Zalma’s Insurance Fraud Letter – December 1, 2022

ZIFL Volume 26, Issue 23

Posted on December 1, 2022 by Barry Zalma

See the full video at https://rumble.com/v1xvyiu-zalmas-insurance-fraud-letter-december-1-2022.html and at https://youtu.be/Kt8eEl5e8Vs

The December 1, 2022 issue contains articles and reports of insurance fraud convictions for every insurance claims professional, SIU investigators and everyone interested in the efforts to defeat or deter insurance fraud. The December 1, 2022 issue includes:

It Doesn’t Pay to Try to Cheat Your Insurance Company

Sigismondi Foreign Car Specialists, Inc. appealed the U. S. District Court's summary judgment in favor of State Auto Property and Casualty Insurance Company on State Auto's declaratory judgment action and statutory insurance fraud claim.

In State Auto Property And Casualty Insurance Company v. Sigismondi Foreign Car Specialists, Inc., No. 21-2435, United States Court of Appeals, Third Circuit (November 18, 2022) the Third Circuit Court of Appeal dealt with the allegations of the insurer that Sigismondi attempted insurance fraud.

FACTS

State Auto issued a commercial insurance policy that provided coverage for Sigismondi's car repair shop. Sigismondi requested an insurance payment for water damage, but State Auto denied the claim, citing fraud.

The misrepresentations asserted as a defense by State Auto occurred during the claims-adjustment process. Sigismondi and State Auto retained adjusters to value the damaged inventory. The adjusters first created a joint inventory-a list of all the damaged items for which Sigismondi sought insurance proceeds. State Auto's adjuster, Chad Foster, then researched prices of the same or similar products to determine either a "replacement value" (if Sigismondi replaced the item) or an "actual cash value" (if not). Sigismondi's adjusters, or Sigismondi itself, likewise valued the items.

Sigismondi valued certain items higher than Foster estimated or could verify. Sigismondi presented what appeared to be original invoices from various vendors trying to convince State Auto to pay more than its adjuster calculated.

In truth, a Sigismondi employee had scanned at least some of the invoices into the computer and then used editing software to change the items and prices listed by the vendors. After Foster alerted State Auto to this issue, State Auto sent Sigismondi a reservation of rights letter, requesting further documentation and highlighting a policy provision stating the policy would be void if any insureds "intentionally conceal or misrepresent a material fact concerning . . . [a] claim under this policy."

State Auto subsequently sued after further investigation confirmed the alterations. It sought a declaratory judgment that the policy was void. It also requested damages for statutory insurance fraud. Sigismondi counterclaimed for statutory bad faith. At the summary judgment stage, Sigismondi initially claimed its misrepresentations were not material. The District Court determined the misrepresentations were material and granted summary judgment to State Auto on its declaratory judgment action and statutory insurance fraud claim.

ARGUMENTS ON APPEAL

Sigismondi contended that it did not knowingly or in bad faith provide false or misleading information by submitting the altered invoices, and that the invoices themselves were not in fact misleading. The company argued it submitted the invoices only to allow the adjusters to identify items and vendors-not prices. Sigismondi insists this should have been clear because the invoices were dated after the water-damage incident.

It was hard to imagine how the invoices-which were doctored to include prices that did not come from the vendor-were anything but knowingly made to include false or misleading information. A fabricated receipt created by a consumer and presented as an official document from a retailer, without the retailer's knowledge, constitutes false or misleading information.

Sigismondi also argued that any misrepresentations were not material because the invoices would not be the final word on value-Foster would conduct his own inquiry into prices based on the items and vendors. Sigismondi provided the altered invoices in response to a request for "invoice support" or other "documentation for the value claimed." Its argument that the invoices, to which it added prices, were relevant only for information about items and vendors is contradicted by undisputed evidence. Because this exchange of information was part of an effort to determine the value of the insured items, the falsified invoices that indicated prices charged by vendors were undoubtedly material.

CONCLUSIONS

Reviewing the record in the light most favorable to Sigismondi the Third Circuit concluded that the altered invoices were material.

The affirmance of the declaratory relief in favor of State Auto doomed Sigismondi's counterclaim for statutory bad faith. Because the policy was void, it did not cover Sigismondi's damaged inventory. It follows, therefore, that State Auto cannot be liable for bad faith denial of the claim.

The Judgment was affirmed.

