The Best Defense: Insurer Voids Policy Ab Initio For Fraud, Alleges Reverse Bad Faith Following Claim

insurance-fraud

PHILADELPHIA, Sept. 27 – A state court judge in Philadelphia has upheld a jury finding that a commercial property insurance policy was void ab initio based on the fraud of the insured in the application, requiring the insured to disgorge claims payments, and the insurer to refund premium dollars paid by the insured for the policy.

In Smith v. United States Liability Insurance Co .,  the  insured filed a  vandalism claim with USLIC which wrote a  commercial policy on the property.  USLIC paid  more than  $150,000.00 on the claim , but a public adjuster hired by the  insured disputed that amount, claiming the total damage was  $444,325.71.

During the claims investigation the insured sat for several  examinations under oath.   The insured ultimately sued USLIC for failure to pay the full claim.  USLIC filed an answer and counterclaim seeking, among other things, (1) declaratory relief  (2) a finding that the insured violated the Pennsylvania Insurance Fraud Statute, and committed  common law fraud; (3) a finding that the insured breached the insuring agreement and (4) committed reverse bad faith.

Following jury trial, the jury returned a verdict in favor of the insurer on all claims and counterclaims.  The Court, per Judge Ann Butchart, denied post trial motions, and entered judgment on the verdict, declaring the policy void,  and requiring the insured to pay the insurer $285,094.40 ($157,725.09 in previous claim payments under the policy and $127,369.31 for claim related expenses incurred by the insurer).  The Court further ordered USLIC to return $48,467.55 in premiums to the insured.

Judge Butchart wrote in part that the insured had lied in the insurance application about the frequency of prior claims, withholding this information from the insurer:

“where the execution of a contract of insurance has been induced by fraudulent misrepresentations of the insured, the insurer may secure its cancellation . . . the jury, as the fact finder, determined by a standard of clear and convincing evidence that the Policy was procured by fraud with the intent to deceive . . . and the Court properly declared the Policy void ab initio. . . the jury was presented with sufficient evidence to determine, under the clear and convincing standard, that [the insured] committed fraud with intent to deceive when he submitted his application for insurance.”

 

Smith v. United States Liability Insurance Co., Philadelphia Court of Common Pleas, June Term 2016 No. 2354, 2017 Phila. Ct. Com. Pl. LEXIS 292 (C.C.P. Phila. Sept. 27, 2017) (Butchart, J.)

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RICO, Fraud Claims Properly Pled Against Insurer, Georgia Federal Judge Rules

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COLUMBUS, Oct. 5 — Georgia’s bad faith statute does not preempt claims against an insurer for fraud or claims of violation of the Georgia Racketeer Influenced and Corrupt Organizations Act (RICO), a federal judge has ruled.  The Court ruled in  Holly Steigel, et al. v. USAA Casualty Insurance Co., et. al., No. 16-346, M.D. Ga., 2017 U.S. Dist. LEXIS 163341  that fraud and state RICO claims could be alleged in addition to bad faith claims because the former were not premised upon the insurer’s unreasonable refusal to pay the claim.

 

Holly Stiegel filed an auto insurance claim with USAA Casualty Insurance Co., which included claims for medical expenses resulting from the  car accident.  USAA denied the claim, after which Steigel filed suit against USAA in the U.S. Middle District of Georgia.  The complaint originally included breach of contract and bad faith claims pursuant to Official Code of Georgia Annotated Section 33-4-6, O.C.G.A. § 33-4-6.  Steigel later amended  the complaint to include her husband as a plaintiff, and to  add claims for fraud, violations of the Georgia RICO Act, O.C.G.A. § 16-14-1 et seq., as well as unjust enrichment.  Steigel aslo added as a defendant Auto Injury Solutions (AIS), a USAA vendor.

According to the  amended complaint, USAA and AIS constructed a plan whereby USAA would outsource claims for medical payments to AIS with the design that AIS would deny or reduce the amount of the medical claims.

USAA and AIS both moved to dismiss the fraud, RICO, and unjust enrichment claims, arguing that they were all preempted by the state bad faith statute, which provided the exclusive remedy for the claims conduct of the defendants in claims handling.

