Expert Commentary

Judicial Estoppel and Insurance Claims

To insurers, it may be an affirmative defense against a claim; to a person filing an insurance claim, it may be a "Gotcha!" eliminating any hopes of indemnification for an otherwise insurable loss. Judicial estoppel is the technical name for this increasingly applied defense in insurance claims. It is a federal doctrine designed to protect the integrity of the judicial process by preventing a litigant from intentionally taking different positions in separate judicial or quasi-judicial proceedings. Chances are that you will find very little recognition of this doctrine in claims literature.


Current Trends and Issues
November 2013

In the insurance context, a judicial estoppel defense seems to be applied most frequently when someone who makes an insurance claim files for bankruptcy either before or after the insurance claim arises. If disagreement over the claim results in a lawsuit being filed over the matter, typically, the insurer's adjuster or attorney compares asset disclosures in bankruptcy to determine whether the insured listed the insurance claim as an asset. An insurer may also compare the proof of loss on personal property with the personal property valuations filed in bankruptcy court. Failure to list the claim against the insurer or inconsistencies between what the insured is demanding from the insurer to cover the loss and disclosures of personal assets in a bankruptcy filing can trigger use of judicial estoppel as a defense. From a public policy perspective, failure to provide honest and complete disclosure shortchanges creditors, grants an unfair advantage to a debtor, and compromises the bankruptcy court's ability to do a thorough, fair job of handling the estate.

Bankruptcies are the main field of play in recent years because of the recession's impact; indeed, from 2008 to 2012, the US Bankruptcy Courts handled 6,567,608 personal bankruptcies.

More than likely, persons petitioning a court for personal bankruptcy do not do so in anticipation of later suing an insurance company, thereby increasing the probability of inconsistencies. While it can be harsh in its effects, arguably it is consistent with a fundamental insurance principle, utmost good faith.

Disclosure Duties Vary

Disclosure pertains to properties that form a part of the bankrupt estate; consequently, properties that are exempt or are otherwise excluded from the estate are not among items for disclosure. Exemptions may vary among the states.

A bankrupt person's disclosure duties vary according to the type of bankruptcy. In delineating the duties, Georgia's Supreme Court opined:

Unlike a bankrupt proceeding under Chapter 13, there are only limited circumstances in which Chapter 7 or 11 debtors must amend the schedule of assets to reflect property acquired after commencement of the case. This is in stark contrast to the amendment requirement that a chapter 13 debtor is under, which directs that all property acquired after the commencement of the bankruptcy proceeding be included in an amended schedule of assets. There is no analogous provision for bankruptcy proceedings under Chapter 7 or 11. Accordingly, a debtor under Chapter 7 or 11 is under no statutory duty to amend its schedule of assets. Period Homes v. Wallich, 275 Ga. 486 (2002).

Thus, according to state requirements, a Chapter 13 debtor is under a continuing duty to disclose assets, whereas Chapter 7 and 11 debtors' disclosure duties end at date of filing.

Federal courts may take a more expansive view of disclosure responsibilities. For example, in Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. 2002), the Eleventh Circuit took the position that, irrespective of the type of bankruptcy, the need for "complete and honest disclosure in all types of bankruptcies" is so compelling that judicial estoppel may be asserted if a debtor knows of a claim (asset), has a motive to conceal it, and fails to disclose it. Even if a debtor acts on advice of an attorney, the debtor is nevertheless responsible for the filing.

With its focus on institutional integrity of the judiciary, judicial estoppel is indifferent to the interests of the litigating parties. As a Georgia court stated, "the doctrine does not require reliance or prejudice before a party may invoke it." Southmark Corp. v. Trotter, Smith & Jacobs, 212 Ga. App. 454, 442 S.E.2d 265 (1994).

Judicial Estoppel Defined

While stipulating that the following factors do not set "inflexible prerequisites or an exhaustive formula for determining the applicability of judicial estoppel," the US Supreme Court laid out the elements of judicial estoppel in the 2001 case of New Hampshire v. Maine, 532 U.S. 742. To cite Justice Ginsberg's description:

First, a party's later position must be clearly inconsistent with its earlier position.
Second, courts regularly inquire whether the party has succeeded in persuading a court to accept that party's earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or second court was misled.
Third, courts ask whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on an opposing party if not estopped.

