Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

The reason for this warning to policyholders and risk managers is a very recent case, Pope v. Mercury Indem. Co., 2009 Ga. App. LEXIS 448 (Ga. Ct. App. Apr. 9, 2009). The simple facts leading to the dispute are:

"On July 5, 2005, the Popes' property sustained significant tornado damage. After they made a claim under the Policy for that damage, Mercury sent a claims adjuster to the Popes' residence. The claims adjuster took pictures of the damage, and one of those pictures showed the swimming pool with the diving board reinstalled. Mercury thereafter initiated the current action, seeking to rescind the Policy based upon the Popes' material misrepresentation that they had permanently removed their diving board."

Now, I know that many are wondering what a tornado loss has to do with an insurer's liability concern about a diving board. The answer from the insurer's perspective is very important--the insurer would not have provided any coverage if a diving board was present. Obviously, the existence of the diving board is "material" to the insurer. Even though the diving board had nothing to do with the tornado loss, in most states the misrepresentation does not have to concern the loss. The Georgia Court noted this when discussing its reasons for finding no coverage existed for the tornado loss.

The Pope Court also quoted fairly longstanding Georgia statutory and case law:

"Under OCGA § 33-24-7, "[m]isrepresentations, omissions, concealment of facts, and incorrect statements" made by an insured during negotiations for an insurance policy will bar recovery under that policy where they were "[m]aterial either to the acceptance of the risk or to the hazard assumed by the insurer; or" where "[t]he insurer in good faith would . . . not have issued the policy or contract . . . if the true facts had been known to the insurer. . . ." OCGA § 33-24-7 (b) (2), (b) (3). To avoid coverage under this statute, "the insurer need only show that the representation was false and that it was material." (Punctuation omitted.) White v. Am. Family Life Assur. Co... "A material misrepresentation is one that would influence a prudent insurer in determining whether or not to accept the risk, or in fixing a different amount of premium in the event of such acceptance... While ordinarily the question of materiality is for the jury, "where the evidence excludes every reasonable inference except that [the misrepresentation] was material, [the issue becomes] a question of law for the court."

In this particular case, it appeared the policyholders knew the installation of a diving board was material:

"The Popes further argue that summary judgment was inappropriate because they were never informed "that the presence of a diving board was material to [Mercury's] decision to provide [them] with" homeowners insurance. The evidence, however, simply does not support this assertion. Rather, it shows that a notice of cancellation was mailed to and received by the Popes; that thereafter their agent informed them he needed a picture of their swimming pool without the diving board; and that after they provided the agent with that picture, they were aware that their insurance with Mercury had been continued. Additionally, Mr. Pope freely admitted that, after he gave the picture of the swimming pool without the diving board to Woodworth, he asked him what effect the reinstallation of the diving board would have on the Popes' homeowners policy. All of this evidence shows that the Popes were aware that the presence (or absence) of the diving board was material to Mercury's decision to insure them.

Moreover, the Popes' argument ignores the fact that they were obligated to deal with their insurance company truthfully, regardless of whether they thought the facts in question were material... Additionally, OCGA § 33-24-7, does not require that an insurer prove the insured's knowledge of either the materiality or the falsity of the misstatement or omission at issue. Nor is the fact that the Popes' loss was unrelated to their use of the diving board relevant in determining whether their misrepresentation regarding the board's removal should void coverage. Celtic Life Ins. Co. v. Monroe... ("O.C.G.A. § 33-24-7 (b) does not require that the information concealed be connected to the ultimate cause of the loss")..."

What is the lesson to be learned? Insurance applications are very important documents. Mistakes, wrong information, or misrepresentations can lead to denials of coverage, even if the loss is not related  to the wrong application information. Agents need to stress accuracy in the information customers  provide to the insurance company. I do think that unintentionally wrong information should be a basis for denial of coverage after a loss because that essentially makes application information a "warranty."  Many states have statutes that apply this old contractual requirement to modern insurance contract formation.

Policyholders need to spend more time with their agents discussing application information. Agents can help by warning their clients of the possible ramifications from providing wrong answers.

