Insured's Fraud can Void an Insurance Contract

Posted Saturday, April 29, 2017 by Ed Harper

Insured’s Fraud can Void an Insurance Contract

The case of Mutual of Enumclaw v. Clinton Cox, 110 Wn. 2nd 645, 750 P 2nd 499, points out that an insured’s overreaching and making “mistakes” in his itemization of lost items in a fire can void a contract.

In this case arising from a fire at a Clear Lake Washington home owned by Clinton C. Cox, Dr. Cox made numerous mistakes in his itemized inventory following a fire that destroyed his house on December 7, 1984. Dr. Cox had purchased a homeowner’s insurance policy with Mutual of Enumclaw Insurance Co. (MOE). Following the fire Dr. Cox provided a 143 page inventory list for items of his personal property he had lost. These items totaled $324,420. The amount greatly exceeded the $137,000 of unscheduled personal property coverage.

MOE hired an investigator to sift through the remaining fire debris. The investigator found no trace of certain items claimed lost by Dr. Cox. These items included such items as jewelry, a television, a video cassette recorder and 8 bronze sculptures. Then MOE deposed Dr. Cox to discuss these missing items. Cox denied that he tried to defraud MOE, but he admitted to making numerous mistakes on the inventory list. (See Cox, at 645 – 46.)

MOE commenced a declaratory judgment action against Cox. This was based on an antifraud provision within the policy. The antifraud provision reads as follows: “misrepresentation, concealment or fraud – this entire policy is void if, whether before or after a loss: an insured has willfully concealed or made up or misrepresented: any material fact or circumstance concerning this insurance; or to an insured’s interests herein.” A trial was held wherein Dr. Cox alleged bad faith arising from MOE’s denial of the claim. MOE in their defense claimed that Dr. Cox and his “mistaken” inventory list voided the policy. The anti-fraud provision stated “where there has been fraud or false swearing by an insured regarding any matter relating to this insurance or subject thereof.”

The trial court allowed the case to proceed to a jury trial in the Superior Court, and entered this order on an initial motion for summary judgment. 1. Even where the actual loss exceeds the policy limits, fraud is material and voids the policy; 2. As a matter of law the insurance policy was not severable and, therefore, fraud would void the entire policy; and 3. As a matter of law there was no waiver or estoppel resulting from interim payments by mutual Enumclaw to Cox when the trial ended the jury returned a verdict for Cox

However on MOE’s post-trial motion, the trial court granted a judgment notwithstanding the verdict to Mutual of Enumclaw. The court held that Cox’s fraud included his use of estoppel. Cox appealed the trial court’s decision to this court. The court held “if Cox’s misstatements had simply been errors in remembering what property was at Clear Lake, then clearly no fraud would’ve occurred. However Cox deliberately claimed that numerous expensive items had been destroyed although he knew that the items were not in the house at the time of the fire. We find no merit in Cox’s claim that Mutual of Enumclaw induces false statements.”

“Moreover a party claiming estoppel must have proceeded in good faith and with ‘clean hands.’” See 110 Wn. 2d 650

“Washington follows the rule that the doctrine of equitable estoppel is available to innocent parties only.” (Citing Christman v. General Construction Company). We see no reason to deviate from Christman.”

“Nevertheless the court finally realized that Cox’s assertion of estoppel was improper incorrectly gave a judgment notwithstanding the verdict in favor of MOE. (MOE v. Cox at 652)

This case points out that an insured has an obligation to be honest and not overreach in their listing of items requesting competence in their request for compensation from their insurance company.

Insurer's Failure to Act in Good Faith in Defending Subject to a Reservation of Rights

Posted Tuesday, April 04, 2017 by Ed Harper

Insurer’s Failure to Act in Good Faith in Defending Subject to a Reservation of Rights

Washington Pattern Instruction 320.03 states: “An insurer who, under a reservation of rights, defends the claim, and owes a duty of good faith to its insured. This duty requires the insurer to: - thoroughly investigate the liability and damage issues related to the claim; or - retain competent defense counsel, recognize that the defense counsel represents only the insured and not the insurer, and act accordingly; or - fully inform the insured that the insurer is defending the case subject to a reservation of rights; or- fully inform the insured of all developments relevant to the policy coverage and the progress of the claim against the insured; and - refrain from conduct to demonstrate a greater concern for the insurer’s financial interest then for the insured’s financial interests.

An insurer who fails to fulfill this duty and/or any of these duties fails to act in good faith.”

With Safeco v. Butler, 118 Wn.2nd 383, 820 P.2nd 499 (1992), delineates when an insurance company fails to protect its insured’s interests when utilizing a reservation of rights. In Butler the insured, Hap Butler, took off after several delinquents who had destroyed his mailbox. He ran into his house grabbed 2 loaded handguns and got in his car. He chased the delinquents through the streets of Spanaway.

Butler claimed he a saw flash coming from the truck holding the delinquents and believed someone in the truck was shooting at them. Butler shot back and injured Eddie Zenker in the head. A civil suit ensued with Zenker suing Butler for his injuries.