ZIFL OPINION

Insurance fraud like that attempted by Sigismondi is fairly easy to prove. Since the invoices and receipts presented were not originals the insurer merely had to have its adjuster or SIU investigator visit the various vendors to either affirm the authenticity of the invoices or establish that they were prepared in an effort to defraud. State Auto did just that and proved to the court and the Third Circuit that fraud was attempted. Although Sigismondi had incurred a proper loss it recovered nothing because it tried to cheat and when caught argued it really didn’t intend to defraud. The Third Circuit looked through the specious arguments and ruled against Sigismondi and in favor of the insurer.

Read the full article at ZIFL-12-01-2022

Wisdom

“And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works." —Frederic Bastiat

“What the welfare system and other kinds of governmental programs are doing is paying people to fail. Insofar as they fail, they receive the money; insofar as they succeed, even to a moderate extent, the money is taken away.” – Thomas Sowell

“Unthinking respect for authority is the greatest enemy of truth.” – Albert Einstein

“There is something you must always remember. You are braver than you believe, stronger than you seem, and smarter than you think. — A.A. Milne

“A big part of being confident is being brave, and you can’t be brave unless you’re scared.” – Bo Burnham

“You know you're getting old when work is a lot less fun, and fun is a lot more work.” – Joan Rivers

“When a true genius appears in the world you may know him by this sign; that the dunces are all in confederacy against him.” — Jonathan Swift

“Your son is at five your master, at ten your servant, at fifteen your double, and after that, your friend or foe, depending on his bringing up.” — Rabbi Chasdai ibn-Crescas

“The possession of unlimited power will make a despot of almost any man. There is a possible Nero in the gentlest human creature that walks.” —Thomas Bailey Aldrich

“There is no moral argument that justifies using the coercive powers of government to force one person to bear the expense of taking care of another.” – Walter Williams

“All of us share a dream. A dream of a world at peace. ... It's a dream of a land where every citizen is judged only on merit, a land where every woman and man is free to become all that she or he can.” — Ronald Reagan

New California Law Means New Obligations for Insurance Agents & Brokers

California Governor Gavin Newsom has signed into law Senate Bill 1242, written by the Senate Insurance Committee and aimed at protecting California consumers by imposing a variety of requirements upon producers.

The omnibus bill is essentially a kitchen sink of unrelated topics covered under a single piece of legislation. It takes effect on Jan. 1, 2023, and addresses, among other things, insurance fraud reporting and education mandates, fingerprinting and licensing disclosures.

Reporting Fraud

At the start of the year, agents and brokers will be required to report fraud to the California Department of Insurance (CDI). More specifically, SB 1242 amends the California Insurance Code to require producers who suspect or know a fraudulent application for insurance is being made to submit to the DOI Fraud Division via the electronic Consumer Fraud Reporting Portal information regarding the factual circumstances of a dubious application and the alleged misrepresentations it contains.

Read the full article at ZIFL-12-01-2022

Crime Doesn’t Pay – It Leads to Bankruptcy

North Carolina’s Wake County Superior Court judge ordered the liquidation of two life insurance companies in rehabilitation operated under billionaire insurance and finance executive Greg Lindberg. The judge approved the order to liquidate Colorado Bankers Life Insurance Co. and Bankers Life Insurance Co., which have been in rehabilitation since 2019. The companies were put into rehabilitation after questions arose about Lindberg’s alleged use of reserve funds to support other businesses he operated.

Read the full article at ZIFL-12-01-2022

Good News From the Coalition Against Insurance Fraud

A pain doc stuck patients with unneeded injections for knees and other body parts in a $240M scheme in San Antonio, Tex. Area. Dr. Jorge Zamora-Quezada falsely diagnosed patients with degenerative diseases such as rheumatoid arthritis. He gave them batteries of injections, invasive chemo and other toxic treatments they didn’t need. He earned a trip to the Coalition’s Insurance Fraud Hall of Shame in 2020 — and finally is scheduled for federal sentencing May 18. Zamora-Quezada kicked patients out of his office if they questioned his treatments and hid their records from docs the patients next saw. He also laundered the insurance money. And he bought a private jet, owned luxury properties in Aspen and other jet-set locales and bought a fleet of luxury cars. And Zamora-Quezada gave patients knee-buckling doses of chemo and other toxic treatments they didn’t need, all to keep insurance money flowing. Many patients — one aged just 13 — suffered serious physical and emotional damage from the chemo injections and sometimes hours-long intravenous infusions. Zamora-Quezada falsely diagnosed one man with rheumatoid arthritis. The patient later developed burns on his skin, lost both finger and toenails, and later began losing his skin from the toxic medications. His health problems continued until his death.

