insurance and intentionally misrepresented the state of the system in order to 

receive lower insurance premiums from Seneca. 

Given this evidence and this Court’s admonition that a Rule 50 motion “should 

only be granted if the record is critically deficient of that minimum quantity of evidence 

from which a jury might reasonably afford relief,” Raiczyk v. Ocean County Veterinary 
10

Hosp., 377 F.3d 266, 269 (3d Cir. 2004) (internal quotation marks and citation omitted), 

we find that the District Court did not err by denying Hered’s motion. 

Hered’s second argument is that judgment as a matter of law should have been 

granted because Seneca waived the right to assert the misrepresentation defense by 

accepting an incomplete application and issuing the insurance policy nonetheless. Hered 

submits that the law bars claims of verbal misrepresentation of the type Seneca asserts 

here because Seneca chose to issue an insurance policy even though the portion of 

Hered’s insurance application relating to the sprinkler system was incomplete. We are 

not persuaded by this argument. As a general rule, “the question of whether an insurance 

company has waived its right to rescind a contract or policy is a question of fact.” 

Matinchek v. John Alden Life Ins. Co., 93 F.3d 96, 102 n.6 (3d Cir. 1996) (citing cases). 

This is because, “under Pennsylvania law, for an insurer’s failure to rescind to amount to 

a waiver of the right to rescind, ‘there must be sufficient knowledge disclosed to the 

insurer that there is some falsity in the statement by the insured or something of some 

significance which would put a reasonably prudent person on notice to make further 

inquiry.’” Id. at 102 (citing First Penn, Banking and Trust Co. v. U.S. Life Ins. Co., 421 

F.2d 959, 963 (3d Cir. 1969)). In short, the duty to request clarification of an imperfect 

answer exists only “if the [insurance company] was in possession of information warning 

it of the falsity of the answers in the application would the duty devolve upon it to make 

independent inquiry or be held bound by the knowledge such inquiry would have 

disclosed.” Franklin Life Ins. Co. v. Bieniek, 312 F.2d 365, 375 (3d Cir. 1972). 
11

Whether Hered’s assertions regarding the status of the sprinkler system should 

have put Seneca on notice of the falsity of the information in the application was an issue 

for the jury to decide because there was evidence on both sides. Although Hered’s 

insurance application left the sprinkler question blank, Seneca followed up by obtaining 

assurance from Hered’s broker that the building was “sprinklered.” There was evidence 

that the term “sprinklered” referred to a functional sprinkler system. Hered submits that 

Seneca knew that the sprinkler system was not operational when it received the ISI and 

the H & S reports. Yet the ISI report, the only report Seneca received before the fire, 

stated only that a sprinkler system existed and that the sprinkler heads were scheduled to 

be changed within the next 60 days, and that an outside company “recently conducted a 

flow test of the sprinkler system in the past 90 days.” Seneca received the H & S report 

after the fire, and thus that report could not have put Seneca on notice that the sprinkler 

system did not function. 

In light of this competing evidence, whether “there [was] sufficient knowledge” 

for Seneca to have waived this argument was an issue properly left to the jury. 

Hered’s Rule 50 motion also sought judgment as a matter of law on the ground 

that Seneca waived its right to rescind the policy pursuant to the Protective Safeguard 

Endorsement contained in the policy. The “Protective Safeguard Endorsement” provided 

as follows: 

1. This insurance will be automatically suspended at the 

involved location if you fail to notify us immediately when 

you:

1.1 Know of any suspension or impairment in the 

protective safeguards; or 
12

1.2 Fail to maintain the protective safeguards over 

which you have control in complete working order. 

If a part an Automatic Sprinkler System is shut off due 

to breakage, leakage, freezing conditions or opening of 

sprinkler heads, notification to us will not be necessary 

if you can restore full protection within 48 hours.

The policy specified that the protective safeguard at issue was an “AUTOMATIC 

SPRINKLER SYSTEM.” Seneca denied Hered’s claim for damages on the ground that 

Hered had failed to inform Seneca that the sprinkler system did not function, and thus the 

insurance policy was not in effect at the time of the fire. Hered argues on appeal, as it did 

in the District Court, that the testimony at trial showed that, although Seneca possessed 

two separate reports informing it that the sprinkler system was inoperable, appellee

continued to issue coverage and accept premiums. Therefore, there was no genuine issue 

of material fact “for the Jury to decide upon the issue of waiver.” Appellant Br. 28.