Bill Gross is the most famous philatelist of United States stamps. He was supposed to be there as well, but he was pulled away to a last minute meeting with Alan Greenspan and Treasury Secretary Geithner on an allegedly more important endeavor--how to save the economy.

I know that collecting stamps seems a bit nerdy. But, when you consider that I also study insurance policies and read how obscure insurance clauses are legally interpreted, it makes a little more sense. As an adult, it is now a hobby usually done in solitude with a lot of study. Similarly, I find that most good lawyers spend a lot of time studying their area of practice in quiet reflection.

At this weekend's gathering, I met Dan Walker, treasurer of the American Philatelic Association. When he learned what I do for a living, he shared an experience he had when he owned an insurance company that specialized in insuring collectibles.

A collector insured Civil War items for approximately $2.5 million. He reported a burglary of his entire collection, and Dan felt something was wrong. He hired an attorney and a SIU (fraud) adjuster just to check out the circumstances. Apparently, the collector had recently suffered a severe medical setback with diabetes. They learned that he had approached several dealers trying to sell his collection. When those dealers heard the collection was stolen, they suggested that it might be a fraud because they found most of the items to be forgeries. The SIU investigator tracked down a storage facility that rented space to the collector just before the alleged burglary.

Eventually, the insurance case became a criminal matter, and the collector was convicted of insurance fraud.

Dan said it was a very desperate and sad story of a person being "duped" into purchasing allegedly valuable collectibles without doing enough investigation to determine the authenticity of the items. Collectibles insurance does not cover the loss of market value if one purchases a forgery.

Collectors should always get an independent appraisal and expertization before purchasing from a dealer or at auction. Some dealers and auctioneers advertise and promote items which are not authentic, damaged or altered. Dealers often make expert repairs which are difficult to detect and make the item appear pristine. Such alterations subtract significantly from value. Items sold on eBay are notorious for this.

So always follow this rule:

When buying something of value, get the expertization from a true expert not affiliated with the dealer or seller.

Sandy Burnette and Barry Zelma would be happy to hear that Dan’s SIU team did such a great job. There is a need for such trained attorneys and adjusters. My sense from Dan Walker was that this was a very unique situation. He indicated that it was the only time he ever had to go into a courtroom in his twenty-two year insurance career.

I wonder why an insurer like State Farm would spend so much money on advertising fraud detection. It cannot be to get people to buy State Farm policies. When you consider how few of their customers ever commit fraud, why would State Farm spend money on an advertising campaign about fraud?

For example, State Farm advertised that it provided arson dogs to investigators. I cannot imagine somebody reading that advertisement and saying, "Edna, let's go buy some State Farm insurance because they are out to get their customers that are arsonists." What is the real purpose of that advertising campaign?

Some may suggest that State Farm and others in the insurance fraud industry make up such advertisements and statistics to raise suspicion of everybody that makes a claim. Of course, those who determine the purpose of the advertising and make up the statistics are not about to reveal their motives. Consumers should question such insurance advertisements and the potential impact upon those receiving the message.

Still, none of those concerns and thoughts mean that there is not a significant need for the hard and important work of those that investigate and detect fraudulent insurance claims. It also does not mean that we need to consider every claimant a potential crook.

Barry Zalma noted the unfairness when some do not pay for breaking the law in Mercy to Insurance Criminals Aids & Abets The Crime: 

“We, as insurance fraud professionals must inveigh against those “merciful” judges and prosecutors who insist that a “white collar criminal” should not go to jail. The prosecutors and judges must know that insurance criminals are as more [sic] vicious and damaging to society than the armed robber who holds up a convenience store and is punished to the full extent of the law without mercy.”

I agree with Zalma that insurance criminals need to be punished.

But, I wonder what insurance companies would say if they had to pay more severe penalties for delaying claims payments or applying wrongful schemes to underpay claims?

I was at a conference some time ago in Philadelphia when insurance industry attorney, Steve Cozen was talking about the possible unconstitutionality of insurance companies having to pay punitive damages after breaking the rules of claims handling. I suggested that since they are stealing from the policyholders, if the rules were that the claims executives went to jail instead of paying punitive damages, there probably would be a lot less cheating against policyholders and the punitive damages argument would be moot. The insurance defense attorneys smiled and shook their heads at me---they knew I had a point.

