Opinion ID: 202661
Heading Depth: 1
Heading Rank: 2

Heading: Relevant Proceedings

Text: 5 Without further investigation, Federal responded to HPSC's ultimatum by filing a diversity suit seeking rescission of the policy for fraud and misrepresentation. HPSC counterclaimed for recovery under the policy and for damages under Mass. Gen. Laws ch. 93A for unfair and deceptive trade practices based on Federal's delay in investigating and paying the claim. 6 Two weeks after the initial case management conference, HPSC informed Federal that MacKay had misread the PwC report. 1 In fact, it was not Morrison, but his subordinate, Sylvia Maguire, who reconciled the bank statements on ACFC's fifteen operating accounts. Maguire did not sign checks or handle deposits, and ACFC had no check signing machine or signature plate. All transactions on these fifteen accounts were accomplished through wire transfers. The only account for which Morrison both reconciled statements and signed checks was an imprest petty cash account, which was capped at $10,000 and could only be replenished each month after HPSC reviewed ACFC's disbursements. 7 Federal then shifted its theory of the case, relying on Morrison's authority over all sixteen of the ACFC accounts. Federal also contended that Morrison's authority over wire transfers was the equivalent of signing checks for the purposes of Question 12 on the renewal application. 8 Both sides filed cross motions for summary judgment. The district court denied both motions, concluding that HPSC's response to Question 12 was truthful as to the fifteen operating accounts, given that the question did not ask about an employee's unexercised authority or about wire transfer authority. The district court found that the only misrepresentation made by HPSC involved Morrison's control over the petty cash account, 2 but that given the relatively small size of that account compared to the fifteen operating accounts, the materiality of the misrepresentation was a question of fact for the jury. The district judge noted, however, that if he were the factfinder, [he] would most likely agree that the misrepresentation ... [was] a material one. 9 Prior to trial, Federal moved in limine to exclude any evidence regarding Federal's past underwriting practices on the basis that such evidence was irrelevant to the materiality of HPSC's misrepresentation. The district court denied the motions. 10 At trial, Federal's underwriter, Yalonda Mason, testified that had she known the truth about Morrison's unsegregated duties, she still would have written the policy, but with a larger deductible or higher premium because of the increased risk. Federal also called a risk management expert, Dean P. Felton, who testified that the lack of segregation between reconciliation and check-writing duties increased the risk of loss from theft. Felton further indicated that if HPSC's answer to Question 12 had been truthful, he would have either increased the deductible, increased the premium, or excluded the checking account from coverage. 11 HPSC's expert, Michael Bracken, testified that in his opinion the imprest petty cash account did not present a materially elevated risk of loss to HPSC or [Federal]. Bracken also concluded that had HPSC answered yes to Question 12, it would have made no difference in Federal's decision to underwrite HPSC's policy. He explained that he had reviewed HPSC's past applications to Federal, and that Federal had not followed up on any of HPSC's past no answers or even questioned its yes answer to Question 12 in 1995. Bracken claimed that this question was important and that, as an underwriter, he would have investigated an affirmative answer. 12 At the conclusion of the evidence, Federal moved for a directed verdict under Rule 50(a), but the district court denied the motion. The district court instructed the jury that Federal was not obligated to pay HPSC's claim if HPSC's misrepresentation was material, meaning that if Federal had known the truth, it would have declined to issue the policy or charged a higher rate or premium in light of the increased risk. The jury found in favor of HPSC, concluding that its misrepresentation was not material. 13 The district court then held a bench trial on the chapter 93A claim. At the close of HPSC's case, Federal filed a motion for judgment as a matter of law, which the district court denied. After Federal presented its case, the court found that Federal's initial determination regarding HPSC's misrepresentation was made in good faith, but that Federal had violated two statutory duties under Mass. Gen. Laws ch. 176D, § 3(9): Federal's decision to seek rescission without inquiring into the facts or giving HPSC a chance to respond breached its duty under subsection (d) to conduct a reasonable investigation before rejecting a claim, and its failure to make a reasonable settlement offer upon learning of its mistaken conclusion regarding Morrison's reconciliation and check-writing duties on the fifteen operating accounts violated its duty under subsection (f) to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear. The court concluded that the two statutory violations constituted unfair business practices within the meaning of chapter 93A, and that Federal's conduct after learning of its flawed assumptions was a breach of its duty of good faith, which merited doubling the damages incurred thereafter.