Federal Court Issues Sanctions Against Insured

On February 11, 2014, the U.S. District Court for the Southern District of Texas issued an order in the case of Alexander v State Farm Lloyd’s, 2014 WL 549389 (S.D. Tex., Feb. 11, 2014), finding that the insurance company was entitled to its attorney fees as a sanction against the pro se insured.  The subject of the lawsuit was the insured’s claim after his newly constructed home was damaged by fire.  After the loss, the insured filed a claim under his homeowners insurance policy seeking in excess of $1 million for damage to the dwelling and $77,000 in additional living expense (ALE), personal property damage, and securing of the residence.  During the adjustment of the claim, the insurance company determined that the insured made knowing misrepresentations regarding the claim.  In particular, the insured misrepresented his need to ALE, submitted fraudulent leases and receipts in connection with his claim for storage expenses, misrepresented the cost of architectural plans, and submitted a fraudulent debris removal invoice to the insurance company.  Based upon those misrepresentations, the insurance company denied the insured’s claim.

The insured filed suit against the insurer and two of its agents alleging claims for breach of contract, bad faith, and other statutory claims available under Texas law.  After three days of trial, the court interjected and inquired whether there was any factual basis for the insured’s claims based on the insured’s misrepresentations made during the claims process.  The insured consulted with his attorneys and, the following day, moved to dismiss each of his claim with prejudice.  The insurer filed a post-trial motion seeking its attorney fees and costs as conditions of dismissal and sanctions against the insured, which caused the insured to retain counsel.

The court summarized the attorneys’ argument: “[They] argue he cannot be sanctioned, because his fraudulent actions—euphemistically referred to as ‘foolishness,’ as if [the insured] is an errant teenager and not a well-educated, upper middle class adult with a six-figure salary and a million-dollar home—all occurred prior to the filing of the lawsuit.  They contend that he never lied during the course of the lawsuit, and therefore never displayed contempt for the judicial process.”  The court rejected the attorneys’ arguments.  In addition, the court determined that the insured’s decision to file suit was worthy of sanctions given that he was a sophisticated individual that understood his abuse of the judicial system, citing his work in the finance industry, possession of an advanced degree, and the fact that he operated a number of businesses.  Additionally, the court noted the insured’s improper use of the judicial system to further his efforts to extract insurance benefits, despite his clear misrepresentations during the claim process.

After considering the parties’ positions, the Court awarded sanctions under Texas law against the insured for his conduct during the lawsuit.  The court awarded the insurance company its attorney fees prior to the case being removed from state court to federal court.  The court opined that it would have awarded additional attorney fees, but the insurance company did not comply with the requirement in the federal rules that the insurance company provide the insured with a period to cure the offending conduct before moving for sanctions.

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