Free Reply to Response to Motion - District Court of Colorado - Colorado

Case 1:04-cv-00865-REB-CBS

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO
Civil Action No. 04-cv- 0865- REB- CBS
ESTATE OF APRil Hill

SCOTT Hill , personal representative; SCOTT Hill , as Conservator of the Estate of Katelyn Hill; and SCOTT Hill , individually
Plaintiffs

AllSTATE INSURANCE COMPANY; MERASTAR INSURANCE COMPANY; and PRUDENTIAL INSURANCE COMPANY OF AMERICA

Defendants.
DEFENDANT ALLSTATE INSURANCE COMPANY' S REPLY IN

SUPPORT OF ITS MOTION FOR LEAVE TO FILE: (1) AMENDED ANSWER AND COUNTERCLAIM; AND (2) THIRD- PARTY COMPLAINT AGAINST JOHN PAUL
Defendant Allstate Insurance Company ("Allstate ), through its counsel , submits

the following Reply in Support of its Motion for leave to File an Amended Answer and
Counterclaim and Third- Party Complaint Against John Paul.

INTRODUCTION

This lawsuit arises out of a tragic accident that occurred on July 25 , 2002 , in

which Allstate s insured , April Hill ("April" ) was killed. Her infant daughter , Katelyn Hill
was seriously injured , and two other passengers in the car were also involved. When

Allstate received claims arising from this accident , its priority was not to seek out
evidence of fraud by the insureds , but to honor its stated obligations under the policy
and pay the benefits expressed by its terms.

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In fact , Allstate paid over $270 000 in UM/UIM benefits to the victims of the crash

including $59 167 in UM/UIM benefits on behalf of Katelyn Hill , April Hill' s daughter.
Notably, Allstate paid these benefits even though it was not required to do

so under the

policy or Colorado law. 1 Allstate then promptly paid approximately $100 000 in basic

PIP benefits for the benefit of Katelyn Hill , and paid a $1 000 death benefit for the death
of April Hill.

Despite Allstate s prompt and generous handling of the claims , Plaintiff decided to

sue for more. In particular , Plaintiff decided to sue Allstate for extended PIP benefits

that were offered but not selected , and certainly never paid for by April Hill or her former

husband , John Paul. Unlike a typical bad faith case , Plaintiff does not allege here that
Allstate failed to honor the policy as written. Rather , Plaintiff seeks to recover benefits
from a hypothetical " reformed" policy that was never purchased , which would provide
PIP coverage " without limitations as to time or dollar amount" See ,
e.

, Am. Compl. ~~

, 35 , 36 , 38.
In the course of recent depositions , Allstate learned that April and John Paul

concealed material facts in applying for the policy at issue. A few weeks after receiving
transcripts of these depositions , Allstate filed a Motion for Leave to File an Amended

Answer and Counterclaim and a Third- Party Complaint Against John Paul (the
Motion ). Through the requested amendment , Allstate seeks to assert the

See

Rule 26(a)(2) Report of William J. Kirven ,

attached hereto as

Ex. A

at 4.

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policyholders ' fraudulent concealment as the basis for a defense , a counterclaim , and a
third- party claim against John Paul. See Motion at
In response , Plaintiff has filed an Opposition to the Motion , arguing that the

Motion should be denied because it is untimely, granting the amendment would be

prejudicial , and Allstate has waived any defense of fraud in this case. Opp. at 3Plaintiff does not deny that the fraud occurred , nor has he raised a futility argument , nor

disputed the merits of the proposed defense and counterclaim. Nor can Plaintiff dispute
that insurance fraud has reached epidemic proportions in the U.
, costing the industry

billions of dollars per year and increasing the average household' s annual premiums by

over $200? Instead , Plaintiff relies on the premise that because April and John Paul got
away with the fraud for two years , neither her Estate nor Mr. Paul can be held
accountable for their conduct.

This argument must fail. As explained more fully below , Allstate s Motion was not
untimely, nor did Allstate waive the proposed defense and counterclaim. Moreover
Plaintiff cannot show prejudice because the claim arises from the same transactions as
the Plaintiff's claim , Plaintiff has barely begun discovery efforts , and trial is not

scheduled until March of 2006. Under these circumstances , justice requires that leave
to amend be granted.

Penalty By Proxy: Holding The Innocent Policyholder Liable For Fraud Coinsured, Claims Professionals, And Other Agents 38 Tort Trial & Ins. Prac. L.J. 907 (2003).

2 D. Nersessian

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II.