Ricky Gonzales ran Ricky’s Construction Company, which supplied construction labor for contractors. The Tampa, Fla.-area man lied he paid worker’s comp for the laborers he provided — who were undocumented immigrants. The contractors then sent Gonzales what they thought were payroll checks. Gonzales cashed the checks at banks to pay the workers. Gonzales lied that employees had full worker's comp. In truth, he received and cashed more than $7M of checks from construction contractors for his employees. That far exceeded the limited payroll that Gonzales reported to his comp insurer. His employees — who often were undocumented aliens — thus worked at job sites without adequate insurance coverage. The insurers lost premiums they’d have charged had they known about the true number of workers their policies were being manipulated to cover. Gonzalez also illegally avoided state and federal payroll taxes. He pled federally guilty and was handed 48 months. He also must repay more than $500K.

An agent grew his prosperous business while stealing nearly $700K of federal disability money after claiming he was unable to work, federal prosecutors allege in Arlington, Mass. Patrick Quinn is an ex-Marine who claimed he received service-related injuries and PTSD. Quinn claimed that his PTSD prevented him from securing gainful occupation, and he was too disabled to work. He submitted a letter from his purported final employer, Insurance Management Consultants. It claimed Quinn was fired due to his erratic behavior. He was declared disabled and started receiving VA and Social Security disability. Quinn completed and returned four VA employment questionnaires attesting he didn’t work during the previous year. Yet Quinn ran Quinn Group Insurance Agency since at least March 2003. He also ran Insurance Management Consultants from 2000 through 2007, despite lying he was fired. And Quinn grew his business significantly by acquiring nine smaller agencies. He was handed a year in federal prison.

The Examination Under Oath Is Not a Replacement for the Insurance Claims Professional

An attorney is not an insurance adjuster. The attorney representing an insurer at an EUO is not a “super adjuster.” The attorney is a lawyer who was retained to provide legal advice and counsel after assisting the insurer in gathering facts at an EUO.

Competent outside adjustment services can be obtained for a great deal less per hour than any attorney. The EUO should complement, and be part of, the thorough investigation of the Insurance Claims Professional.

It should provide the information that the Insurance claims professional is unable to obtain because of the recalcitrance of the Insured, because of the lack of records, or because complex legal and factual issues have made resolution of the claim on an adjusting level impossible.

The Attorney Taking the EUO Should Be Given Explicit Instructions by the Insurance Claims Professional Retaining Him.

The instructions should include the reasons for the EUO, the facts that have been discovered that caused the Insurance claims professional to refer the Insured to the attorney take an EUO, and that the Insurance claims professional seeks advice and counsel from the attorney whether he or she concurs that it is in the best interest of the insurer and the insured that the EUO proceed. The claims person should not instruct the attorney what to find. The assignment must be clear that the investigation indicates that the adjuster believes the insurer has collected sufficient information to indicate a reason for the taking of an EUO. The lawyer will then independently review the facts and advise whether it would be proper on the facts established, the policy wording and local law, the EUO should go forward or not.

The attorney will then provide the insurance claims professional with his or her analysis of the file. He or she will, invariably, request that the insurance claims professional fulfill certain investigative tasks before the date scheduled for the EUO to make the EU fruitful of facts relevant to the issues raised by the claim and the policy wording.

The insurance claims professional will learn, by attending examinations under oath, interview methods and skills that will assist him or her in other investigations. By being present at the EUO the insurance claims professional can shorten the time necessary for completion of the investigation and receive requests for follow-up investigation on the spot. By his or her presence, the insurance claims professional makes clear to the insured that the insurer is interested in the claim and is giving its resolution a high priority. In addition, because the insurance claims professional is closer to the facts of the case, he or she can also assist the lawyer with the questioning by passing notes to the lawyer or meeting with the lawyer during the EUO.

The formality of the EUO, including the presence of a court reporter, defeat the emotional effect of a one on one interview. This formal type of interview requires more than one experienced interviewer available to team together to examine the insured under oath. The extra pair of eyes and ears make for a more thorough EUO. For this reason, I always insist that my investigator or insurance claims professional be present during any EUO I take. While I concentrate on the EUO itself the investigator watches the witness for clues in facial expression and body language. Since the Insurance adjuster has been to the scene of the loss and the lawyer (in most cases) has not, the adjuster or investigator’s first-hand knowledge can greatly assist the lawyer.

