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.
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 insurer 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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