The Concealment/Fraud Clause

When Fraud Makes a Policy Void

What is the Meaning of “Void”

“Void” can mean either void or voidable. Void is defined as “of no legal force or effect and so incapable of confirmation or ratification.”

Voidable is defined as “capable of being adjudged void, invalid and of no force (a voidable contract may be set aside usually at the option of one party).”^[1] The Restatement 2d of Contracts defines a “voidable contract” as a valid transaction with legal consequences until the power of avoidance is exercised.

Although jurisdictions are split as to the meaning of void in this context the distinction is largely semantic since the actions required of insurers wishing to dispose of a void or voidable insurance contract are ultimately the same.

Void as Void

The California Court of Appeal found fraud sufficient to declare a policy void:

First, plaintiff admits that she knew she was lying to the defendant and did so with the intent that defendant not find out the actual facts. Second, under Claflin, [Claflin v. Commonwealth Insurance Company, 110 U.S. 81, 3 S.C. 507, 28 L.Ed. 76 (1884)] the intent to defraud the insurer is necessarily implied when the misrepresentation is material and the insured willfully makes it with knowledge of its falsity. Thus, plaintiff’s intent to deceive was established as a matter of law. (Emphasis added.)[2]

A fraud and concealment clause in an insurance policy generally voids the policy upon the insured's attempts to deceive the insurer. Deceit may involve false representations to obtain insurance coverage or to obtain benefits after a claimed loss.^[3]

Misrepresentations in a policy application concerning use of the property was found to be sufficient to declare a policy void in Coca Cola Bottling Co. v. Columbia Casualty Ins. Co. (1992) 11 Cal. App.4th 1176, 1187-1189 and fn. 4, 14 Cal.Rptr.2d 643. A policy was also declared void when the insured set fire to his property and submitted false claims concerning value of property destroyed.^[4]

The Ninth Circuit, applying California law, also held with regard to a misrepresentation, concealment or fraud provision of an insurance policy:

Under such a provision it is clear that an insurer may void the insurance policy when the insured intentionally submits a false claim or lies about the nature of the loss. (Citations omitted.) These cases, which involve only a single loss, show a willingness to impose some forfeiture upon the insured as a necessary consequence of the insured's dishonesty.[5]

In a situation where the insured first lied at an examination under oath and then tried to amend his response, the New York Supreme Court, Appellate Division held:

Plaintiff's attempts to correct the misstatements … at his first examination under oath that he was the true owner of the subject property and used his own funds for its purchase, in a correction sheet submitted a year and a half later and at a subsequent examination under oath, were properly rejected by the IAS Court as "disingenuous".

These willful misrepresentations were of a material nature, violating the fraud and concealment provision of the policy, and hence invalidating it (see, Rickert v Travelers Ins. Co., 159 A.D.2d 758, 760, lv denied 76 N.Y.2d 701; 232 Broadway Corp. v New York Prop. Ins. Underwriting Assn., 206 A.D.2d 419, lv denied 85 N.Y.2d 808). (Emphasis added.)

When an insurer seeks to void the policy for insurance under a provision in the insurance policy that prevents an insured like Felix from concealing or misrepresenting material information. The insurance policy at issue in this case provided that the entire policy shall be void if, whether before or after a loss, any insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof or the interest of any insured therein or in the case of a fraud or false swearing by any insured related thereto. Therefore, the court concluded that the insurer was entitled to void the entire insurance policy if it proved that Felix engaged in willful concealment or misrepresentation relating to any material facts or circumstances concerning his insurance claim. [Am. Nat'l Prop. & Cas. Co. v. Felix (W.D. Pa., 2019)]

The fraud language of the policy was inserted by the drafters of the statute to provide a basis for a successful defense by insurers when an insured willfully conceals information about the insured loss or submits incorrect information in an insurance claim. Even when the fraud language is mandated by statute, courts often appear unwilling to support vigorous enforcement of the clauses.

Some statutes provide that a misrepresentation by a person does not constitute a defense for voiding a policy unless the misrepresentation concerns a matter that contributes to the loss. For example:

1) Wisconsin Statutes Annotated § 631.11(2) (1980):

No misrepresentation or breach of an affirmative warranty affects the insurer’s obligations under the policy unless the insurer relies on it and it is either material or is made with intent to deceive, or unless the fact misrepresented or falsely warranted contributes to the loss.

2) Nebraska Revised Statutes § 44-358 (1943):

No oral or written misrepresentation or warranty made in the negotiation for a contract or policy of insurance by the insured, or in his behalf, shall be deemed material or defeat or avoid the policy, or prevent its attaching, unless such misrepresentation or warranty deceived the company to its injury.

3) Montana Code Annotated § 33-15-403(3) (1985) which holds:

Misrepresentations, omissions, concealment of facts, and incorrect statements shall not prevent a recovery under the policy or contract unless:

(a) fraudulent

(b) material either to the acceptance of the risk or to the hazard assumed by the insurer; or

(c) the insurer in good faith either would not have issued the policy or contract or would not have issued a policy or contract in as large an amount or at the same premium or rate or would not have provided coverage with respect to the hazard resulting in the loss if the true facts had been made known to the insurer as required either by the application for the policy or contract or otherwise.

In South Carolina forfeiture of coverage will result only as to that element of the insured’s claim that was misrepresented.[6]

For example, if an insured misrepresents on the application that he has a silent, central station reporting burglar alarm system to protect his property, the insurer will not be able to declare the policy void if the loss that occurs is a trip and fall where a person is injured on the insured’s front steps. Similarly, if an insured misrepresents that all of his drivers are licensed and loss free, the insurer will not be allowed to declare the policy void if a licensed and loss free employee is involved in an auto accident.