Justice Ginsberg further noted that without success in a prior proceeding, "a party's inconsistent position introduces no risk of inconsistent court determinations" and "poses little threat to judicial integrity."

The Supreme Court emphasized that "it may be appropriate to resist application of the doctrine of judicial estoppel when a party's prior position was based on inadvertence or mistake." Thus, judicial estoppel is operative "in situations involving intentional contradictions, not simple error or inadvertence." Burnes v. Pemco Aeroplex, Inc. (Emphasis added.)

Generally, courts may infer intent from the record if a person has knowledge and motive at the time of nondisclosure. Whether judicial estoppel applies at all is a discretionary matter for a trial judge to decide. Consequently, one may find a variety of factual scenarios with hints of how courts decide whether an inconsistency is intentional or inadvertent.

Distinguishing Intent and Inadvertence

In Nettles v. State Farm Fire & Cas. Co., 2011 U.S. Dist. LEXIS 64335 (M.D. Ga. June 17, 2011), Nettles filed for Chapter 13 bankruptcy before experiencing fire damage to a State Farm–insured Georgia home. The day following the fire, Nettles notified State Farm of the loss. Three days later, Nettles advised the bankruptcy trustee that the property was covered by a State Farm policy and that he had "met with a field rep." It bears repeating that, under Chapter 13 bankruptcy law, a debtor has a continuing duty to update asset listings in a petition for bankruptcy. However, Nettles did not follow through and amend the bankruptcy files.

Nettles filed suit when State Farm failed to pay the claim, after which State Farm moved for summary judgment based on judicial estoppel—Nettles's failure to list the State Farm claim as an asset in bankruptcy court while demanding payment of the claim in another court (Bankruptcy Court). After State Farm raised the judicial estoppel defense, the Nettles plaintiffs asked their attorney to amend the bankruptcy filing. When the attorney failed to do so, Nettles fired him and retained another attorney who made proper amendments.

In rejecting State Farm's motion, Judge Clay Land recognized that the insured had knowledge of the pending claim, had motive to conceal the lawsuit, and made no official amendment to the filing until State Farm invoked an equitable estoppel defense. However, considering the record as a whole, he concluded that Nettles "lacked the requisite intent for judicial estoppel to apply." Citing precedent, he characterized "intent" as "cold manipulation and not an unthinking or confused blunder … a purposeful contradiction—not simple error or inadvertence." A time element was also noted from precedent: intent is the state of mind "at the time of nondisclosure."

In evaluating intent, the court recognized that Nettles had promptly notified State Farm, the mortgagor, and the bankruptcy trustee about the loss; moreover, Nettles demanded that the bankruptcy attorney amend the Chapter 13 filing and retained another attorney to amend the filing when the first attorney failed to amend. In addition, Nettles moved to add the trustee as a party to the case. The court also concluded that any recovery from State Farm would not go directly to the Nettles family but to the estate to pay creditors.

"In a perfect world," Judge Land noted, "perhaps the Nettles in the midst of a significant fire loss should have put everything else on hold while they located a typewriter, amended their bankruptcy schedules and immediately rushed down to the bankruptcy court to file them; but any reasonably prudent person would have been justified in believing that by notifying the trustee, they had notified the bankruptcy court of the potential claim."

In Cook v. United Health Care, 2010 U.S. Dist. LEXIS 94720 (M.D. Ala. Sept. 10. 2010), a dispute over chargebacks in insurance commissions, independent insurance agent Cook filed for Chapter 13 bankruptcy on October 15, 2005. After filing the bankruptcy, Cook carried on a continuing battle with defendants by complaining to regulators, retaining counsel, complaining to his congressman, and eventually filing a lawsuit against the insurer over the commission dispute. When the defendants pled judicial estoppel as a defense because Cook did not include the claim for disputed commissions in his bankruptcy filings, Cook claimed that he did not amend his bankruptcy filing because he was uncertain of the value of his claim against the insurers, exactly when the debt arose, and why it arose.

In deciding against Cook, the court stated:

It is implausible that Mr. Cook was not on notice of whom he had claims against, given that he had signed contracts with Defendants, and in light of the evidence that Mr. Cook undertook multiple complaints about Defendants' conduct to various authorities during his bankruptcy. Further, the bankruptcy forms are clear that there is no requirement that a debtor be aware of the precise amount of a claim, much less on the exact date on which it arose….