Georgia Middle District Chief Judge Clay D. Land denied the motions to dismiss.  Chief Judge Land ruled that the preemption issue was one of first impression in Georgia, and that RICO and fraud claims were not precluded by Georgia’s bad faith law.  The Court specifically held that RICO and fraud claims were not strictly premised upon USAA’s failure to pay a claim, and that they were therefore not precluded by the bad faith statute.  Rather, the judge ruled, the RICO and fraud claims were based on the alleged conspiracy of the defendants to commit theft and deception:

“Plaintiffs allege that Defendants stole their money when they devised a scheme for USAA to avoid paying benefits legitimately owed under their insurance policy while collecting premiums for insurance that they knew was not being provided.  Thus, Plaintiffs appear to seek as their damages the return of the money they paid in the form of premiums to USAA.  The Court finds that this claim is not a claim by a holder of an insurance policy to recover benefits under the policy and bad-faith penalties based on an insurance company’s refusal to pay a loss covered under the policy.”

Chief Judge Land also denied the motion to dismiss the unjust enrichment claim, writing that he would re-visit the issue at summary judgment.

Holly Steigel, et al. v. USAA Casualty Insurance Co., et. al., No. 16-346, M.D. Ga., 2017 U.S. Dist. LEXIS 163341

Pa.: State Farm Adequately Pled Chiropractor Billing Fraud

insurance-fraud

PHILADELPHIA, May 20 — A federal judge has denied a motion to dismiss State Farm Mutual Automobile Insurance Co.’s amended complaint of billing fraud against a chiropractic and physical therapy practice.  It ruled also that State Farm need not prove justifiable reliance on the bills at this stage of the case.

U.S. District  Judge J. Curtis Joyner of the Eastern District of Pennsylvania also found that State Farm’s  amended claims were both timely, and adequately alleged misrepresentation in the billing submitted by the defendants.

State Farm alleges that  Eastern Approach Rehabilitation LLC, Aquatic Therapy of Chinatown Inc., Leonard Stavropolskiy, P.T., D.C., and Joseph Wang, P.T., D.C., submitted false and fraudulent insurance claims on behalf the practice’s patients.  State Farm claims that the defendants  created a series of records for patients suffering from “moderate-to-severe joint dysfunctions, pain, and muscle spasms across multiple regions of the spine,”  and that these impressions from initial examinations were copied and pasted into subsequent treatment notes.  The amended complaint contends that planned treatments recorded in the notes were simply pre-determined, and not individually tailored to each patient.

State Farm also alleges claims that dating back to 2010, the practicioners took action to hide the nature of the fraudulent activity through the use of software to randomize and synonymize similar observations and diagnoses.  The amended complaint alleges that this conduct created the impression that diagnosis and treatment of patients was individualized when in fact it was not.

State Farm alleges damages in excess of $850,000.

On Feb. 17, Judge Joyner granted the motion to dismiss the original complaint,  but allowed State Farm to file an amended complaint.  He ruled that the amended complaint, however, sufficiently set forth misrepresentations allegedly made by the defendants, and that, at least at the pleading stage, the insurer need not show  justifiable reliance on the misrepresentations allegedly made in the billings.

State Farm Mutual Automobile Insurance Company v. Leonard Stavropolskiy, P.T., D.C., et al., No. 15-cv-5929, E.D. Pa.; 2016 U.S. Dist. LEXIS 65234

State Farm Voids Homeowners’ Policy For Material Misrepresentation

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OXFORD, April 19 – A federal judge in Mississippi has granted State Farm’s request to void a homeowners insurance policy on grounds the insureds made misrepresentations material to the risk.

U.S. District Judge Sharion Aycock of the Northern District of Mississippi voided a policy issued to Cedric Flowers, because he misrepresented his ownership interest in the policy on the coverage application.   On April 19, 2012, Cedric Flowers applied to State Farm for homeowners insurance, after which State Farm issued a policy.  A fire destroyed a portion of the home on June 17, 2012, a fire damaged the house and its contents.

In 2015  State Farm sought to have the policy voided, and  filed a declaratory judgment suit seeking an order voiding the policy was void when issued.  State Farm also sought to void the policy claiming the Flowers violated several policy conditions.  Cedric Flowers counterclaimed for breach of contract, negligence, bad faith and fraudulent and negligent misrepresentation.

