Expert Commentary

Minor Claims Fraud Voids Entire Policy

After a fire destroyed the plaintiff's house, the plaintiff made a claim on his homeowners insurance policy with the defendant insurer. The defendant investigated and ultimately denied the claim. The plaintiff sued, and in response, the defendant asserted that the insurance contract was void due to the plaintiff making misrepresentations during the defendant's claim investigation.


Claims Practices
July 2021

The trial court granted summary judgment for the defendant based on the contract being void. In Kelly v. State Farm Fire & Cas. Co., 312 Or. App. 361 (June 16, 2021), the Oregon Court of Appeals was asked to interpret the statutory fraud language in the policy.

The Facts of the Case

In 2017, there was a large house that was insured under a homeowners policy issued by the defendant to the plaintiff and his then-wife. A fire completely destroyed the house on May 16, 2017. The fire marshal was unable to determine the cause of the fire but could not rule out that it originated at the grinder.

The plaintiff filed an insurance claim. The defendant made an advance payment of $10,000 to the plaintiff for loss of personal property. An adjuster interviewed the plaintiff on May 22, taking an initial recorded statement. During the interview, the plaintiff represented that he made $150,000 annually as a general contractor with his business, Kelly and Sons Construction, Inc. He also represented that, in the 5 months before the fire, he had been staying in the property's guesthouse or with his girlfriend.

After the interview, the defendant set loss reserves on the plaintiff's claim. It also began paying "Additional Living Expense" (ALE) benefits to cover the cost of alternative housing.

In connection with the ALE benefits, the plaintiff represented to the defendant that he had moved into the "Boxwood property" on June 19, lived there until August 31, and incurred $1,500 per month in rental charges to live there. The defendant paid the plaintiff $3,600 in ALE benefits based on that information.

Meanwhile, on June 22, the defendant's special investigations unit began investigating concerns of potential fraud in connection with the insurance claim and, in November 2017, interviewed the plaintiff. The defendant's investigation revealed that the plaintiff owned the Boxwood property, that he had not moved into or lived at that property after the fire, and that he had sold the property on August 29, 2017. Further, the defendant learned during its investigation—and the plaintiff admitted in his November interview—that the plaintiff had been in jail from December 29, 2016, until May 10, 2017, not living in the Aumsville guesthouse or with his girlfriend. The defendant also learned—and the plaintiff then admitted—that the plaintiff's construction company had last been active in 2014, that the plaintiff had made about $51,000 doing construction work for other companies in 2016, and that the plaintiff had not received any 2017 income as of May 2017.

In May 2018, the defendant denied coverage on the plaintiff's insurance claim. The defendant invoked the "concealment, misrepresentation, or fraud" provision of the plaintiff's homeowners insurance policy, which the defendant asserted applied because the plaintiff had wilfully concealed facts and made misrepresentations regarding his income, work history, incarceration, residency, and the ALE claims.

The trial court granted summary judgment to the defendant. The trial court concluded that the plaintiff's misrepresentation about where he was living during the 5 months before the fire was material and that the defendant relied on it in paying $37,666 in ALE benefits and setting loss reserves, which was yet another reason that the policy was void.

The Court's Analysis

ORS 742.208 requires a fire insurance policy to contain a provision regarding concealment, misrepresentations, or fraud by the insured. The provision in the plaintiff's fire insurance policy with the defendant is identical in substance to the statutory language.

The purpose of ORS 742.208 is to discourage insurance fraud. That includes discouraging false claims concerning the amount of loss or the circumstances of the fire and false statements that prevent or hamper the investigation of the claim. Only "material" misrepresentations void a policy. How the materiality requirement applies in practice depends on the context in which a misrepresentation is made. In the context of claim fraud, a misrepresentation is material if it is relevant and germane to the insurer's investigation as it was then proceeding.

A misrepresentation after the loss as to a single material fact will forfeit the entire insurance contract. Thus, under longstanding Oregon law, the general maxim disfavoring forfeiture of insurance contracts is trumped by the concealment, misrepresentation, or fraud policy provision required by ORS 742.208.

Whether a $3,600 misrepresentation is "material," since there is no factual dispute that the plaintiff misrepresented that he was renting the Boxwood property and that that misrepresentation had a monetary value of $3,600. In this case, where the statements were admittedly made and the finding of their falsity was not attacked on appeal, the question seems to be purely one of law.

False sworn answers are material if they might have affected the attitude and action of the insurer. They are equally material if they may be said to have been calculated either to discourage, mislead, or deflect the company's investigation in any area that might seem to the company, at that time, a relevant or productive area to investigate. Under that standard, the plaintiff's misrepresentation that he was living at the Boxwood property from June 19 to August 31, 2017, at the cost of $1,500 monthly, was material in that it undoubtedly might have affected the attitude and action of the defendant, particularly with respect to paying ALE benefits under the policy.

The Oregon Court of Appeal concluded that the trial court did not err in concluding that the plaintiff's misrepresentation that he was living at the Boxwood property at the cost of $1,500 per month was material for purposes of the "concealment, misrepresentation, or fraud" provision in his insurance policy.

Forfeiture of the entire policy is undoubtedly a harsh penalty. However, it is the penalty that the legislature appears to have intended in enacting ORS 742.208, and it is what the policy requires under existing case law.

Conclusion

The Oregon Court of Appeals applied the law as written. Presenting a false claim to an insurer with the knowledge that it is false voids the entire policy. The amount of the fraud is irrelevant. An insured cannot say: "You caught me on the $3,600 claim but must pay the legitimate part of my claim." To do so would emasculate the reason for the concealment, misrepresentation, or fraud provision of the policy. A little fraud voids the entire contract just as easily and importantly as a big fraud.


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