The Insurance Claims Professional Should Not Expect the EUO to Be More than a Fact Gathering Session

In the last 40 years I have only twice heard a person who had attempted a fraud confess to that fraud, on the record, and then only after days of cross-examination. Others have told me stories of how they extracted confessions from insureds, but these stories are less than believable than stories of the 50-pound trout caught in a nearby creek. Only fictional lawyers like Perry Mason have witnesses jump up in a crowded courtroom and confess the crime. More often, I have heard insureds, under close questioning, testify to facts that compel a conclusion that a fraud has occurred. Occasionally, when the witness realizes the extent of the inquiry, he simply drops the claim.

Sometimes, after completing the EUO, the insured will realize he has failed in the attempted fraud and accept the denial of the claim without complaint. More often, in this litigious society, even the most blatant fraud will file suit hoping the insurer will pay him to go away.

A good, thorough, EUO will be a most effective weapon for the insurer to use to defeat the suit. Insurers must be ready to admit into evidence every word said in the EUO. Interviewers should refrain from making jokes on the record since a jury will hear the cold record without tonal inflection. Most honest lawyers will not assist an insured in perpetrating a fraud if the facts are presented to them clearly.

More often than not, the EUO will cause the attorney retained by the insurer to recommend payment of full indemnity to the Insured. If the attorney advises the insurer that indemnity should not be paid the insurance claims professional should carefully analyze the recommendations to independently verify that there are sufficient facts, supported by policy language and legal precedent, to support the conclusion. Remember, it is the claims person who makes the decision, not the lawyer. All a lawyer can do is give advice. It is the claims person who must decide whether or not it is best for the insurer to take that advice.

The EUO Should, When Added to the Claims Investigation, Be the Cornerstone upon Which the Attorney Builds the Legal Advice and Counsel He Gives the Insurance claims professional Concerning the Resolution of the Claim.

No lawyer is always right. Perfection is not handed out with a law degree. Decisions made by insurers must sometimes be based on reasons other than the law. If the attorney fails to provide the Insurance claims professional with detail sufficient to make a decision, the insurance claims professional must require the attorney to provide the detail before making a decision.

An attorney who tells the insurance claims professional to do something "Because I say so" is courting disaster for his client and himself. In order to advise the insurer to the best of his or her ability counsel must always know the basis for the advice given.

Counsel's report to an insurer after completing an EUO should include, at least:

1.??????????????????All facts learned in the investigation;

2.??????????????????The applicable policy wording on which counsel relies;

3.??????????????????The facts must then be analyzed in relation to statutory and case law;

4.??????????????????The testimony at the EUO that supports his opinions; and

5.??????????????????Counsel’s recommendations for further investigation or for resolution of the claim.

The claims handler will then be in a position to make a fully informed decision on the claim. The attorney works for the insurer. It is his obligation to follow his client's instructions. The Insurance claims professional is the representative of the insurer to the attorney and must adequately instruct the attorney and if the attorney’s recommendations meet the facts, the law and the policy wording follow that advice. However, recognizing that no lawyer is perfect, the facts, the law and the policy wording must be also evaluated carefully by the insurance claims professional, whose decision – even if it disagrees with the advice of counsel – must be final.

The insurance claims professional must make it clear to the attorney taking an EUO that it is his or her obligation to provide sufficient factual information supported by legal authority for the insurer to make a decision on the claim. I recommend that attorneys be used only when it is economically reasonable to hire one. It may be impractical to hire a lawyer to examine under oath a person presenting an $800 claim and unreasonable not to have an attorney take and EUO when the claim is for $8 million.

The insured may have counsel, if he desires, but counsel is not required nor can counsel do anything at the EUO other than provide legal advice to the insured. If the witness arrives without counsel the interviewer should put on the record that the witness has chosen not to be represented by counsel. An offer should be made to continue the EUO to a date when an attorney can be present for the witness. Regardless, the insured's attorney has no right to ask questions or offer information during the EUO.

It is wise, regardless of right, to allow the insured's attorney to ask any question he wishes or to develop any facts he wishes, since by doing so the purpose of the EUO, to get as much information as possible, is accomplished.

