There are many different kinds of insurance fraud, as this column regularly observes. There can be fraud contained in applications for insurance policies, fraudulently staged accidents, and fraudulent claims by health care providers treating injured policyholders, among other things.
Insurance policies try to eliminate, or at least to cut down on, insurance fraud in a variety of ways. This column focuses on two particular policy provisions focused on that goal: the “concealment or fraud” provision, and the “cooperation” clause.
A typical concealment or fraud provision in an insurance policy authorizes the insurer to deny coverage for a first-party claim by the insured if the insured intentionally concealed or misrepresented any material fact or circumstance or engaged in fraudulent conduct before or after a claimed loss. Generally speaking, under New York law, to deny a claim based on fraud, an insurer must show that the insured “willfully made a false and material statement under oath with the intent to defraud the insurer.” Staten Island Supply Co. v. Lumbermens Mutual Casualty Co., No. 02-CV-6390 (DGT) (E.D.N.Y. Mar. 29, 2005).
As the U.S. Court of Appeals for the Second Circuit has explained, the materiality requirement is satisfied if the false statement concerned a subject “relevant and germane to the insurer’s investigation as it was then proceeding.” Fine v. Bellefonte Underwriters Ins. Co., 725 F.2d 179, 183 (2d Cir. 1984).
Under New York law, a key element to determining whether insureds intentionally misrepresented their claims is intent. An insured’s unintentional errors or omissions are insufficient to make out a fraud claim. See Magie v. Preferred Mutual Ins. Co., 91 A.D.3d 1232, 1233-34 (3d Dep’t 2012).
Under an insurance policy’s cooperation clause, an insurer may deny coverage of an insured’s first-party claim where the insured willfully failed to “cooperate” with the insurer in the “investigation or settlement of the claim.” Cooperation, as the New York Court of Appeals explained 90 years ago, means “a fair and frank disclosure of information reasonably demanded by the insurer to enable it to determine whether there is a genuine defense.” Coleman v. New Amsterdam Casualty Co., 247 N.Y. 271, 276 (1928). The information provided by the insured must be “fair and truthful,” the Appellate Division, Fourth Department, has noted. Nationwide Mutual Ins. Co. v. Graham, 275 A.D.2d 1012, 1013 (4th Dep’t 2000).
Two recent cases have explored the concealment or fraud and cooperation concepts, and have found that insurers did not have to cover the insureds’ claims because they violated these particular policy provisions.
Concealment or Fraud
D’Andrea v. Encompass Ins. Co. of America, No. 15-CV-467-MJR (W.D.N.Y. Aug. 28, 2018), arose after the insured sought property insurance coverage for a fire loss that occurred at property he owned in Lancaster, N.Y.
After the fire loss was reported, the insurance company retained an origin and cause investigator to perform an investigation. The investigator concluded that the fire had originated in the basement of the property, but he could not determine the cause of the fire, as he was unable to rule out an accidental cause or a fire originating due to human involvement.
The insurer’s investigation also included requesting sworn statements in proof of loss and various other documents from the insured. The insured submitted sworn statements for the loss of the dwelling, for loss of use of the dwelling, and for loss of business personal property.
After receiving the proofs of loss, the insurance company had the insured submit to an examination under oath (EUO) at which he was questioned about, among other things, his alleged ownership of the property. The insured testified that, at the time of the fire, no names other than his name were on the deed as title owner of the property and that there was no mortgage on the property. He also testified that he had not transferred ownership of the property to his son and that there had been only a “verbal agreement” between him and his son to sell the property.
Relying on what it believed to be the insured’s misrepresentations in his proofs of loss and at his EUO, the insurer denied the insured’s request for coverage.
The insured sued, and the insurer moved for summary judgment. Among other things, the insurer argued that the insured was not entitled to coverage because he had breached the policy’s concealment or fraud provision by misrepresenting his ownership and financial interest in the property.
The court granted the insurer’s motion. It found that the insured’s testimony regarding the deed and mortgage for the premises “was incorrect” because he had granted title to the property to his son pursuant to a warranty deed dated and recorded a few months before the fire—at which time his son had mortgaged the property to the insured to secure a $50,000 note.
The court also decided that the insured’s misrepresentations regarding the deed and mortgage were “material” because questions as to ownership, liens and encumbrances, and changes of interest in property were “material as a matter of law.” It explained that materiality did not turn on whether or not the insurer would have issued the policy absent the misrepresentations, but rather whether the misrepresentations concerned a subject “relevant and germane” to the insurer’s investigation as it was then proceeding—and the court decided that in this case the misrepresentations were relevant and germane to the insurer’s investigation.