From the policyholders view, the insurance company that fails to pay on time and denies benefits for various unfair reasons is not that much different from the bank robber or internet thief that takes money in a different manner. It is quite ironic that the insurance industry lawyers and spokespeople are not publicly calling for greater penalties for those acts by claims executive "white collar criminals." Maybe they think accountability works only one way.

Let’s start with your analogy to 17th century witch-hunts. Suggesting that the investigation of suspected fraud by insurance companies is a “witch-hunt” is, to me, almost laughable. I realize your knowledge and experience with fraud investigators is limited to taking their depositions and challenging their findings, so I could hardly expect you to be objective about the individuals you make a living opposing, but your assessment of their abilities and their motivations is more than wrong, it is entirely unfounded.

The SIU investigators, private investigators and law enforcement investigators I have worked with for over 30 years are, with rare exception, among the finest, most ethical and most dedicated professionals I have ever met. (You might want to compare the number of fraud investigators implicated in corruption/dishonesty last year with the number of attorneys implicated in corruption/dishonesty. The numbers run about 100 to 1 for corrupt lawyers!) They work long hours under difficult—and sometimes dangerous—conditions to uncover the truth. When they do, their findings are challenged by the criminals they expose (and their lawyers) as being “biased”, “slanted”, ‘improper”, “incomplete” and even “untruthful.” When they testify in court, they will be called everything but an honest child. But for nearly all of them (Yes, there are always some bad apples in every barrel) they do it because they believe in their work and because they want to expose fraud in the interests of all of society. They don’t do it for the money, Chip. You have secretaries making more money than some of the fraud investigators I know. They don’t do it because they have some perverse interest in making false accusations to ruin the lives of innocent people, either. Most of them have more principle than the clergy I have met. They do it because they feel their work has a purpose and a value—to all of us. Ask yourself if what we have recently seen from the likes of Enron and Bernie Madoff suggests the uncovering of fraud is a worthwhile mission. I know how I feel about that.

When you call for “unshakable proof” of insurance fraud, are you suggesting some heightened standard of proof to uncover fraud? (Isn’t true proof “unshakable” by definition? I mean, is there such a thing as “shakable” proof?) Is there some social purpose in affording such protection to those who perpetrate insurance fraud? Should we give them greater protection than murderers and rapists, as if they merit some type of special protection? I would hope not!

Nobody wants to see an innocent person wrongly accused. Believe it or not, some of the people who feel most strongly about that are the same people you accuse of engaging in a “witch-hunt”. I have worked with many investigators who have gone out of their way to look for evidence which casts doubt on the suspicions of fraud, to pursue truth rather than seek evidence to support an accusation. But the sad truth is that insurance fraud in this country is not some “rare occurrence of fraud to justify an open season on policyholders” as you suggest, but is an epidemic of staggering proportions. When a national survey just a few years ago revealed that over 50% of the people in this country—the majority, for God’s sake!--think it is “okay” to pad an insurance claim to get back your deductible or recover some of the premium that has been paid “all these years,” we have a moral crisis on our hands. And after handling perhaps 5,000 fraud cases in my career, I can offer some first-hand testimony that the problem is real and the prevalence is rampant. Just from my own cases, I have proved fraud committed by persons from every walk of life—including CEOs, legislators, judges, clergy, accountants, lawyers, entertainers and professional athletes. Not to mention insurance contractors, adjusters and public adjusters in numbers which leave me shaking my head. Chip, insurance fraud is no “rare occurrence” in this country, it is a true epidemic.

When you say that “If all you concentrate upon in life is uncovering fraud, you may start seeing signs of it everywhere,” I beg to differ. When we go to a doctor, we want a specialist. When policyholders come to your firm, they want somebody who only concentrates upon your type of practice. (You wouldn’t want your law firm described as a place where “all they concentrate upon in life is uncovering bad faith, so that they see signs of it everywhere!”) And when insurance fraud is being investigated, I sure don’t want somebody doing it on a part-time basis, do you?

