Homeowners Beware: Fraud in Claims Process Can Lead to Judicial Sanctions in Bad Faith Action

By Beth E. Yoffie, Sedgwick Los Angeles

A federal court for the Southern District of Texas has sanctioned a pro se litigant for making fraudulent misrepresentations to his homeowner’s insurer following a fire, and for bringing a bad faith action against the insurer.

In Alexander v. State Farm Lloyds, 4: 12-CV-490, 2014 WL 549389 (S.D. Tex. Feb. 11, 2014), Tony Alexander sued State Farm Lloyds (“State Farm”) for breach of contract, violations of the Texas Insurance Code, violations of the Texas Deceptive Trade Practices Act, and bad faith.  He sought more than $1 million under the policy’s Dwelling Coverage as well as $77,000 for the cost of additional living expenses, personal property damage, and securing of the residence.  He did so despite concealing material facts and making misrepresentations to State Farm during the claims process.

Mr. Alexander abandoned the case three days into the jury trial after his fraudulent conduct had become apparent.  Following that, State Farm moved for sanctions to be levied against him.  Mr. Alexander retained counsel, who argued that he could not be sanctioned because his “foolishness” had taken place before he had filed the lawsuit.  Counsel asserted that Mr. Alexander had not lied during the trial, and so had not displayed contempt for the judicial process.  The court disagreed.

Mr. Alexander’s decision to file suit was itself contemptuous.  The court found that he was a sophisticated individual, given he had worked in the finance industry, possessed an advanced degree, and previously operated multiple businesses; and, that he had connived to use the judicial system as a continuation of his lawless efforts to exploit the July 24, 2005 fire to squeeze additional money from State Farm.

The court concluded that, although Rule 11 did not permit sanctions on the facts before it, attorney’s fees could be awarded to State Farm under Texas Rule 13 and Chapter 10 of the Civil Remedies and Practices Code.  Accordingly, it awarded attorney’s fees to State Farm.

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