STANDARD OF REVIEW
Rule 15 ,

Fed. R. Civ. P. provides that leave to amend shall be freely given when

justice requires. Generally, refusing leave to amend is only justified upon a showing of
undue delay, bad faith or dilatory motive , failure to cure deficiencies by amendments

previously allowed , undue prejudice to the opposing party, or futility of amendment.
Foman v. Davis
371 U. S.

178 , 182 (1962); see

also Childers v. Indep. Sch. Dist. No.

676 F . 2d 1338 , 1343 (10th Cir. 1982). While there is " invariably some practical

prejudice resulting from an amendment" to a pleading, that is not the test for refusing to
allow an amendment.

Patton v. Guyer 443 F. 2d 79 , 86 (10th Cir. 1971). Rather , the

inquiry is whether allowing the amendment would produce a " grave injustice " to the nonmoving party.

Id.

In some cases , untimeliness alone may be a sufficient reason to deny leave to
amend. See ,
e.

Frank v. u.S. West, Inc.

3 F. 2d

1357

1365- 66 (10th Cir. 1993).

However , unlike Allstate in this case , the cases citing this rule consistently involve a
party who knew of the claim long before seeking amendment , and had no explanation

for the delay. See , e.

Duncan v. Mgr. , Dep tofSafety,

397 F. 3d 1300 1315 (10th Cir.

2005) (amendment denied where proposed supplemental complaint was both untimely

and based on inadmissible evidence). Moreover , in the absence of prejudice , a court is
not required to deny a motion to amend , even if its filing is delayed.
Ralston Purina

REB. , Inc. v.

Co. , 525 F. 2d 749 , 751- 52 (10th Cir. 1975) (amendment granted five

and a half weeks before trial).

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III.

ARGUMENT

Because Allstate Recently Discovered the Concealment , the Amendments are Timely and Good Cause Has Been Shown.
In his Opposition to the Motion , Plaintiff argues that the facts giving rise to the

Motion were not newly discovered , but have been known to Allstate throughout this

litigation. Opp. at 3. However , in making this argument , Plaintiff mischaracterizes the
newly discovered facts " by stating as follows:
The alleged " newly discovered" facts are based on the fact that the Allstate policy at issue in this case included April Hill as a named insured , along with John Paul , her former husband when April was living with her new husband , Scott Hill.

Opp. at 3. Those are not the facts giving rise to the Motion.
What Allstate did

not learn until discovery in this case is that April and John Paul

provided false information in August 2000 , when they purchased the policy as husband

and wife. For example , none of the application documents , claim documents , or
pleadings in this case notified Allstate that:

At the time of the application , John Paul had been separated from April for six months. Paul Dep. Tr. , attached hereto as Ex. B at 45:21- 46: 15. At the time of the application , John Paul believed there was no hope of a reconciliation with April. kL at 47: 11- 24.

April and John Paul had begun divorce proceedings before submitting their application for insurance , on June 20 , 2000. kL at 43: 16- 44:3.
the application ,

Although John Paul was living in the same hotel unit as April at the time of he was staying in a separate bedroom , intending to move out shortly after applying for insurance. kL at 30: 1- 31 :9.

John Paul moved back to California just a few weeks after completing the Allstate application , never again to live with April. In other words , John

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Paul

never

resided" with April during the policy period. kL at 30: 1- 32:22;

34:24- 35: 19.
The divorce decree for April and John Paul was entered on November 16

2000 , just three months after they submitted the application. kL at 45:814; 47:9- 10.
Contrary to John Paul' s statement that he was employed as a manager

he was actually unemployed at the time of the insurance application. kL at 65:8-66:21.
Allstate learned these facts in deposing John Paul on June 6 , 2005 , and learned
additional relevant facts in deposing Scott Hill the following day.

These facts were material because in issuing the policy, Allstate relied on the

insureds ' representation that the policy would cover a single household. For two years
April and John Paul maintained the pretext of marriage to pay a single premium for a
policy that was actually covering two households , the John Paul household and the
Scott Hill household.

Unable to show that Allstate knew the above-cited facts before the recent
depositions and related discovery, Plaintiff suggests that Allstate was somehow "

notice " of fraud upon learning that April had remarried. Opp. at 4- 5. However , Allstate
was entirely reasonable in assuming that the insureds were truthful in applying for the
policy, that their circumstances had recently changed , and they had merely neglected to

notify Allstate. Because Allstate prepared its amended pleadings and filed its Motion
promptly after discovering the Pauls ' fraudulent concealment , Allstate s Motion is timely

under the circumstances , and there is good cause for allowing amendment beyond the
Rule 16 deadline. See , e.
Summers v. Missouri Pac. RR

Sys. , 132 F. 3d 599 , 604

(10th Cir. 1997) (good cause to modify scheduling order shown where movant acted

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with diligence);

Datastrip Int'l Ltd. v. Intacta Technologies , Inc. 253 F. Supp. 2d 1308

1317- 18 (N. D. Ga. 2003) (good cause shown where party did not learn of activities
giving rise to claim until after deadline to amend had passed).

