A Video Explaining Grounds for Denying a Claim
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To constitute fraud, an insured must have concealed or misrepresented a material fact with the intention of inducing an insurer to pay a claim it would not, otherwise owe had it known the true facts. The facts that are deemed to be “material” for purposes of denying a claim or voiding a policy are not clearly defined and therefore each case must be evaluated separately.
Generally, a fact is material to the application for insurance if it might have influenced a reasonable insurer in deciding whether to accept or reject the risk on the same terms and conditions. Material facts intentionally concealed or misrepresented with intent to mislead the insurer that result in damage to the insurer are fraudulent. Fraud, at the option of the insurer, allows the insurer to void the policy. A misrepresentation after a loss as to a single material fact will forfeit the entire insurance contract.
An insured cannot commit a “small” fraud any more than he can be just a little dead. Once caught in a small fraud, the insured cannot demand that he or she be paid the legitimate part of the claim and expect the insurer to forgive the attempted fraud.
Determining the existence of a “misrepresentation” is not always straightforward. In Suggs v. State Farm Fire and Casualty. Co., 833 F.2d 883 (10th Cir.1987), an initial investigation by an insurer and the state fire marshal concluded that a residential fire was the result of arson. The fire marshal further concluded that it was the insured who set the fire. The insured was arrested and charged with arson.
With criminal charges pending, the insured hired experts who concluded that the fire was probably caused by an electrical malfunction. Criminal proceedings were then dismissed. Another expert retained by the insurer later concluded that the fire was not of electrical origin, and the insurer denied the insured’s fire damage claim on the ground that the insured had intentionally set the fire. The insured responded by suing for benefits under the policy, as well as for bad faith. A jury found in favor of the insured on both causes of action.
On appeal, the Tenth Circuit reversed the bad faith judgment. The termination of the arson prosecution was found to be immaterial because the disposition of criminal cases require different criteria than civil cases. In any event, substantially conflicting evidence existed regarding the nature of the fire. Based on this conflict, the Suggs court held that the only reasonable conclusion the jury could have reached was that the insurer had not acted in bad faith. The insurer had good reason to believe that the insured, Suggs, misrepresented facts material to the claim by denying he set the fire. The insurer was unable to convince the jury that the insured lied but was able to convince the Tenth Circuit Court of Appeal that the denial was made in good faith.
Although this case resulted in a beneficial or partially beneficial verdict on behalf of the insurer, it reveals the need to deal fairly and in good faith with all insureds and even more so with insureds suspected of fraud. If the insurer treats the suspected fraud with the utmost of good faith, it will avoid unnecessary litigation, will have sufficient facts to deny a claim, and will explain to the insured all of the reasons for the denial.
Misrepresentation or Concealment in an Application
In some states, like California and New York, when misrepresentations as to material facts made in an application for insurance, existence of a fraudulent intent to deceive is not essential to the avoidance of the policy. In these states, applying what has been called the “marine rule” a policy can be rescinded (that is, declared void from its inception) for an innocent misrepresentation or concealment of a material fact.
In the presentation of a claim, however, the insured’s act must have been intended to defraud the insurer. Even a gross overvaluation of a claim will not permit an insurer to deny the entire claim or declare the policy void unless the insurer can prove that the overvaluation was not an honest mistake.
Fraudulent Intent
Courts in different states have difficulty with the concept of fraud and fraudulent intent. In Auto-Owners Ins. Co. v. Hansen Housing, Inc., 604 N.W. 2d 504, 514 (S.D. 2000), the Supreme Court of South Dakota confirmed that exaggerated claims for the purpose of gaining an advantage in settlement negotiations are considered attempts to defraud, even if insureds do not expect to ultimately obtain more than their actual loss. On the other hand, that Court recognizes that there may be an honest misstatement of some fact and that although, as a general rule, fraud and false swearing will void the policy, mere mistakes in stating facts that do not in themselves annul its conditions and do not appear to be willful misrepresentations will not defeat the action. It is up to the jury, with instructions from the court, to determine whether the misrepresentation is a “mere mistake” or an intentional attempt to deceive. The insurer can prove reliance in the application process by showing that it issued a policy based on the insured’s fraud that it would not otherwise have issued.
