Last month, I attended the First Party Claims Conference in Warwick, Rhode Island. Chip Merlin posted from the conference in Jay Feinman Interview at First Party Claims Conference. If you are not familiar with the FPCC, I highly recommend this annual conference to public adjusters nationwide. The conference is open to public, independent, and company insurance adjusters and attorneys who handle first-party property insurance cases. This conference was jam packed with CE credits for the adjusters and there was no shortage of great information shared by all.

At one of the courses I attended, David Pettinato of Merlin Law Group provided the audience with an in-depth look at insurance fraud in his course called Insurance Fraud & Bad Faith: Legal Perspective. David provided many cases and scenarios for the audience to consider. After David’s class, I took a closer look at insurance fraud and found an opinion where the public adjuster’s estimate was heavily scrutinized.

An Illinois homeowner brought an action against her homeowners insurance after her home suffered a fire loss American Casualty Company failed to pay the full amount of the damages to her home. The carrier alleged that the fire was intentionally set by the owner and that she committed fraud in connection with her submission of the claim. The jury disagreed and awarded damages to the owner in excess of the amount she sought.

The Seventh Circuit reviewed the case, and its opinion contains a great explanation of the facts. The Court determined that the jury was able to properly determine there was not in fact, fraud or concealment on the part of the owner. American Casualty did not appeal the jury’s finding that the homeowner did not intentionally set fire to her home. This case, decided in 1992, is not breaking news, but the explanation from this Court is valuable.

The setting is the village of Dolton, Illinois. Dolton is such a small town that the total village consists of 4.7 square miles. When the home was destroyed by fire, the homeowner shared it with her daughter, son-in-law, and grandchild. The insurance company paid for the contents damage and additional living expenses, but did not pay the claimed structure damages. The homeowner hired Clayton Nalon, a public insurance adjuster, to assist her with the claim. His estimate was the basis for the structure damage calculation on the proof of loss. The insurance company began to investigate the claim for fraud.

It is important to note that the homeowner was widowed in 1969. Her husband and his business partner owned “Ed N’ Sam’s Motor Cars.” The record showed that the homeowner had nothing to do with the business while her husband was alive, but received rent from the business for many years after his death. She was not privy to the operations until hard times hit in the 1980’s. She attempted to sort out financial issues at business when she learned it was struggling.

Ordinarily, under Illinois law, the insurer’s defense of fraud and false swearing presents an issue for the jury, but it becomes a question of law when the insured’s misrepresentation cannot be considered innocent. The insurance company argued that any reasonable jury should have found that the insured knowingly made false statement and/or willingly sought to defraud the insurer by misrepresentation.

There appears to be three reasons the insurance company believed the homeowner committed fraud. First, the insurance company argued she fraudulently concealed her personal liability on an SBA loan for Ed-N-Sam’s Motors. However, the Court explained that since the homeowner disclosed the full amount of the debt and provided a reasonable explanation — that she classified the loan as a business debt and not a personal debt — the jury could find that this was reasonable and not an act of fraud. The homeowner also testified that when she signed the papers, she did not understand her personal liability for the business loan.

Next, the insurance company took issue with a purported misrepresentation on the proof of loss. The homeowner listed herself as the sole owner of the property on the proof of loss form, when, in fact, Phoenix Bond Company had an interest in the property. She explained to the jury that she did not consider Phoenix Bond Company as having a true interest in the property because, even though she knew she owed Phoenix money, she did not think there was an actual lien on the property. She knew Phoenix had “bought her taxes” in a tax sale, but she considered the home solely hers because she held possession of the home. She did not understand that a tax sale gave Phoenix an interest in the property because, as she understood it, she still had additional time before she had to pay Phoenix and risk them taking the property. The Court explained that “American exposed Mrs. Trzcinski’s ignorance of the legal effect of a tax sale but it did not foreclose the possibility that her omissions were innocent.”

Finally, the insurance company argued that the estimate submitted to the insurance company was fraudulently excessive. The public adjuster estimated the structural damage to the home at approximately $43,737.03. The insurance adjuster estimated the repairs at $21,434.00. Attempting to come to an agreement with the insurance company, additional estimates were prepared by general contractors, but those estimates were closer in number to the insurance company’s estimate. Clayton Nalon explained the discrepancy.

Nalon explained that the estimate he prepared used the National Cost Estimator Manual, a publication that provided local, current pricing on special materials. Nalon testified his estimate was not exaggerated and presented a tabular comparison of his repair estimate compared to two other estimates.

Nalon discussed several reasons for the difference between the estimates. Nalon believed the floors in the living room, dining room and kitchen should have been removed down to the joists, and the damaged joists replaced at least to the main support beams; the subflooring should have been replaced; and all of the oak flooring should have been replaced. By contrast, Nordic Construction and Sikora Builders proposed to cut out the burned sections of the joists and “sister” them together, which Nalon believed was not the most structurally sound solution. Furthermore, Nordic and Sikora proposed to replace only the burned oak, but Nalon testified that the unburned oak had sustained substantial water damage. While Nalon’s estimate had included the replacement value of the Italian gold leaf wallpaper in the living room, Nordic’s and Sikora’s estimates did not. Lipensky noted that Nalon’s estimate included the cost of replacing smoke damaged materials while Lipensky’s estimate included only the cost of cleaning and refinishing these materials.

The Court determined that the estimate for the building repairs was not fraudulently excessive:

Nalon explained that his job as a public insurance adjuster was to estimate the value of the property in its pre-fire condition to determine the loss that the insureds are entitled to have compensated. This is not necessarily the same as the cost of the repairs that the insureds may decide to undertake to remedy the problem. Nalon not only explained how he arrived at his estimate but also explained some of the difference between his estimate and those of Sikora and Nordic. While Nalon’s estimate exceeded those of Sikora, Nordic and Ramsey, Nalon sufficiently justified his calculations so that we cannot say he fraudulently misrepresented the true value of Mrs. Trzcinski’s loss as a matter of law.