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An insurer can be sued for fraud under Pennsylvania law for its “mere silence” in failing to disclose material changes to a policy, a federal judge has ruled. In his eight-page opinion in Guthrie Clinic Ltd. v. The Travelers Indemnity Co. of Illinois, U.S. District Judge James M. Munley refused to dismiss a suit brought by a medical provider that was denied coverage for a malpractice suit under an umbrella policy it had maintained for four years. Lawyers for the Guthrie Clinic, a Sayre, Pa.-based non-profit group of physicians, argued that Travelers never provided it any notice of the substantial and material revisions it had unilaterally made to the policies in 1998 and 1999. The clinic’s suit says Travelers never even provided a copy of the changed excess umbrella renewal policy until long after it took effect. The suit sounds in claims of bad faith, common law fraud, breach of contract, intentional and negligent misrepresentation, breach of the common law duty of good faith, and breach of fiduciary duty. It also seeks a declaratory judgment that Travelers owes it a defense and indemnification of the claim. Lawyers for Travelers moved to dismiss the fraud claim, arguing that the clinic had failed to set forth “with particularity” the circumstances constituting fraud, as required by Federal Rule of Civil Procedure 9(b). Munley found that the purpose of Rule 9(b) is “to place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior.” The rule is satisfied, Munley said, when “some precision and some measure of substantiation is present in the pleadings.” Under Pennsylvania law, Munley found that a fraud claim requires four elements – a material misrepresentation of existing fact; scienter; justifiable reliance on the misrepresentation; and damages. The Guthrie Clinic’s suit, Munley found, is “basically a fraudulent concealment case,” since it makes no allegation of an affirmative misrepresentation, but instead alleges only that Travelers “knowingly concealed” that its 1998 policy contained a revised definition of the term “claim.” Munley found that Guthrie cannot meet the elements of a fraudulent concealment claim since it cannot show that Travelers prevented it from acquiring the necessary information. “Mere silence cannot be the basis for a claim of fraudulent concealment,” Munley wrote. But Guthrie argued that mere silence is enough to establish a material misrepresentation because Travelers had a duty to speak. On that point, Munley agreed and ruled that the fraud claim survived. “While it may be true that mere silence in the absence of a duty to speak cannot suffice to prove fraudulent concealment under Pennsylvania law, when an insurer elects to issue a policy differing from what the insured requested and paid for, there is an affirmative duty to advise the insured of the charges so made,” Munley wrote. Since Guthrie alleged that Travelers altered the policy without advising it of the changes, Munley found that the suit properly pleaded all of the elements of common law fraud. LOOKING TO �BIRTH CENTER’ Travelers also challenged Guthrie’s claims for breach of common law duty of good faith and breach of fiduciary duty. Under Pennsylvania law, Travelers argued, there is no fiduciary duty based on good faith and fair dealing with respect to insurance contracts. And to the extent that a duty to act in good faith under an insurance policy exists, a claim for breach of that duty would be redundant of a claim for breach of contract. But Guthrie’s lawyers cited the Pennsylvania Superior Court’s 1999 decision in Birth Center v. St. Paul Companies Inc. which held that a policyholder may proceed simultaneously on its claims that the insurer breached its fiduciary duty, breached an implied covenant of good faith; breached its contract and acted in bad faith. The Birth Center court explained that the duty to act in good faith “is said to arise not under the terms of the contract, but because of the contract, and to flow from the contract.” As a result, Munley found that it was proper for Guthrie to plead separate causes of action for the distinct alleged breaches of the contract, the duty of good faith, and the fiduciary duty.

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