Safeco had an insurance policy to defend Hap Butler. “An insurer’s duty to defend the insured is one of the main benefits of the insurance contract.” (Cite omitted) The insurer who accepts that duty under a reservation of rights, but then performs the duty in bad faith, is no less liable than the insurer who accepts but later rejects the duty. (Butler at 392) The court has articulated an insurer must give equal consideration to its insured. (Cites omitted) In the case of Tank v. State Farm Fire and Casualty Company 105 Wn. 2nd 381, 715 P.2nd 1133 (1986) the language is clear that the fiduciary relationship between an insurer and an insured is not a true fiduciary relationship. Tank holds that an insurer must give equal consideration to the insured’s interests. However under a true fiduciary relationship, the insurer would have to place the insured’s interests above its own. (Butler at 389)

Safeco had raised a motion for summary judgment which had been denied at the trial court level. The Supreme Court of Washington determined that Safeco had possibly acted in bad faith, and disputed as a material fact that precluded Safeco’s motion for summary judgment.

“To summarize our holding so far: we hold (1) harm is an essential element of an action for an insurer’s bad faith handling of a claim under a reservation of rights; (2) if the insured shows by a preponderance of the evidence the insurer acted in bad faith, there is a presumption of harm; (3) the insurer can rebut the presumption by showing by a preponderance of the evidence its actions did not harm or prejudice the insured closed; and (4) if the insured prevails on the bad faith claim the insurer is stopped from denying coverage.” (Butler at 394) Here the court sided with the insured Butler, who was presumably prejudiced and remained at trial on whether Safeco acted in bad faith.

Insurer's Duty of Good Faith - General Duty

Posted Tuesday, March 28, 2017 by Ed Harper

Insurer’s Duty of Good Faith - General Duty

Washington Pattern Instruction 320.02 states: “An Insurer has a duty to act in good faith. This duty requires an insurer to deal fairly with its insured. The insurer must give equal consideration to its insured’s interest and its own interests and must not engage in any action that demonstrates a greater concern for its own financial interests than its insured’s financial risk. An insurer who does not deal fairly with its insured, or who does not give equal consideration to its insured’s interests, fails to act in good faith.

In proving that an insurer failed to act in good faith, the insured must prove that the insurer’s conduct was unreasonable or frivolous and/or unfounded. The insured is not required to prove that the insurer acted dishonestly or that the insurer intended to act in bad faith.”

RCW 48.01.030 sets up the statutory basis for this jury instruction:

“The business of insurance is one affected by the public interest requiring that all persons be actuated by good faith; abstain from deception and practice honesty and equity in all insurance matters. Upon the insurer, and the representatives rest the duty of preserving inviolate the integrity of insurance.”

The insurance company must hold their interests in equal consideration with the interests of their insured. With* Mutual of Enumclaw v. Dan Paulson Construction Inc., 161 Wn.2d 903, 169 P.3d (2007) the Supreme Court of Washington noted that because of Mutual of Enumclaw, “Subpoenaed to the arbitrator, explaining into ex parte letters to the arbitrator,” it needed information to resolve its coverage dispute with Dan Paulson Construction Inc. (DPCI). The court held that “Mutual of Enumclaw’s subpoena and ex parte communications to the arbitrator constituted bad faith, that mutual of Enumclaw did not rebut the resulting presumption of harm to DPCI, and that Mutual of Enumclaw did not raise a genuine issue of material fact with respect to whether the settlement amount was reasonable.” (MOE* at 908.)

Initially the court ascertained the standard that an insurance company must avoid any action that may infringe on their obligation of fairness towards its insured because of “Potential conflicts of interest between the interests of insurer and insured, inherent in a reservation of rights defense.” -* Tank v. State Farm Fire and Casualty Company,* 105 Wn. 2nd 381, 383, 715 P. 2nd 1133 (1986). The court factually determined that by sending it subpoena and two letters to the arbitrator, Mutual of Enumclaw clearly had greater concern for its own interests then how its conduct might affect DPCI financial risk. “Mutual of Enumclaw’s great concern for its own interests and lack of concern for DPCI’s risk conclusively demonstrates that Mutual of Enumclaw had a greater concern for its own interest than for DPCI’s financial risk. (Tank at 388). The conclusion was that Mutual of Enumclaw acted in bad faith.

Furthermore, the court determined that due to Mutual of Enumclaw’s bad faith interfered with the defense DPCI, Mutual of Enumclaw failed to rebut the presumption of harm to their insured. This presumption of harm arises as, “Insured should not be required to prove what might’ve happened had the insurer not breached its duty to defend in bad faith; that obligation rightfully belongs to the insurer who caused the breach.” Kirk v. Mount Airy Insurance Company, 134 Wn 2nd 558, at 563, 951 P.2nd 1124 (1998).

