Fraud Used to Create a Bad Faith Suit
Creativity in litigation is often found to be an honorable pursuit of legal remedies. However, creating a mechanical problem by programming a key fob to create anomalies in a vehicle that could not be detected by professional mechanics is a fraudulent act that should, if proved, defeat a bad faith suit.
In Karen Nesjan, and Tormod Marc Nesjan, a/k/a Marc Nesjan v. Allstate Fire And Casualty Insurance Company, Civil Action No. 1:18-cv-01489-PAB-SKC, United States District Court For The District Of Colorado (May 14, 2020) an expert hired by Allstate to inspect the vehicle found the vehicle testing “supports the hypothesis that Mr. Nesjan has a second operational key fob and it is being used to manually make the rear hatch open or close or trigger the vehicle’s alarm.” It also found the problem only occurred when Nesjan was present.
On April 3, 2015, a T-bone collision damaged Plaintiffs’ vehicle. Allstate insured the vehicle under a policy of insurance that provided property damage, collision coverage, and Uninsured Motorist (“UIM”) coverage. It ultimately paid for the necessary repairs. Subsequently, Mr. Nesjan complained to Allstate that the vehicle continued to function improperly due to the accident, to include: the tailgate opening on its own; the doors locking and unlocking on their own; and the vehicle’s alarm going off at random. So, Allstate authorized Mr. Nesjan to take the vehicle to a mechanic of his choice for an inspection. Neither the mechanic nor various technicians who later inspected the vehicle could identify any mechanical or technical problems; nor could they replicate the malfunctions Mr. Nesjan claimed.
The Nesjans sued Allstate alleging breach of contract, bad faith, and statutory claims.
During discovery, Allstate retained an expert, Dr. Robert Butler (“Dr. Butler”), to inspect the vehicle. And on August 2, 2019, Dr. Butler issued his report. (“Butler Report”) Dr. Butler found that every time “the vehicle’s hatch opened or closed, its alarm went off, or its doors unlocked, a corresponding remote RF signal command was recorded at the FCC-restricted frequency range that originated from a nearby location. He further opined that the vehicle “only experienced anomalies . . . while Mr. Nesjan was present” as a result of a signal received from the vehicle’s key fob. He concluded that “[i]nspection results and data from the subject vehicle testing supports the hypothesis that Mr. Nesjan has a second operational key fob and it is being used to manually make the rear hatch open or close or trigger the vehicle’s alarm.”
Armed with the Butler Report, Allstate sought leave to amend its Answer to assert fraud as an affirmative defense.
Amendment of Pleadings under Rule 15(a)
Rule 15(a) provides that leave to amend “shall be freely given when justice so requires.” Fed. R. Civ. P. 15(a). Generally, refusing leave to amend is only justified upon a showing of undue delay, undue prejudice to the opposing party, bad faith or dilatory motive, failure to cure deficiencies by amendments previously allowed, or futility of amendment. Whether to allow amendment is within the trial court’s discretion.
A finding of excusable neglect under Rule 6(b) requires both a demonstration of good faith by the party seeking the enlargement and a finding that there was a reasonable basis for not complying within the specified period. Excusable neglect is a higher standard than the good cause required to modify a scheduling order under Rule 16(b)(4).
Allstate argued good cause and offered a reasonable basis for its failure to seek to amend its pleading before the applicable deadline. Allstate argued it was not aware it had a fraud defense until it received the Butler Report, which it received after the applicable deadline. Although Allstate suspected fraud after the numerous vehicle inspections, it took the prudent course and hired an expert to determine and verify the facts before seeking to put fraud on the table. This was sound because this new information is an intervening circumstance beyond Allstate’s control. The Court found Allstate’s neglect to seek this amendment sooner is excusable.
Good Cause Under Rule 16(b)
The important inquiry is not simply whether Defendant has delayed, but whether such delay is undue. Delay is undue when the party filing the motion has no adequate explanation for the delay or when the party seeking amendment knows or should have known of the facts upon which the proposed amendment is based but fails to include them in the original complaint.
The Parties agree that the fraud defense is asserted based on the findings in the Butler Report. The Butler Report was completed and given to Allstate on or about August 2, 2019. Forty days later, it filed the Motion and proposed Amended Answer. Moving to amend forty days after receipt of the information forming the basis for amendment is not an undue delay. This is especially true where Allstate seeks leave to assert fraud—a defense subject to Rule 9’s heightened pleading standard and the court found that there is good cause for extending the deadline to amend pleadings to allow for Allstate’s amendment to assert a fraud defense.
Bad Faith and Dilatory Motive
Merely raising fraud as an affirmative defense is dispositive of nothing. Allstate must still carry its burden of proving its affirmative defense. Allstate’s choice to raise this affirmative defense (like an insured’s decision to file a claim under their policy), without more, is not bad faith or dilatory. Allstate was diligent in investigating and now asserting its fraud defense. It did so only after receiving and reviewing the Butler Report.
Allstate may amend its answer to assert fraud as an affirmative defense and to assert the related factual allegations.
The Nesjans were creative. Mr. Nesjan, according to Allstate’s expert, created a device that created problems with the operation of his vehicle that only appeared when Nesjan was present. The problems could not be replicated when he was not present. Dr. Butler concluded that the problems with the vehicle were created by a separate key fob that cause the rear hatch to open and other problems. As a result of the report Allstate promptly moved to amend their answer to assert a fraud defense. If the trier of fact believes Butler Allstate will receive a favorable verdict. If not, it will not. Allstate should be commended for refusing to pay what it believes to be a false and fraudulent claim.
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts
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