Under New York’s Penal Law § 176.05 (1), a fraudulent insurance act consists of the presentation with fraudulent intent of a false written statement in connection with a policy for either commercial or personal insurance. [People v. Boothe, 68 A.D.3d 402, 2009 NY Slip Op 8859, 890 N.Y.S.2d 484 (N.Y. App. Div. 2009)]
When Plaintiffs argued that the trial court erred in granting defendant summary disposition because a question of fact existed concerning whether the statement at issue in the application was made in good faith and without fraudulent intent. The Michigan Court of Appeal concluded that it is unnecessary for an insurer to show fraudulent intent in order to cancel an insurance policy where an applicant makes a material misstatement concerning prior medical history. [Wiedmayer v. Midland Mutual Life Ins. Co., 108 Mich.App. 96, 100, 310 N.W.2d 285 (1981); Legel v. American Community Mut. Ins. Co., 506 N.W.2d 530, 201 Mich.App. 617 (Mich. App. 1993)]
Fraudulent intent is rarely susceptible to direct proof and must ordinarily be established by circumstantial evidence and the legitimate inference arising therefrom. [Barkley v. United Homes, LLC, 2012 WL 2357295, at *8 (E.D.N.Y. June 20, 2012) (internal quotation omitted).] An inference of fraudulent intent can be established by a showing of a motive for committing fraud or by identifying conscious behavior by the accused party. [Enzo Biochem, Inc. v. Johnson & Johnson, 1992 WL 309613, at *11 (S.D.N.Y. Oct. 15, 1992) (internal quotation omitted) (alteration in original); Gov’t Emps. Ins. Co. v. Jacobson (E.D. N.Y. 2021)
Determination of Materiality
Materiality of false statements is determined by the result it would have on the insurer, its underwriter or claims person. Materiality is not determined by whether or not the statements deal with a subject later determined to be unimportant. If, for example, false statements are made about factors other than those that caused a loss, the false statements are nevertheless material.
Falsely sworn statements are always material. False statements are material if they might have affected the attitude and action of the insurer. They are equally material if they were calculated to discourage, mislead, or deflect the company’s investigation in any area. A fact is material to a claim if it concerns a subject relevant and germane to the insurer’s investigation of the claim.
Based on the evidence an insurer, GEICO, presented, a reasonable jury might conclude that the person seeking benefits from the insurer, acted with fraudulent intent. Courts have regularly held that a medical professional’s financial motive to obtain no-fault insurance benefits by making intentional misrepresentations to an insurance company is sufficient to demonstrate scienter, or evil intent. [Gov’t Emps. Ins. Co. v. Badia, 2015 WL 1258218, at *15 (E.D.N.Y. Mar. 18, 2015); Allstate Ins. Co. v. Etienne, 2010 WL 4338333, at *10 (E.D.N.Y. Oct. 26, 2010); Gov’t Emps. Ins. Co. v. Jacobson (E.D. N.Y. 2021)]
The term “material” means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. [Kungys v. United States, 485 U.S. 759, 770, 108 S.Ct. 1537, 99 L.Ed.2d 839 (1988)] This materiality requirement descends from common-law antecedents. The common law could not have conceived of “fraud” without proof of materiality. [Neder v. United States, 527 U.S. 1, 22, 119 S.Ct. 1827, 144 L.Ed.2d 35 (1999); Universal Health Servs., Inc. v. U.S. & Mass. ex rel. Escobar, 136 S.Ct. 1989, 195 L.Ed.2d 348 (2016).]
ZALMA OPINION
Before an insurer decides to deny a claim it must have conducted a thorough investigation that establishes, beyond a preponderance of all available evidence, that the claim is one that is not covered by the policy. In addition, if the claim includes evidence of fraud, it is essential that there is strong evidence sufficient to require the insurer to report to the state the suspicion that a fraud is being attempted or has succeeded.
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.
He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.
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He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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