Insurer's Failure to Act in Good Faith - Burden of Proof - Third Party Claim

Posted Tuesday, March 21, 2017 by Ed Harper

Insurer’s Failure to Act in Good Faith - Burden of Proof – Third Party Claims

Washington Pattern Instruction 320.01.01 states: “the plaintiff has the burden of proving that the insurance company failed to act in good faith in one of the ways claimed by the plaintiff.

If you find that the insurance company failed to act in good faith in one of the ways claimed by the plaintiff, and the law presumes that the plaintiff was injured and/or harmed and/or damaged and/or prejudiced and that the failure to act in good faith was a proximate cause of this injury and/or harm and/or damage and/or prejudice. You are bound by that presumption unless you find that the insurance company’s failure to act in good faith did not injure and/or harm and/or damage and/or prejudice the plaintiff. The insurance company bears the burden of proof that any failure to act in good faith did not injure and/or harm and/or damage and/or prejudice the plaintiff.”

In short, the plaintiff bears the burden of proving the amount of damages.

With Ellwein v. Hartford Accident and Indemnity Company, 142 Wn. 2nd 766, 15 P 3rd 640 (Washington 2001) the court held that the Hartford insurance company in misappropriating the plaintiff’s accident reconstruction expert acted in bad faith. (At page 768.)

In Ellwein, which was the UIM claim, Hartford encouraged and ultimately changed accident reconstructionist Bill Cooper’s opinion to be more favorable to the insurance company.

The relationship between a UIM insurer and its insured is by nature adversarial and at arms-length. In Fisher v. Allstate Insurance Company, 136 Wn. 2nd 240, 249, 960 1P 2nd 350 (1998), the UIM insurance provides an excess layer of coverage designed to provide full compensation for all amounts that the claimant is legally entitled to where the tortfeasor is underinsured. Allstate insurance company v. Dejbod, 63 Wn.App. 278, 281, 818 P 2nd 608 (1991).

In Ellwein the court articulated quotes the insurer must deal in good faith and fairly as to the terms of the policy and not overreach the insured, despite its adversary interest. In their analysis, the court stated, “We find in Hartford’s claim, he believed Cooper was its expert disingenuous. Hartford clearly understood Cooper to be the Ellwein expert, and intended to manipulate his conclusions, as is evidenced by its apparent satisfaction and having been to get the reconstruction expert to reevaluate his position.”

Insurer's Failure to Act in Good Faith- Burden of Proof

Posted Tuesday, March 14, 2017 by Ed Harper

Insurer’s Failure to Act in Good Faith - Burden of Proof

Washington Pattern Instruction 320.01 states the following: “the plaintiff has the burden of proving each of the following propositions:

1 – That the insurer failed to act in good faith in one of the ways claimed by the plaintiff;2 – That plaintiff was injured or damaged; and3 – That the insurer’s failure to act in good faith was a proximate cause of the plaintiff’s injury or damage.

If you find from your consideration of all the evidence that each of these propositions has been proved, your verdict on the claim of failure to act in good faith should be for the plaintiff. On the other hand, if any of these propositions has not been proved, your verdict on the claim of failure to act in good faith should be for the insurer.”

The plaintiff’s burden of proof, in establishing the insurer’s liability for bad faith, is in essence the attempt to prove that they failed to act in good faith. “The duty to act in good faith or liability for acting in bad faith generally refers to the same obligation.” Tank v. State Farm, 105 Wn.2d 381, 385, 715 P 2d 1133 (1986).

Additionally the case of Van Noy v. State Farm, 142 Wn. 2d 784, 793, 16 P.3d 574 (2001) helps establish what the plaintiff has to prove when they allege the insurer failed to act appropriately.

In Van Noy, which was a class action lawsuit by 1st party claimant’s alleging there personal injury protection (PIP) was not handled adequately by State Farm, the court articulated that the insurer State Farm had a duty to exercise a high standard of good faith which obligates it to deal fairly and give “equal consideration” in all matters to the insured’s interests. Van Noy at 794.

State Farm had been delaying payments on PIP claims brought by their insured, and then summarily sending these claims for peer review, thereby violating their insurance policy which said “payments will be made on a monthly basis within 30 days…” The claims by the class against State Farm for reaching their fight to Sherry and contractual obligations and thereby acted in bad faith were allowed to proceed to trial.

In the concurring opinion by Justice Talmadge, the justice points out “the fact that the relationship between 1st party insurers and ensure and claims handling will be found in the duty of good faith as expressed in the Washington insurance code…” Van Noy at 801. Justice Talmadge points out the duty owed by 1st party insurers to insureds is one of good faith. Citing Coventry Associates v. American states, 136 Wn.2d 269, 960 P.2d 933 (1998). Further he states RCW 48.01.030 defines the public interest which requires that all persons be actuated by good faith, abstain from deception, and practice honesty and equity in all insurance matters. Additionally he refers to WAC 284 – 30 the fair claims handling statute which states: “The insurer must deal fairly with its insured in the claim context of a claim and must give equal consideration to the interests of the insured in handling a claim”. Van Noy, at 801