By Barry Zalma, Attorney and Consultant
Insurers Must Never Pay a Fraud
When I was a young adjuster the motto of the insurance industry was "Millions for Defense and not a Dime for Tribute." Fraud was known but not a large problem. Police officers, when advised of fraud, would investigate and prosecute fraud. For some reason the need for quarterly profit overrode the philosophy to never pay a claim not owed. When faced with a suspected fraud the usual response of modern insurers is to see if the claim can be bought cheaply to avoid litigation.
States across the country, concerned with increasing insurance fraud, have passed statutes requiring insurers to fight fraud. The statutes and regulations to enforce the statutes have had some effect. On the other hand, some insurers still believe that it is wrong to pay fraud no matter how much it will cost them to defeat a fraudulent claim. Those few insurers still follow the philosophy stated by the title of this post.
Insurance professionals understand that contracts, by definition, cannot indemnify an insured who misrepresents or conceals a material fact whether in the application for the insurance or in the presentation of a claim. When their Chevrolet Blazer was reportedly stolen and crashed a claim was made to Coast National Insurance Company. The initial investigation revealed the reported theft was in a fashion not consistent with theft and reports from the insureds were contradictory caused an investigation by the Special Investigation Unit (SIU) and an Examination Under Oath by counsel.
When an insurer conducts the thorough investigation of a suspicious claim and determines fairly and without bias that the insured has misrepresented or concealed material facts, it has no option but to deny the claim. Suits for breach of contract and bad faith almost always follow a denial of a claim for misrepresentation, concealment or fraud. In May and June 2011, the Honorable Donald R. Alvarez, Judge, Superior Court, State of California presided over Joel P. Todd and Yojana V. Todd vs. Coast National Insurance Company, Inc, et al, Case No. CIVSS 801883 over the claimed theft of a Chevrolet Blazer vehicle.
The Use of an Expert to Defeat a Fraudulent Claim
The public, from whom jury panels are drawn, know little or nothing about insurance fraud or the obligations of an insurer faced with a potential insurance fraud. To assist the jury in understanding the obligations of insurers when faced with a suspected fraudulent claim, the investigation required of the insurer, the means used by the insurer to evaluate a suspicious claim, the custom and practice of the insurance industry when presented with a suspicious claim, and the obligation of an insurer to refuse to indemnify an insured who misrepresents or conceals material facts in the application for insurance and in the presentation of a claim the insurer retains an expert witness to testify at trial. Barry Zalma was designated as an expert by Coast National and was honored to testify as an expert in the case that was resolved June 14, 2011 with a verdict for the defense. The insurer defendant was represented ably by Ms. Limor Lehavi of Archer Norris in Newport Beach, California.
Mr. Zalma testified as an expert that the claim of Joel P. Todd and Yojana V. Todd (Todd) was properly denied by the insurer for misrepresentation of material facts and the making of false statements that were material to the investigation of the claim. Mr. Zalma also testified about the fact that California law requires insurers to maintain a Special Investigation Unit and that it thoroughly investigate any claims presented where there was a suspicion of fraud. After completing its thorough investigation and an examination under oath of the plaintiff Yojana V. Todd, coverage counsel retained by Coast National recommended, and the insurer agreed, that the claim be denied for misrepresentation and concealment of material fact.
Mr. Zalma testified that the decision to deny was correct because, among other things, based upon his analysis of the documents reviewed, the testimony of the parties, his training, education and experience, that Coast National followed the custom and practice of automobile material damage insurance practices, completed a thorough and exhaustive investigation, acted in good faith, and dealt fairly with the Plaintiffs.
After Mr. Zalma completed one and a half hours of testimony the case was presented to the jury who entered judgment in favor of the defendant on June 14, 2011 establishing that the insurance contract was not breached and Coast National did not act in bad faith.
The case teaches that when an insurer concludes that a fraudulent claim has been attempted the insurer must stand by its decision and spend whatever is necessary to defeat the attempt at fraud. The cost of defending this case through trial was much more than the cost of the vehicle. The amount saved by making it clear to all those who will attempt to defraud Coast National in the future that the attempt will be resisted and will fail.
Reprinted with Permission from Zalma on Insurance, (c) 2011, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, "Heads I Win, Tails You Lose - 2011," "Zalma on Rescission in California," "Zalma on Diminution in Value Damages," "Arson for Profit" and "Zalma on California Claims Regulations," "Murder and Insurance Fraud Don't Mix" and others that are available at Zalma Books.
Mr. Zalma can be contacted at Barry Zalma, firstname.lastname@example.org and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma's Insurance Fraud Letter.
For more information about LexisNexis products and solutions connect with us through our corporate site.