Can Misrepresentations In a Proof of Loss Void Coverage?

It can be difficult after a fire for an insured to remember with 100% certainty what personal property they had in their home. Most likely, receipts and other purchase records have also been destroyed. As such, public adjusters in preparing estimates and/or proofs of loss are typically left to rely upon the insured’s memory. After all, who knows better than the insured what property was there before the fire? But what if there are inaccuracies in the proof or estimate….is that enough to cause the claim to be denied based on the concealment and misrepresentation clause?

According to the United States Court of Appeals for the Eighth Circuit: Yes. In Borchardt v. State Farm Fire and Casualty Co., 931 F.3d 781 (8th Cir. July 29, 2019), the Eighth Circuit Court of Appeals recently affirmed that the evidence presented at trial regarding certain misrepresentations in a proof was sufficient to support the jury’s finding that misrepresentations were material and thus voided the right to recovery under the policy.

Following a fire to their home, the insureds retained the services of a public adjuster to assist them in preparing an inventory and valuing the items destroyed by the fire. At trial, the public adjuster testified that he relied upon the insureds to provide an inventory of the contents.

At the time of trial State Farm identified items on the proof of loss that it argued were material misrepresentations. For instance, the insured identified the value of a wedding ring at $2,000, whereas the insured had declared the value of that same ring at only $50.00 in a prior bankruptcy petition. The testimony of various family members presented either through deposition or at trial also did not line up with what was being claimed on the proof. The proof listed that the insureds owned 1,000 DVDs. The son’s deposition testimony was that they only owned about 100 DVDs. Similarly, there was divergent testimony about the number of televisions, lawn mowers and laptops owned.

The jury was instructed on the meaning of “material” and “intent to defraud” under Minnesota law:

For a concealment or misrepresentation to be “material,” it must be sufficiently substantial to matter to a reasonable insurer. A concealment or misrepresentation that impacts the investigation of an insurer into the cause of the fire is material. Likewise, a concealment or misrepresentation about items of personal property that were allegedly destroyed by a fire is material unless the amount of money involved in the concealment or misrepresentation is so small that a reasonable insurer is not likely to care about it.

To act with an “intent to defraud” means to act with the purpose or intent of deceiving or cheating someone else. In considering whether any of the Borchardts acted with an intent to defraud, you may consider whether they acted with a desire or purpose to bring about some gain or benefit to themselves at the expense of State Farm.

Ultimately, the jury determined that the inaccuracies on the proof of loss statement were enough to establish a willful intent to defraud State Farm by concealment or misrepresentation of a material fact or circumstances relating to the claim.

In affirming this determination, the Eighth Circuit noted that it was apparent from the record, particularly the fact that the jury had submitted a question during deliberations, that the jury did not presume materiality. In relevant part, the jury had submitted the following question:

Is there a specified amount State Farm considers to be a ‘small amount’. ex. % or dollar amount.

The trial court responded by directing the jury’s attention to the jury instructions and reiterating that State Farm had the burden to prove that any concealment or misrepresentation was ‘material’ – that is, “sufficiently substantial to matter to a reasonable insurer.”

The Eighth Circuit affirmed the jury’s conclusion, believed there was sufficient evidence to sustain the jury’s determination and therefore the material misrepresentations regarding the personal property lost voided the right to recovery under the policy.

This case is a good reminder to public adjusters, insureds, and attorneys alike to consider alternative sources of information that may provide quantities or values such as bankruptcy pleadings or prior insurance claims information. Obtaining this information before an estimate, inventory or proof of loss is submitted may very well help guard against claims by an insurer that a misrepresentation was made.