Whenever a claim is denied for fraud, suit is often filed by the insured seeking damages for breach of contract and the tort of bad faith. This is not evidence that insurers deny claims for fraud wrongfully as much as it is evidence that insurance fraud perpetrators recognize that many insurers will pay a settlement rather than pay major attorney fees.
Sometimes, however, insurers decide they will not succumb, and will compel the insured to take the case to trial. When a case goes to trial as a result of a denial for fraud, and the court agrees with the insurer, the insurer may spend more than the cost of the claim but will teach those who perpetrate insurance fraud that it is an insurer to be avoided.
On November 1, 2006, Judge Lee Smalley Edmon entered a ruling that, in effect, told fraud perpetrators to avoid the Fire Insurance Exchange of the Farmers Group of Companies. After a multi-week bench trial in the case of Sonia Peralda, et al. v. Fire Insurance Exchange. The insureds sued Fire Insurance for breach of contract, the tort of bad faith, and sought compensatory and punitive damages because of the denial of the claim.
The insureds found a lawyer willing to sue the insurance company for bad faith. He was surprised when they refused settlement overtures and caused the case to go to trial. Fire Insurance Exchange was comfortable with its decision to deny the claim, and took the matter to trial. Trial counsel Helen M. Luetto effectively presented the defense and allowed me the opportunity to testify as an expert on behalf of Fire Insurance Exchange to explain to the court the investigations methodology, the use of the examination under oath, and the reasonableness of the advice of coverage counsel retained by the insurer.
The decision made it clear that an insurer who has conducted a thorough and fair investigation of a claim it believes was an attempt at fraud, could effectively defend the claim.
Factual Background
Fire Insurance Exchange issued a residential fire policy for a Northridge, California, home owned by Sonia and Edwin Peralda. Two separate fire claims were presented to Fire Insurance by the Peraldas in a 15-month period. The first claim occurred on November 29, 2000. The probable cause of the loss was determined to be an unattended camp stove in the kitchen of the residence. As a result of this loss, the Peraldas claimed and were paid more than $200,000 for repairs to the residence structure (including an additional 20 percent to have a licensed contractor perform the necessary repairs or reconstruction); policy limits of $176,250 for damaged contents; and $60,484.50 for additional living expenses (ALE).
The second claim arose from a loss on February 21, 2002. An investigation indicated that the fire started in the kitchen and the probable cause of the loss was electrical wiring in the kitchen ceiling. The Peraldas claimed damages again for building and contents.
The insureds' claim for the second loss was referred to counsel for coverage advice on August 8, 2002, and attorney Richard Knapp recommended and took examinations under oath of both the insureds. Knapp recommended denial of the claim based on material misrepresentations by the insureds and the failure to cooperate. Their insurer denied the claim.
Before denying the second claim, however, Fire Insurance paid $70,000 to the insureds for damaged contents, the first occurring within days of the fire loss and second one some time thereafter. Additionally, it paid 8 months' of additional living expense coverage at the rate of $4,000 per month. Finally, it paid $180,000 as the undisputed amount owed on account of the lender's loss endorsement, which was based on a fair market appraisal which found that immediately before the fire, the home was worth $480,000: $300,000 for the land and $180,000 for the structure. Knapp made the recommendation that Fire Insurance pay $180,000 as an advance based on the appraisal, and the insurer did. Fire Insurance denied the remainder of the claim, and this suit ensued.
Red Flags
As part of the preparation to testify, I detected and testified about the following red flags of possible fraud found by the claims investigation.
- Fire late at night.
- Fire during or immediately after completion of renovation
a. Fire within 2 days of issuance of Certificate of Occupancy by Department of Building and Safety.
b. Fire less than a week after insured moves in.
- Two fires within 2 years in same approximate location in house.
- Insured refuses to answer questions concerning relevant and material facts:
a. Prior loss presentation.
b. Earnings.
c. Business relationships.
d. Assets and liabilities.
- Named insured away from house at time both fires discovered.
- Insured operated dog breeding business on premises, but dogs were not involved in either fire.
- Husband quitclaims title to property to wife less than a year before a loss.
- Nephew Alexander, a foreign national, at the home at time of both fires.
- Insureds admit to presentation of false invoice and/or lease for additional living expenses (ALE) in support of claim of loss at time of first fire.
- Insureds submit suspicious and unverifiable invoices for ALE after second fire.
a. Insureds' claim payment of rent for ALE was made with cash.
b. Insureds present receipts for ALE that are incomplete.
c. Landlord lives at rental property on multiple occasions.
- Insureds claim business relationship with ALE landlord who is:
a. A person involved in criminal activity.
b. A person with a record of receiving stolen property.
c. A person with a record of an arson fire at his business.
d. A person with a record of buying and selling salvage vehicles without proper documentation.
e. A business relationship where insured claims no records of amounts invested, amounts paid, or net earnings.
- Insureds admit that the personal property inventory is false in many particulars.
- Valuable items claimed inherited from deceased relative (Rolex, Cartier, etc.) in a foreign country. (Insured allows remains of purported Rolex gold and diamond watch to be thrown away.)
- Filing of extensive list of contents not supported by debris.
a. Insured admits that dates of purchase not accurate.
b. Insured admits that they did not attempt to make list accurate.
c. Insured admits that quantities stated not accurate.
- Both insureds admit to use of multiple, false Social Security Numbers. (Reportedly correct SSN issued at dates inappropriate to age and time in the United States.)
- Both insureds admit that they worked in the United States illegally.
- Both insureds admit that they receive income from outside the United States in cash.
- Insureds claimed inability to describe means of employment and earnings.
- Insureds admit to making claim for item paid for as a total loss in prior fire.
- Ms. Peralta admits to using false name and SSN to avoid restrictions on U.S. visa.
- Presentation of false statements concerning personal property losses.
- Creation of false business—Dove GCE—to control insurance payments.
- False contract for reconstruction between Insured and Dove GCE.
Red flags of fraud are not—standing alone—evidence of fraud. They are, rather, indicators that require further investigation. Here, further investigation established, among other things, that the insureds committed fraud with regard to their first claim and attempted fraud with regard to their second claim.
The Ruling
Judge Edmon stated that the insureds failed to cooperate by refusing to answer certain questions at their examination under oath, and that doing so on advice of counsel was no excuse. Additionally, the insureds failed to provide all of the social security numbers they used and failed to provide accurate information regarding the age, place of purchase, actual cash value or true replacement cost of the contents to support their claim for damaged or destroyed contents. They failed to cooperate by not providing, despite multiple written requests by Mr. Knapp, legitimate additional documentation and information regarding costs of repairs to the structure after the first fire, the names and contact information of the repair persons who worked on the house, and the contents inventory list.
The court stated that the misrepresentations and concealments were knowingly and willfully made, basing its finding not only on the fact that the intention to deceive can be necessarily implied from all of the circumstances because the statements were false to the knowledge of the parties making them, but also based on the demeanor and testimony of the insureds. The judge said their testimony lacked credibility.
The court ruled that the insureds' failure to cooperate interfered with the insurer's ability to investigate, resulting in prejudice to the insurer, and justifying its denial of the claim.
Conclusion
Not only did the insureds here lose their case because the insurer had detailed evidence of fraud in the presentation of both claims, but also because, on the advice of counsel, they refused to cooperate in the investigation of the claim and answer questions relevant and material to the investigation.
Insurers faced with a potential claim should learn from this case the importance of preparation, a thorough investigation, and use of competent counsel to take an examination under oath and provide advice regarding the disposition of the claim. By doing so, insureds will find it difficult to pursue a fraudulent bad faith case against the insurer.
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