Judge Aycock granted State Farm’s motion for summary judgment, holding:

“This Court has held in other cases that ownership is a ‘material fact’ that would influence ‘a prudent insurer in determining whether to accept the risk. . . Therefore, the Court finds that the representation that the Flowers owned the property at the time he applied for this homeowner’s insurance policy is a material misrepresentation under both the objective (prudent insurer) and subjective (particular insurer) standards, and due to this material misrepresentation the policy was void from the beginning. . . [That] the Defendant .  believed, in good faith, that he owned the home at the time he applied for the policy is unavailing because the relevant cases make clear that the fact that a misrepresentation ‘was intentional, negligent, or the result of mistake or oversight is of no consequence.’”

State Farm Fire and Casualty Company v. Flowers et al, (N.D. Miss. 2016)

Property Value Admissible By Allstate To Prove Arson Fraud

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SPRINGFIELD, Feb. 29 –  A federal judge in Missouri has denied an insured couple’s attempt to exclude expert evidence Allstate Insurance  intends to submit  in a declaratory judgment action in which it seeks to have its denial of a homeowners insurance coverage claim upheld.

In Allstate Indemnity Company v. Joseph Dixon, et al., No. 14-cv-03489-MDH. W.D. Mo.; 2016 U.S. Dist. LEXIS 24678, U.S. District Judge Douglas Harpool denied a motion to strike Allstate’s expert disclosures filed by Allstate insureds Joseph Dixon and his wife, ruling that the value of the couple’s home could be probative of the couples’  financial motive to commit arson fraud. The Court found that Allstate’s proposed testimony from a county assessor as to the value of the insured couple’s home would not prejudice the homeowners, although it reserved final judgment about the precise nature of the allowed testimony until later in the case.

Allstate  denied coverage for the April 2014 fire, claiming that the Dixons falsified material facts with regard to the claimed loss. A cause and origin and claims investigation by Allstate revealed that the fire was intentionally set.  The Dixons contended in their motion to strike expert disclosures that the value of their home was not in dispute, and that expert testimony concerning the value of the property would be confusing to the jury as well as irrelevant, cumulative and prejudicial.

In denying the motion, Judge Harpool cited to an Eighth Circuit U.S. Court of Appeals’ ruling which discussed proper evidence of motive in arson fraud cases,  Gen. Cas. Ins. Companies v. Holst Radiator Co. (88 F.3d 670, 672 [8th Cir. 1996]).

Allstate v. Dixon (W.D. Mo. 2016)

Insured’s Failure To Cooperate In Corvette Theft Claim Dooms Bad Faith Case in Mississippi

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ABERDEEN, Feb. 26 – An insured’s failure to cooperate in the investigation of the claimed theft of his Corvette entitled his insurer to judgment as a matter of law on coverage and bad faith claims, a Mississippi federal judge has ruled.

In Holt v. Victoria Fire & Casualty Company, Plaintiff Eddie Gray Holt claimed his 2008 Corvette was stolen from an Alabama parking lot where it was left overnight, and filed a theft claim with his insurer, Victoria.  Because video surveillance of the parking lot did not show the presence or the theft of the car, Victoria sought Holt’s Examination Under Oath, and requested in writing that he bring to the examination documentation, including documentation regarding his finances, income, and expenses.

At his examination, Holt refused to produce the requested documents, and refused to answer certain questions.  After Victoria denied his claim, he filed a breach of contract and bad faith suit, after which Victoria moved for summary judgment on grounds that Holt breached several contractual duties in the policy, most notably his contractual duty to cooperate in the investigation of any claim.

After reviewing not only the applicable policy language but Mississippi common law, U.S. District Judge Carlton Reeves ruled that Holt’s refusal to cooperate in the investigation voided the policy, and entered judgment for Victoria on breach of contract and bad faith claims.

Holt v. Victoria Fire & Casualty Co., (N.D. Miss., March 3, 2016)

Winning the Arson/Fraud Case – Part II

In an earlier post, we examined some key points to structuring and winning a civil arson/fraud trial against an insured suspected of misconduct in the making of an insurance claim.  We resume our examination in Part II of Winning the Arson/Fraud Case.

