Insurance Fraud: Something Old and Something New on a Frequently Litigated Issue
March 2011
The potential for insurance fraud is a
constant in property insurance claims. Concerns about insurance fraud tend
to increase, sometimes substantially, in troubled economic times. While
insurance fraud should not be condoned, there are limits to the situations
in which fraud should be used as a defense.
by Jay M.
Levin
This article will address three recent cases where the insurer raised
fraud as a defense. These three cases show the different boundaries of the
defense.
A Clear Case of Fraud
Williams v. Farmers Ins. Co., 2011 U.S.
DIST. LEXIS 2660 (W.D. Ark. Jan. 11, 2011), presented a classic case of
insurance fraud by claim inflation. Williams's house was destroyed by fire,
and Williams submitted a Proof of Loss claiming $85,000 in personal property
loss as a result. Some 6 months later, Williams's counsel wrote to Farmers
that the actual cost of the personal property in the home at the time of the
fire was $118,731.28, and that the replacement cost of that personal
property was $127,967.91. Williams submitted a list that identified three
items with replacement costs of over $14,000 each. These representations
were confirmed at Williams's deposition.
Only 2 years before the fire, however, Williams declared in a bankruptcy
proceeding that the value of her personal property was $19,325. At her
deposition, Williams could not account for the discrepancy in personal
property values and admitted that she did not acquire some $110,000 worth of
property in the 2 years between the bankruptcy and the fire. She also
testified that she had no recollection of anything in the house with a value
of over $14,000. In fact, she offered no explanation whatsoever for the
discrepancy.
The court assumed that Williams made a true and accurate representation
of the value of her personal property during her bankruptcy. The court noted
that Williams presented no evidence to account for the 6-figure increase in
that value in only 2 years, particularly given Williams's admission that she
made no significant acquisitions of property and had no property worth over
$14,000. The court held that the only reasonable inference was that Williams
knowingly and willfully materially misrepresented the personal property
claim to Farmers. The court noted that the concealment and fraud clause of
the policy was clear and unambiguous, and granted summary judgment in favor
of Farmers.
The result in Williams is not surprising.
Based on the statement of facts set out by the court, Williams was seeking
to recover for $100,000 worth of property which was neither damaged nor
apparently even existed. This is classic fraud. While the court appeared to
make certain assumptions that favored the insurer, a practice contrary to
summary judgment procedure, in light of the insured's complete failure to
explain a 6-fold increase in the value of her personal property, the court's
decision is understandable. Even the most pro-policyholder partisan would
agree that there are strong public policy arguments against insurance fraud,
and that policyholders who commit insurance fraud should suffer the
consequences of their actions.
Fraud at Policy Procurement Applies
A different scenario is presented in Hanson v.
Metropolitan Prop. & Cas. Ins. Co., 2011 U.S. DIST. LEXIS 3778 (E.D.
Mich. Jan. 14, 2011). In Hanson, Hanson and
Ryder purchased a building for $1,500 in December 2008. In June 2009, Hanson
applied for a homeowners policy from MetLife. Hanson never indicated that
the property was jointly owned with Ryder. Hanson did not disclose the
actual purchase price, but said that the people who owned it before him were
buying it for $45,000. On July 6, 2009, a month after MetLife issued the
policy, the property was damaged by fire. Hanson submitted a proof of loss
for just under $90,000. MetLife investigated and found that Hanson and Ryder
jointly owned the property at the time Hanson had applied for the policy.
MetLife also discovered that Ryder had filed a "suspicious" fire claim
earlier in 2009, which MetLife claimed that, had it known about the claim,
it would have refused to underwrite the policy.
Hanson sued, and MetLife filed a motion for summary judgment on the fire
claim and for rescission of the policy because Hanson materially
misrepresented ownership of the property at the time he applied for
coverage. Interestingly, the court did not decide the case under the common
law of rescission, which allows an insurer to rescind the policy and declare
it void from the beginning based on a material misrepresentation in the
application. Instead, the court found that the concealment or fraud
provision of the policy applied because Hanson had made a material false
statement affecting "any matter relating to this insurance . . . whether
before or after a loss." Because MetLife would not have issued the policy
had it known of Ryder's ownership, the court held that Hanson's
misrepresentation was material and, even if it was unintentional, the
concealment or fraud provision allowed MetLife to avoid coverage.
Hanson also does not break new ground. It
has been the law in most states for decades that a material
misrepresentation when applying for insurance company provides a basis for
the insurer to rescind the policy and not pay a claim. While the court
applied the wrong standard when it held that even an unintentional
misrepresentation would allow the carrier to avoid coverage (to void
coverage, a misrepresentation must be knowing or the insured must not have a
basis to believe the statement was true), the court may have determined
without so stating that Hanson could not have a basis for believing that
only he owned the property. The court apparently assumed that the
misrepresentation was material as it cited to no specific evidence to
support MetLife's statement that it would not have issued the policy. In
addition, and as noted above, the court relied on the concealment and fraud
provision in the policy, as opposed to the common law of rescission to
support summary judgment in favor of MetLife.
The lesson for policyholders in this context is that one should be honest
and straightforward with insurers even when dealing with policy procurement,
not only when submitting a claim.
Fraud Defense May Apply to Multiple Claims under the Same Policy
The third case Giambanco v. Sherrer, 2010
WL 5173829 (N.J. Super.), presents an unusual fact pattern because the insurance
fraud occurred in connection with a separate claim under a preceding policy
period. Plaintiff was a passenger in a car in 2003. In connection with the
2003 accident, plaintiff submitted a personal injury protection (PIP)
application and an affidavit of no insurance, and submitted to an
examination under oath. In all three, plaintiff used his brother's name,
date of birth, and social security number, rather than his own. Plaintiff's
misrepresentation was discovered before the claim for the 2003 accident was
finalized.
Plaintiff was involved in a 2004 accident, and he made both a PIP and
uninsured motorist claim. He made no misrepresentation in connection with
the 2004 claim. In litigation arising out of the 2003 accident, the insurer
was granted summary judgment and was relieved of its obligation to provide
insurance coverage based on the material misrepresentations. In litigation
arising out of the 2004 accident, the insurer sought to avoid coverage for
that accident, arguing that the fraud with regard to the 2003 accident
should preclude coverage for the 2004 accident.
The policy had a concealment or fraud provision that voided coverage for
an "insured who has intentionally or concealed or misrepresented any
material fact or circumstance in connection with any claim" under the
policy. The insurance company argued that the clause voids coverage not only
for the claim in connection with which the misrepresentation was made, but
for any further claim, even an unrelated claim. The insurer also argued that
the clause applied to coverage for the individual person committing the
fraud in perpetuity, even under later policies.
The court held that the concealment and fraud provision would allow an
insurer to deny coverage for any claim made under the same policy even if
the claim in connection with which the fraud occurred was completely
unrelated to the other claim. However, the court held that if the claims
were submitted under separate policies, fraud committed as to a claim under
one policy would not apply to a claim submitted under a renewal policy.
Giambanco shows that the fraud defense has
limits, although perhaps broader limits than one might suppose. An initial
impression would be that fraud in a claim arising out of one loss would not
affect a legitimate claim arising out of a separate loss.
Giambanco teaches us that fraud in one claim
under a single policy may bar unrelated, legitimate claims under the same
policy period. Giambanco also teaches us that
the outside limit for a fraud defense is claims submitted under the same
policy. Claims under different policies, even renewal policies, are not
affected by unrelated fraud for claims submitted under other policies.
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