Your reference to the recent scientific developments in fire investigation and the suggestion “many innocent people were accused of arson” is a popular refrain in recent years, but it lacks any statistical basis in fact. Issues such as concrete spalling, depth of char analysis and flashover have certainly changed the way we look at a fire and the basis for determining the cause of a fire. But there were only a small number of cases where those issues were the determining basis for concluding a fire was arson. In almost all of the arson cases prosecuted over the past 50 years, they were only one small part of the proof. Those “bad cases” have drawn a lot of attention and deservedly so for the individuals wrongfully convicted. (Perhaps you saw me on CNN’s “Anderson Cooper 360” last year discussing this very point.) But to suggest there was some widespread misapplication of fire science so that hundreds or thousands of innocent people were wrongfully convicted of arson is just wrong, way wrong. There is absolutely no evidence of that on such a scale.

Chip, we all run the risk of developing “tunnel vision” from the work we do. I’m sure you and many others who visit your website feel that way about me. But after reading your blog, I have to tell you I fear you may have developed that affliction yourself when it comes to this issue. Insurance fraud is a threat to all of us. It drives up indemnity payments on claims, it causes tens of millions of dollars to be spent trying to uncover it, and in the end it hurts everybody when they go to pay their insurance premiums. And lest we forget, it is both legally and morally wrong. Rather than disparaging insurance fraud investigation, we should all be promoting and supporting it. I’ve spent my life doing just that and I plan to continue to do so. I would welcome your assistance, my friend.

--Sandy Burnette

This was exactly my point of my blog---the insurance industry has only a few examples of fraud it can prove, yet it claims a significant number of all its customers are crooks. Zalma's logic and that of the insurance industry is similar to the logic of McCarthyism prevalent in the 1940's and 1950's. Then, thousands of Americans were accused of being Communists or communist sympathizers. They became the subject of aggressive investigations and questioning before government or private-industry panels, committees and agencies. The suspicions were often given credence despite inconclusive or questionable evidence. Here, the insurance industry cites some specific examples of wrongdoing and then somehow extrapolates those very few examples to justify ridiculous statistics. Zalma claims that most successful frauds are never recognized.  Thus, the industry then makes up "suspicious" claims which others, such as Zalma, cite to be actual fraud:

I don't know, nor does anyone know, how much insurance fraud costs the insurance industry since most fraud perpetrators succeed. Everyone who puts out numbers bases it upon scientific studies like that recently reported by the Insurance Research Council (IRC) that estimates that claim fraud and buildup added between $4.8 billion and $6.8 billion in excess payments to auto injury insurance claims closed with payment in 2007.

Our firm does not have the IRC study cited by Zalma, but it is being ordered. The study has nothing to do with homeowners or commercial property insurance claims, only automobile claims. The Insurance Research Council is made up of large insurance companies. Their website lists its 2008 members as follows:  Allstate Insurance Company American Family Insurance Group Farmers Insurance Group The Hartford Financial Services Group, Inc. Liberty Mutual Group National Association of Mutual Insurance Companies (NAMIC) Property Casualty Insurance Association of American (PCI) Safeco Insurance Companies State Farm Insurance Companies United Services Automobile Association These large insurance companies are often responsible for the propaganda I criticize. They use these statistics in the hope that nobody will actually question their accuracy. They hope those figures can be asserted as fact to influence cultural public policy in a similar manner that others have used propaganda (like that spewed in the McCarthy era) to influence public perception and legislation. Each of these carriers is not acting alone. They are in concert, sharing information and strategies, to influence perceptions that will help them be more profitable. One must question why this type of activity is not being investigated as collusion among competitors.

Again, insurance fraud is wrong. It exists and is a problem for all of us. Barry Zalma and other insurance defense attorneys that do this very specialized practice of law should be applauded for teaching methods of fraud detection. I believe there is a very real need for SIU departments and fraud investigators within the insurance industry because fraud, by the nature of it being a hidden scheme, can be difficult to detect. Heck, we have terminated clients because of fraudulent activity. The bottom line is that I believe insurance fraud is very rare compared to the large number of legitimate claims, and the insurance industry is making up these statistics for propaganda. Indeed, if one were to define "insurance fraud" as the underpayment of an insurance claim, most would agree that the insurance industry would be found guilty substantially more than its customers.