Plaintiff Has Shown No Prejudice.
Plaintiff's arguments should also be rejected because the requested amendment

will cause no prejudice. Plaintiff argues that allowing the amendments will result in
prejudice because Plaintiff will have " insufficient time to defend against the allegations.

Opp. at 8. However , Plaintiff neglects to mention that he has not yet conducted any
discovery of Allstate , other than serving his first set of written discovery requests , and as of nine days ago , his second set. This was the last day on which the parties were

permitted to issue written discovery under the Amended Scheduling Order. Plaintiff's
first depositions , of the key Allstate agents with knowledge of the claims , are scheduled

for September 7 and 8 , 2005. See Notices of Deposition

, attached as

Ex. C

Plaintiff also fails to note that Allstate s fraudulent concealment claim is based on

the very same transactions - communications during the policy application process

that give rise to Plaintiff's claims. Logically, the Allstate agents with knowledge of the
coverage offered to John Paul are the same witnesses who can testify to the

representations John Paul made to Allstate. Thus , in the upcoming depositions , Plaintiff
will have a full and fair opportunity to obtain discovery regarding the fraudulent
concealment defense , as well as matters related to existing claims in the case.

Undersigned counsel has notified John Paul of these depositions , so that he or counsel

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of his choosing may attend. See Letters to Mr. Darin Schanker dated August 22 , 2005
and to John Paul dated August 24 , 2005 , attached as
Plaintiff also argues without details - that he
Ex.

(without enclosures).

will need to depose " many more

witnesses " than originally planned , to discover details of Allstate s investigations into the
validity of the policy. Opp. at 7- 8. However , even if this were true , Plaintiff intends to
take " many more " depositions in any event. On August 19 , 2005 , Plaintiff served a

Notice of Taking Fed. R. Civ. P. 30(b)(6) Deposition of Allstate Insurance Company (the

Notice ), requesting extensive testimony by Allstate representatives in eight different
subject areas. See Notice , attached hereto as
Ex. E.

Plaintiff may have served the notice to create the appearance that Allstate

proposed claim will substantially complicate this case , and require far more discovery than can be completed by the cutoff date of September 30 , 2005. However , a review of
the Notice reflects that only

three of the eight subject areas arguably relate to the

fraudulent concealment claim. See Notice , ~~ 6- 8. Most of the proposed testimony
appears to relate to existing claims in the case. kL, ~~ 1- 5 (e.

, product development

sales of policies , procedures for providing notice , claims handling, and the handling of
Katelyn Hill' s claims in particular).

3 Mr. Schanker is counsel for "
Hill, et al. v. Western Door,
et al.

John Paul , Conservator for the Estate of Hope Paul , a minor" Case No. 04-cv- 0332- REB- CBS.

in

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Allstate would not object to extending the discovery cutoff , if necessary, to allow
the third- party defendant , John Paul , to take whatever discovery he requires. Given that

the trial of this case is not scheduled to begin until March 2006 , there is ample time for
Mr. Paul to conduct discovery on the third- party
claims against him.

Under these circumstances , allowing amendment will cause no prejudice , let
alone a " grave injustice
" to any of the parties. See

Patton 443 F. 2d at 86.

Plaintiff' s Waiver Argument is Inapplicable Because Allstate Never

Refused to Perform the Contract , Nor Could It Have Waived a
Defense of Which It Had No Knowledge.
Finally, Plaintiff argues that the Motion should be denied because " where one has refused to comply with a contract on one ground , other possible grounds for refusal are
thereby waived. "

Opp. at 9

, citing

Metro. Paving

Co.

v. City

of

Aurora 449 F. 2d

177

182 (10th Cir. 1971). However , that principle is inapplicable to this case because
Allstate never denied coverage or refused to pay a claim under the policy purchased by

April and John Paul. Unlike the parties in the cases cited in the Opposition , Plaintiff
does not allege that Allstate " refused to comply " with the terms of the policy. Rather , as
discussed

supra Plaintiff seeks to recover benefits that allegedly would have been

available under " extended PIP" coverage , on the theory that John Paul would have

purchased such coverage had it been offered. See, e. , Am. Compl. ~~ 21 , 24 , 35 , 36
38. Because it has not refused to comply with the policy on any ground , Allstate has not

waived the defense and counterclaim it now seeks to assert.

