An Insured Cannot Commit a “Little” Fraud Anymore than be a “Little Dead”
Minor Claims Fraud Voids Entire Policy
After a fire destroyed plaintiff’s house, plaintiff made a claim on his homeowner’s insurance policy with defendant insurer. Defendant investigated and ultimately denied the claim. Plaintiff sued and in response defendant asserted that the insurance contract was void due to plaintiff making misrepresentations during defendant’s claim investigation. The trial court granted summary judgment for the defendant, based on the contract being void. In Matthew Kelly and Shelly Kelly State Farm Fire And Casualty Company, an Illinois corporation, 312 Or App 361, No. 422 A169464, Court Of Appeals Of The State Of Oregon (June 16, 2021) the Court of Appeals was asked to interpret the statutory fraud language in the policy.
In 2017 there was a large house which was insured under a homeowner’s policy issued by defendant to 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.
Plaintiff filed an insurance claim. Defendant made an advance payment of $10,000 to plaintiff for loss of personal property. An adjuster interviewed plaintiff on May 22, taking an initial recorded statement. During the interview, 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 five months before the fire, he had been staying in the property’s guesthouse or with his girlfriend.
After the interview, defendant set loss reserves on 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, plaintiff represented to 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. Defendant paid plaintiff $3,600 in ALE benefits based on that information.
Meanwhile, on June 22, defendant’s special investigations unit began investigating concerns of potential fraud in connection with the insurance claim and, in November 2017, interviewed plaintiff. Defendant’s investigation revealed that 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, defendant learned during its investigation—and plaintiff admitted in his November interview—that plaintiff had been in jail from December 29, 2016, until May 10, 2017, not living in the Aumsville guesthouse or with his girlfriend. Defendant also learned—and plaintiff then admitted—that plaintiff’s construction company had last been active in 2014, that plaintiff had made about $51,000 doing construction work for other companies in 2016, and that plaintiff had not received any 2017 income as of May 2017.
In May 2018, defendant denied coverage on plaintiff’s insurance claim. Defendant invoked the “Concealment, Misrepresentation or Fraud” provision of plaintiff’s home insurance policy, which defendant asserted applied because plaintiff had willfully concealed facts and made misrepresentations regarding his income and work history, his incarceration and residency, and the ALE claims.
The trial court granted summary judgment to defendant. The trial court concluded that plaintiff’s misrepresentation about where he was living during the five months before the fire was material and that 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.
ORS 742.208 requires a fire insurance policy to contain a provision regarding concealment, misrepresentations, or fraud by the insured. The provision in plaintiff’s fire insurance policy with 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 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 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 is 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, plaintiff’s misrepresentation that he was living at the Boxwood property from June 19 to August 31, 2017, at a cost of $1,500 monthly, was material, in that it undoubtedly might have affected the attitude and action of defendant, particularly with respect to paying ALE benefits under the policy.
The Court of Appeal concluded that the trial court did not err in concluding that plaintiff’s misrepresentation that he was living at the Boxwood property at a 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.
The Oregon Court of Appeal applied the law as written. Presenting a false claim to an insurer with 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 $3600 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.
© 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 52 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
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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