Finally, the court determined that the insured had willfully misrepresented the truth about the deed and mortgage with the intent to defraud the insurer, concluding that the “timing and nature” of the insured’s transaction with his son made it “implausible that his testimony regarding the deed and mortgage was a mere mistake” rather than a “concerted effort” to deceive the insurer. In the court’s opinion, the “only reasonable conclusion” to be drawn from the insured’s actions and testimony was that he had attempted to hide the truth about the deed and mortgage from the insurer in an attempt to receive coverage that he was not entitled to under the policy.
The court in D’Andrea also decided that the insurer could deny coverage to the insured under the policy’s cooperation condition but, in Fernandez v. Philadelphia Indemnity Ins. Co., No. 16 Civ. 2533 (JCM) (S.D.N.Y. Jan. 19, 2018), the U.S. District Court for the Southern District of New York issued a more expansive decision focusing on cooperation.
The insured in Fernandez sought coverage in July 2014 for the alleged theft of a 1962 Chevrolet Impala that he asserted he had purchased in June 2012.
The insurer requested information from the insured in connection with the alleged theft, including documents pertaining to the purchase of the Impala and its subsequent upgrades, as well as the insured’s personal and business tax returns dating back to Jan. 1, 2009.
In August 2014, the insured provided a police report and the first page of the 2013 tax return for his business. The insurer twice more requested the remaining documents from the insured and informed him that his failure to produce the documents would be a material breach of the insurance policy.
In October 2014, the insured provided a Nov. 20, 2007 bill of sale signed by “Shayne Alterton” and invoices issued by Golden Customs, indicating that he had paid over $200,000 in cash for upgrades to the Impala.
After the insurance company informed the insured that it would not process his claim if he continued to refuse to comply with all previous requests, the insured sued.
The court granted the insurer’s motion for summary judgment, concluding that the insured had failed to cooperate with the insurer in its investigation, a condition precedent that was an “absolute defense to an insurance claim[.]”
In its decision, the court found that the insurance company’s efforts had been “diligent and reasonably calculated” to bring about the insured’s cooperation. The court observed that the insurer had sent the insured “numerous letters” regarding his obligations under the policy and had continued to follow up even after the insured failed to respond. The insurance company also had specifically informed the insured that his failure to comply with its requests would be a material breach of the policy, the court noted.
The court added that no reasonable jury could find that the insured’s attitude was not one of “willful and avowed obstruction,” and it ruled that he had breached the policy’s cooperation condition by providing the insurer with “false documents”—namely, a “back-dated bill of sale” and invoices for upgrades that he had “prepared” himself after the fact using “estimates.”
The court explained that the insured was obligated under the cooperation condition “to provide the correct information” to the insurer in seeking coverage in connection with his loss. It added that even if some of the information on the falsified invoice may have been accurate, the insured had “implicitly represented” to the insurer that the documents he submitted were bona fide, when in fact they had been fabricated. According to the court, the insured’s actions constituted “willful and fraudulent” conduct expressly undertaken to induce the insurer to pay his claim.
The court concluded by pointing out that, ordinarily, New York law does not require an insurer to show prejudice as a result of the insured’s lack of cooperation to establish its entitlement to summary judgment, but that in this case the insured’s policy specifically required that the insurer demonstrate prejudice. The court then found that the false documents submitted by the insured had “clearly prejudiced” the insurer in that they had interfered with its investigation of his claim.
Accordingly, the court decided that the insured’s willful violation of the cooperation condition precluded his recovery as a matter of law.
There have been other recent noteworthy court decisions involving the same or similar issues discussed in this column, including from courts across the country. For example, in Vermont Mutual Ins. Co. v. Natiello, No. 3:17-cv-02050 (MPS) (D. Conn. Sept. 27, 2018), the U.S. District Court for the District of Connecticut refused to dismiss an insurance company’s lawsuit seeking to void an insurance policy based on its contention that, in violation of the policy’s concealment, misrepresentation, or fraud provision, the insured had given incomplete and untruthful testimony in a personal injury case for which the insurer was providing a defense to the insured.
As the cases discussed in this column should make clear, courts recognize the importance of insureds being truthful and forthcoming to limit the risk of insurance fraud. Toward that end, they will support insurance companies’ efforts to ascertain the truth.
Evan H. Krinick, managing partner of Rivkin Radler, can be reached at firstname.lastname@example.org.