Insurer Entitled to Reimbursement from its Insured for Settlement Funds due to the Insured’s Fraud
10th Circuit: This case concerned an insurer, Plaintiff Evanston Ins. Co., filing claims against its insured, Defendant Aminokit Laboratories, for fraud. The issue in this case was whether, under the circumstances of the case, Colorado law permits an insurer to recover a settlement payment made on behalf of its insured based upon fraud.
Aminokit Laboratories fraudulently obtained an insurance policy. When Aminokit was sued by a former patient, Evanston assumed Aminokit’s defense subject to a reservation of rights. Evanston settled with the former patient under pressure from Aminokit. As it said it would, Evanston then sought to recover the settlement payment from Aminokit.
Aminokit had fraudulently obtained the policy by making several material misrepresentations and omissions. For example, Aminokit had failed to disclose that it maintained overnight beds for its patients at the addiction-treatment center, and instead represented that it operated its business only during the day. Other false representations concerned its employees’ treatment for alcoholism or drug addiction, and as to the circumstances under which its CEO (who provided medical care to Aminokit patients) had lost her chiropractic license.
The former patient had sued Aminokit because such claims were outside of the policy’s scope of coverage. At mediation with former patient, Aminokit, and Evanston, the former patient agreed to a settlement for $260,000. Aminokit’s attorney threatened Evanston to fund the settlement otherwise Aminokit would bring a bad-faith action against it. Aminokit’s attorney contended that Evanston was “playing a dangerous game” because the underlying lawsuit’s judgment would likely exceed $700,000 if the settlement wasn’t funded. Evanston agreed to fund the settlement only on the basis that it would seek reimbursement of it from Aminokit thereafter. Evanston then brought the claims for fraud against Aminokit.
“Under Colorado law, the defrauded party may recover such damages as are a natural and proximate consequence of the fraud.” In the action, all parties agreed that Evanston would not have issued the policy if Aminokit had disclosed or communicated the true facts of its operation. But Aminokit argued that Evanston could not argue fraud because Evanston knew of it when it agreed to fund the settlement with the former patient. However, “where the defrauded party discovers the fraud … where it would be economically unreasonable to terminate the relationship, he may … continue the contract and then bring suit for his entire damages.”
The Tenth Circuit Court of Appeals determined that it would have been “economically unreasonable” for Evanston to refuse to pay the settlement because doing so would have placed it at a risk of a bad-faith lawsuit. In addition, Colorado has a policy “to aggressively confront the problem of insurance fraud….” As such, the Court determined that Aminokit was to fully reimburse Evanston for the settlement amount.
Evanston Insurance Company v. Aminokit Laboratories, Inc., 2020 WL 1285848
(10th Circuit Court of Appeals, decided March 18, 2020, not yet released for publication in the permanent law reports).