Moreover , even if Allstate had denied a claim , it could not have waived the
fraudulent concealment defense because it did not have knowledge of that defense

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when it filed its Answer. There can be no waiver without

full knowledqe of the right or
e.

defense allegedly waived. See ,
(Colo. 1988);

Johnson v. Indus. Comm

761 P. 2d

1140

1147

Denberg v. Loretto Heights Coli. 694 P. 2d 375 , 377 (Colo. App. 1984).
Cas. & Sur.

See

also Crucible Materials Corp. v. Aetna

Co. , 228 F. Supp. 2d 182 195-

96 (N.

Y. 2001) (insurer could not waive defense to coverage of which it lacked

knowledge). Because waiver is a question of intent involving a factual determination
Plaintiff's waiver argument is not appropriate for summary disposition in any event. See
Grimm Const. Co. v. Denver Bd. of

Water Commr's 835 P. 2d 599 , 602 (Colo. App.

1992).
IV.

CONCLUSION
The crux of Plaintiff's argument is that because Allstate paid the claims in good

faith instead of investigating for fraud , it is now barred from asserting a meritorious

defense and counterclaim. This argument should be rejected. Because Allstate
Motion is timely, the defense of fraud has not been waived , and amendment will cause
no prejudice to any party, Allstate respectfully requests that its Motion be granted. Respectfully submitted this 24th day of August , 2005. Terence M. Ridley Terence M. Ridley
sf Wheeler Trigg Kennedy

LLP

1801 California Street , Suite 3600

Denver , CO 80202 Telephone: (303) 292-2525 Facsimile: (303) 294- 1879 Mail: ridley~wtklaw. com
Attorney for Defendant Allstate Insurance Company

10-

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CERTIFICATE OF SERVICE
I hereby certify that on this 24th day of August , 2005 , I electronically filed the

foregoing Defendant Allstate Insurance Company s Reply in Support of Its Motion for Leave to File: (1) Amended Answer and Counterclaim; and (2) Third- Party Complaint
Against John Paul with the Clerk of Court using the CMfECF system which will send notification of such filing to the following e-mail addresses:

Michael D. Alper alper~wtklaw. com purdy~wtklaw. com
Michael K. Alston michael. alston~husch. com

Meghan Frei Berglind berglind~wtklaw. com

Robert Bruce Carey
rob. carey~att. net kuhl~careylaw. com

. Co Horgan co~hbsslaw. com karenw~hbsslaw. com

Clifton J. Latiolais , Jr. cjl~clr- Iaw. com dla~clr- Iaw. com
. Alma M. Lugtu

lugtu~wtklaw. com purdy~wtklaw. com
Elizabeth L. Morton 10key. izzy~dorsey. com
valenzuela. I isa~dorsey. com; chafi n. kemper~dorsey. com

Alan E. Popkin alan. popkin~husch. com lisa.carter~husch. com
Casey A. Quillen

caq~clr- Iaw. com

amm~clr- Iaw. com

Terence M. Ridley ridley~wtklaw. com norris~wtklaw. com

Kenneth Alan Senn ksenn~bellsouth. net
David W. Sobelman david. sobelman~husch. com

()
Case 1:04-cv-00865-REB-CBS Document 107 Filed 08/24/2005 Page 12 of 12

Gregory Scot Tamkin tamkin. greg~dorsey. com
valenzuela. I isa~dorsey. com; chafi n. kemper~dorsey. com

Cindy Rae Ten Pas
ctenpas~careylaw. com ddomingues~careylaw. com

John Mark Vaught vaught~wtklaw. com como~wtklaw. com
and I hereby certify that a copy of the document has been served to the following nonCMfECF participant in the manner indicated by the non- participant' s name:

Marian Elizabeth Lokey
Dorsey & Whitney,

( ) First

LLP

Class Mail Hand Delivery

370 Seventeenth Street , #4700
Denver, CO 80202- 5647

( ) Facsimile

Overnight Delivery (x) E- Mail

Terence M. Ridley Terence M. Ridley
sf Wheeler Trigg Kennedy

LLP

1801 California Street , Suite 3600 Denver , CO 80202 Telephone: (303) 292-2525 Facsimile: (303) 294- 1879 Mail: ridley~wtklaw. com

Attorney for Defendant Allstate Insurance Company