Your Claims Adjuster and Claims Witnesses Must Be Demonstrably More Credible Than The Insured(s)

This is a vital assessment which must made in an objective, detached manor.  Hoping that your claims staff will appear more credible than the insured is not sufficient grounds to proceed to try the arson/fraud case.  A reasoned, detached analysis of the insurer witnesses must be done to determine whether they, individually and as a whole, will stand up to the scrutiny of the jury, and be judged more credible.

Beware of the landmines here. How can claims staff be cross-examined?  Are there any troubling issues in their employment histories?  Do they appear to be partial or biased based on the documentation in the claims file and the claims logs?  Are any of them disgruntled in some way or worse, disgruntled in some way and not forthcoming about it.

Next to the law enforcement witnesses, the claims witnesses are the most important pieces in winning the arson/fraud trial.  They deserve detailed vetting as soon as possible in the process.

Who Let The Dogs Out?

This is going to sound silly.  But this indicator has almost never in 25 years of practicing law led me astray from assessing the proper cases to take to trial.

Did the insured have any pets?  Are they normally kept inside?  Did they perish in the fire, or was there some unusual event or explanation which led them to being out of the house at the time of the fire?

Arsonists love their dogs like anybody else.  The average one-off arsonist is simply neither aware enough nor disciplined enough to sacrifice a family pet  to create the impression of a fire of actual unknown origin.   Electrical malfunctions and other accidental fires do not take time to lead otherwise confined pets to safety before they begin.  Almost all arsonists do, however.  The notable exception to this guideline is the rage or anger fire in which the arsonist attempts to harm a pet of the object of his anger — which is a very, very small percentage of intentionally set fires, in my experience.

Look For Mistakes

Some arsonists are more skilled than others. Few are hired professionals, and the amateurs make plenty of mistakes.  Combining the stress of the circumstances which would lead an insured to commit arson for insurance benefits,  and a basic lack of experience in such activity generally leads to a break or two in the fire investigation —  telltale signs of intentionally set fire versus fire of accidental cause and origin.

The following mistakes have all occurred in cases I have handled, including one case in which all of the mistakes occurred in the same fire.  Some of these are sure to strike you as fantastical but they all are true:

  • multiple points of origin which did not communicate with each other;
  • failure to ventilate the fire by opening doors and/or windows;
  • leaving incriminating documents such as  a mortgage foreclosure notice dated within 10 days of the fire  in the area of origin;
  • failing to dispose of lighters/ignition sources in the areas or origin;
  • failing  to plug in electrical appliances which were later offered by the insured as probable sources of an accidental fire
  • writing an apology to a spouse in soot on a window following the fire (this one is not so much as a mistake as it is a confession of the subconscious, I imagine)
  • using a cell phone to call a business associate about the fire twenty minutes before calling 911 Emergency Services to report the fire.

The case in which all of these mistakes occurred in the same fire  was readily identified as an arson/fraud case which should be tried.   And while that particular case is an outlier to put it mildly, most arson fires do not go perfectly for the arsonist, and mistakes can be identified.  They should be pointed out and shown to the jury.

Do Not Forget Damages

In the bustle and effort spent establishing the insured’s liability for arson/fraud, the fact that many statutes provide a right of reimbursement and recovery to the insure is lost, and insurers as a result do not take sufficient advantage of recouping expenses and costs related to investigating the fire, and recouping claims dollars which may have been paid out during the pendency of the claim.

In many ways, an insurer used to being a defendant must become a plaintiff fur purposes of not only putting on an arson/fraud case, but also for putting on a damages case as well.  Costs and claims dollars must be tracked, organized, and presented in the form of cogent damages exhibits and/or summary exhibits, preferably using the same trial presentation software as discussed in the first half of this post.  SIU and other special investigators employed by the insurers, and claims staff can authenticate these items for admission into evidence.

Some states provide for recovery of multiples of such costs, and attorneys fees in the form of penalties.  For that reason, they should not be overlooked if the decision to try the arson fraud case has been made.

Arson/Fraud Cases Can Be Won

While it does require thought and effort, the right arson/fraud cases can be won by insurers who take the time to identify good candidates, and work those candidates up properly for trial.  The prosecution of civil arson/fraud claims can also be a source for the insurer to recoup costs and claims dollars thought to have been lost in the investigation and payment of fraudulent claims.

C.J. Haddick