Again, we conclude that the District Court correctly denied Hered’s Rule 50 

motion. In this case, both parties offered evidence at trial relating to when Seneca 

learned that the sprinkler system was not operational. Seneca argues that it did not 

definitely learn that Hered’s sprinkler system did not work until November 9, 2005, while 

Hered argues that the two reports put Seneca on notice of the problem. Given that the 

testimony and evidence offered by both parties at trial could support either party, the 

District Court properly left this issue to the jury. 

B.
13

We now turn to Hered’s argument that the District Court erred in its response to a 

question asked by the jury during deliberations and that a new trial is required. 

During the course of its deliberations, the jury sent the following question to the 

court: “Please clarify the scope of the application process. Does this include the time 

necessary for an inspection and report and insurer’s consideration?” App. 1682. Hered 

argued then, as it does now, that the term “application process” in this question referred 

to the language in Seneca’s insurance quote stating the policy was “subject to satisfactory 

inspection and complete application.” App. 1682-83. Hered urged the District Court to 

inform the jury that the “application process” did not conclude until the two inspections 

had been completed. The court explained that it had used the term “application process” 

throughout the trial to refer to the time before and up to the issuance of the policy, and 

rejected Hered’s proposed answer. App. 1683. Instead, the court issued the following 

response: “In this case, the application process did not include the inspection report and 

insurer’s consideration of that report. The application process concluded with the 

issuance of the policy.” App. 1683-84. Hered argues that the District Court’s response 

essentially directed the jury not to consider the H & S and ISI inspections as evidence of 

Seneca’s waiver, which was relevant to whether Seneca waived its right to deny coverage 

on the basis of material misrepresentations. Hered made these same complaints at the 

post-trial motions hearing, but the District Court rejected Hered’s Rule 59 motion for a 

new trial. We will affirm. 

“[W]e review jury instructions for abuse of discretion.” Armstrong v. Burdette 

Tomlin Memorial Hosp., 438 F.3d 240, 245-46 (3d Cir. 2006) (citing United States v. 
14

McLaughlin, 386 F.3d 547, 551-52 (3d Cir. 2004)). “However, our review is plenary 

when the issue is whether the instructions misstated the law.” Armstrong, 438 F.3d at 

245 (citing McLaughlin, 386 F.3d at 552). “Harmless errors in parts of a jury charge that 

do not prejudice the complaining party are not sufficient grounds on which to vacate a 

judgment and order a new trial.” Id. (citing Watson v. S.E. Pa. Transp. Auth., 207 F.3d 

207, 221-22 (3d Cir. 2000). 

We must also keep in mind the precepts of a Rule 59 motion. Rule 59 provides for 

a new trial as follows:

(1) Grounds for New Trial. The court may, on motion, grant a 

new trial on all or some of the issues--and to any party--as 

follows: 

(A) after a jury trial, for any reason for which a new trial has 

heretofore been granted in an action at law in federal court; or 

(B) after a nonjury trial, for any reason for which a rehearing 

has heretofore been granted in a suit in equity in federal court. 

Fed. R. Civ. P. 59(a). Under Rule 59, a new trial may be granted if “the record shows 

that the jury’s verdict resulted in a miscarriage of justice or where the verdict, on the 

record, cries out to be overturned or shocks [the court’s] conscience.” Greenleaf v. 

Garlock, Inc., 174 F.3d 352, 366 (3d Cir. 1999). 

We find that the District Court did not err in giving this instruction and no new 

trial is warranted under Rule 59. In referring to the application process as concluding 

with the issuance of the policy, the District Court was being consistent with how the term 

had been used throughout the trial. The court’s response was also consistent with the 

chronology of this case. By its terms, Seneca’s insurance policy became effective on 

November 12, 2004. To find that the “application process” was not complete until 
15

months after Hered started paying premiums and the policy was issued—as Hered 

urged—would have been illogical. Thus, the District Court did not err in informing the 

jury that the “application process” was complete when the policy was issued.

C.

Finally, Hered argues on appeal that the District Court erred in permitting 

testimony about two issues: (1) Hered’s nonpayment of the Peerless insurance policy and 

(2) a collateral arbitration proceeding brought against Hered for nonpayment of services 

relating to the repair of the sprinkler system. Hered argues that this testimony was 

unfairly prejudicial and that a new trial is required. We have carefully considered the 

arguments of counsel on these issues and find no abuse of discretion in the court’s 

rulings. 

III.

For the reasons above, we will affirm the District Court’s order.