Further, Cook had disclosed several other lawsuits without detailing the amounts due and had complained to state officials in June 2008 that defendants owed him a specific amount of money.

Cook's inconsistencies simplified the court's ability to conclude that mere inadvertence was not behind his failure to list the claim against the defendants. Behavior belied Cook's representations.

In Willis v. Homesite Ins. Co. of the Midwest & GMAC Mortgage LLC, 2013 U.S. Dist. LEXIS 110293 (N.D. Ala. Aug. 6, 2013), the Willis home burned on June 5, 2009. It was insured for replacement value by the defendants. About a month later, Robert and Joan Willis's Chapter 13 bankruptcy filing was confirmed. In their asset disclosure, they valued the Alabama house at its mortgage balance ($220,000), not its insured replacement value. Personal property was valued at $11,489.

The plaintiffs also owned a second home in Michigan valued at $230,000 with a secured mortgage of $353,000. When the bankruptcy trustee issued his final report on May 10, 2013, he valued the discharge of unsecured debts at $286,396.49.

In the suit against their insurers, the Willis plaintiffs demanded (a) loss of home—$300,000, the replacement amount; (b) loss of personal property—$150,000; (c) loss of use—$60,000; and (d) additional damages, including forgiveness of the mortgage balance, which brought the total to $510,000.

After the defense attorneys mentioned judicial estoppel, Willis sought untimely to amend the bankruptcy filing. The court ruled against the plaintiffs, concluding without even mentioning intent or inadvertence that any success against the defendants was "barred by the doctrine of judicial estoppel based on various nondisclosures in the bankruptcy proceedings."

The importance of exercising caution to avoid drawing premature conclusions from inconsistencies between proof of loss reports and bankruptcy records is illustrated by State Farm Fire & Cas. Co. v. Billingsley, 2010 U.S. Dist. LEXIS 111957 (S.D. Ala. Oct. 20, 2010).

In Billingsley, State Farm filed a motion for summary judgment in denial of a claim seeking coverage under Billingsley's manufactured home policy in south Alabama. State Farm argued that Billingsley should be judicially estopped from claiming she had certain personal property items in her home when it suffered a fire loss because she had reported very limited value to personal property items in an earlier bankruptcy filing.

In reviewing the motion, the court noted that Alabama had chosen to opt out of the federal bankruptcy statutory requirements regarding exemptions from bankruptcy. However, these exempt items were eligible for coverage under the State Farm insurance policy. This helped to explain the discrepancies.

Further, the insurance claim form and the bankruptcy form asked for different kinds of information. The bankruptcy petition required Billingsley to provide the "current value of debtor's interest" in property for each item on the date of filing. Thus, the court reasoned, the current value of used furniture, which constituted the bulk of her household contents, was not likely to be of much market value. In contrast, State Farm's form demanded that she report "replacement value" of each item. This could mean that an item's market value is $100 while replacement value could be as much as $1,000. A consumer might think of this as street value versus what a new item costs in the current market. So, since the discrepancies apparently showed insufficient evidence of intent, the court ruled that judicial estoppel did not apply. The court also rejected State Farm's backup defense of misrepresentation by Billingsley.

Conclusion

Judicial estoppel now has a firm foothold within the insurance claims process and deserves far more attention than it receives in industry literature where adjusters will find little information. While critics may view it as a harsh doctrine, it is nevertheless consistent with notions of utmost good faith by rewarding honesty and transparency in all dealings involving the courts, policyholders, and insurers.

For attorneys representing policyholders, judicial estoppel underscores the necessity of inquiring about bankruptcies, other lawsuits, and any other source that could possibly constitute an asset before bringing legal action against insurers. Public adjusters also need to inquire about matters that could imperil success in their representation of policyholders.

All parties should be aware of the elements of judicial estoppel, including defense counsel. If the elements are clearly absent, asserting judicial estoppel is a questionable tactic. Additionally, timing is important. Defense counsel aware of the doctrine should assert the defense in a timely manner, not drag the case out with additional discovery or motions to pad legal fees and wear down a policyholder. For this reason, insurers using outside counsel should closely monitor when a judicial estoppel defense ripens and when defense counsel invokes it.

Finally, foolish consistency may, indeed, be the hobgoblin of little minds, but foolish inconsistency in insurance litigation may be the little gaffe that erases a claim.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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