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Kevin Schlosser Writes, "Fraudulent Inducement Claims by Life Insurance Company Dismissed for Lack of Reasonable Reliance"

Jul 31, 2020Litigation & Dispute Resolution
I have commented often in this blog on the element of “reasonable reliance” in the cause of action for fraud. The New York Court of Appeals has observed that requiring a party to act reasonably in relying on allegedly false and fraudulent misrepresentations is a matter of significant “public policy.” Ambac Assur. Corp. v Countrywide Home Loans, Inc. 2018 NY Slip Op 04686 [31 NY3d 569] (2018). (“Public policy reasons support the justifiable reliance requirement.”). Cases can and should be dismissed where the element of reasonable reliance is lacking. In fact, fraud is a powerful cause of action for which substantial remedies are available. With that power, however, comes the duty of those alleging fraud to adequately allege and establish that they have acted reasonably and prudently to protect themselves from alleged fraudulent conduct. That is embodied in the element of reasonable reliance. In a case in which I am defending attorneys accused of fraud, the New York County Commercial Division has just dismissed all claims based upon fraudulent inducement because the plaintiff did not allege a basis to establish the necessary element of reasonable reliance. The decision was rendered in The United States Life Insurance Company in the City of New York v. Horowitz, Index No.: 65022112019 (July 23, 2020). The plaintiff is an insurance company providing life insurance. The plaintiff alleged that it settled a prior case and paid proceeds under a life insurance policy in reliance upon false statements in a videotape provided to the attorneys for the insurance company. The insurance company initially refused to pay under the policy by claiming that the person who submitted the application for the insurance and who appeared for the medical exam was someone other than the deceased insured and therefore even though the incontestability period had ended, the insurance really covered the person who actually applied for the insurance, not the deceased. The deceased’s son originally gave statements to the insurance company during its investigation of the claim in which he denied that the deceased applied for the insurance and identified several false statements in the application. Therefore, the insurance company refused to pay under the policy when the deceased died. When the insurance company refused to pay, the owner of the life insurance policy sued to recover the benefits under the policy. The insurance company defended by asserting what the deceased’s son had told it about the application for insurance and who sat for the exam. The attorneys for the owner of the policy then provided a videotaped statement from the deceased’s son in which he recanted his previous statements to the insurance company, asserting that his father really did properly apply for the policy. The insurance company then settled the case, without taking any deposition of this individual who gave conflicting statements or otherwise exploring the issues in discovery. The insurance company claimed that some unnamed person later told it that the attorneys purportedly bribed the deceased’s son to falsify the statements he made in the videotape. The insurance company tried to allege claims for fraudulent inducement by claiming that it relied upon the videotape in settling the case seeking the benefits under the policy. The insurance company added claims for “conspiracy” and aiding and abetting fraudulent inducement against the owner of the policy and his attorneys. My clients categorically denied ever bribing the witness in any respect. But I recognized that the allegations of the complaint would be assumed to be true at the pleadings stage of the case. Thus, I moved to dismiss these claims against the attorneys by arguing, among other things, that the insurance company could not have reasonably relied upon the videotaped statements because it knew that those statements contradicted earlier statements of the same person and it did not even avail itself of any discovery, such as depositions, in which it could have explored the veracity of the statements. The New York County Commercial Division dismissed all of the fraudulent inducement claims, ruling that plaintiff had not adequately alleged reasonable reliance:

As to the claim of a lack of reasonable reliance, defendants have shown that the reliance alleged was not reasonable as a matter of law. A “[p]laintiff cannot assert reasonable reliance where she had the means to discover the true nature of the transaction by the exercise of ordinary intelligence, and failed to make use of those means,” (Rubin v. Sabharwal, 171 AD3d 580, 580 [1st Dept 2019]). In Rubin, a museum co-founder and co-chair failed to conduct an appraisal of certain jewelry before purchasing it despite having the means to do so, and in fact had the jewelry appraised years later when she wanted to sell it. In Cascardo v. Dratel, plaintiff paid a $10,000 legal fee despite knowing that the funds would not be used for work on her case. In Taurus Petroleum, a sophisticated investor failed to perform due diligence or negotiate a contract to bind defendants to their representations. Here plaintiff was aware of the inconsistencies in the statement made in the video for months prior to entering into the settlement and failed to conduct available discovery aimed at uncovering the true facts.

The court did allow the sole remaining claim under Judiciary Law Section 487, but that portion of the decision is on appeal because that claim was released by the settlement agreement in the prior action. Commentary As I have often observed, complaints seeking to allege claims of fraud can and should be dismissed at the pleadings stage where it appears on the face of the pleading that the plaintiff has not reasonably relied upon the alleged fraud as a matter of law. That is precisely the basis upon which I moved to dismiss the fraudulent inducement claims, and the court correctly agreed.