It is better to know immediately, rather than during later litigation, what the insured wants to say. There should be no time limits. I have taken EUOs as long as eight to ten days and as short as eight to ten minutes. Counsel for the Insured will often open areas of fact not thought of by the interviewer to cover concerns privately told to counsel by the client.

If there is more than one insured who is being examined under oath the insurer may be able to, depending on the state or the policy language, to compel the insureds to testify separately outside the hearing of the other insured. [State Farm Fire & Casualty Company vs. Tan (S.D. Calif. 1988) 691 F.Supp. 1271, and current Insurance Service Office (ISO) homeowners and commercial policies.]

The District Court, in granting State Farm's motion for summary judgment concluded that:

It is logical that the taking of separate examinations under oath, without the insureds sitting in on each other' examinations, would not only lead to more accurate information, but would also discourage or even prevent fraudulent claims.?Separate examinations will not guarantee an absence of chicanery, but they will provide a reasonable means to discover the probability of truth while causing no inconvenience to the insureds.

The ISO modified the HO3 and many commercial policies to avoid further cases like Tan by specifically stating the insurer can require each insured to appear alone.

Conduct of the EUO

The insured's counsel may object to the form of questions. Any instruction not to answer a material question can, by itself, be sufficient grounds to deny the claim for failure to comply with the policy condition concerning examinations under oath. Being advised to refuse to answer a question by a lawyer is no defense to a conclusion that the question was material and the refusal prejudiced the ability of the insurer to complete its thorough investigation. The prudent interviewer will advise the insured of the hazard of not answering a material question. Failure to answer a reasonable and material question can allow the insurer to reject the claim on that ground alone. When faced with a lawyer’s instruction not to answer I often say to counsel and the insured, on the record:

I respect your decision. I must advise you, however, that the insurer I represent considers the question you have refused to answer to be relevant and material to its investigation. It can, if you continue in your refusal, decide to deny your claim on that ground alone. I make no decisions so I will honor your decision and go on to other questions. I felt it my duty, however, to advise you of the rights given by the Insured to the Insurer in the policy so that you can reconsider your decision. Would you like to meet privately to discuss the decision?

In a majority of the cases the EUO is taken off the record, counsel and the insured discuss the statement in private, only to return with a decision to reconsider, and answer the question. There is no reciprocal provision allowing the insured to take testimony of representatives of the insurer before a decision is made to reject the claim.

Lawyers, whose profession is asking questions, will usually do a more thorough job at EUO than an insurance claims professional, adjuster or SIU investigator. The lawyer can also, after completing an EUO give the insurer legal advice as to its rights, duties and obligations.

The insurance claims professional should attend the EUO to assist counsel, to study questioning techniques, and be prepared to conduct further investigation.

It is useful to advise the insured, especially if the insured has lost, as a result of a fire, the documentary evidence necessary to adequately prove his loss, that the reason for the EUO is to assist the insured in his, her or its obligation to prove the loss by oral testimony. The insured should be advised that he, she or it can also remove, by testimony, suspicions of the insurer that a fraud is being attempted. It is the desire of the insurer to pay every legitimate claim and the EUO is a method to determine whether the loss is one that needs to be fulfilled.

The insured is obligated to answer all material questions. Remember from the U. S. Supreme Court:

Every interrogatory that was relevant and pertinent in such an examination was material, in the sense that a true answer to it was the substance of the obligation of the insured. [Claflin, supra.]

The right to EUO is much broader than the right of discovery under a Code of Civil Procedure. Books, records and other documents may be examined.?

It is useful to explain to the insured witness the purpose of the EUO. An example of such advice follows:

The reason you are here is because, when you purchased your policy of insurance from my client you promised that, in the event you presented a claim and the insurer asked, you would submit to examination under oath.?You have presented a claim and you are here to testify as part of the investigation being conducted by my client.?Although you have taken the oath and the court reporter is taking down everything that is said today this is not a deposition which can only be taken in a lawsuit.?We are not adversaries; we are only attempting to get as many facts as possible under oath.

Such an explanation can take some of the fear out of the EUO process since most insureds have never even met a lawyer let alone testified at deposition, in trial or in any other proceeding. To keep the insured calm, it is sometimes useful to begin the EUO with innocuous questions that the insured will have no difficulty answering like his full name, address, date of birth and place of birth. If, on the other hand, the interviewer determines that it is best to keep the insured nervous the questioning might begin without the preview but with a question like: “Are you armed today.” If the answer is “yes” it is wise to call a recess and have the weapon locked in the insured’s vehicle.

Before the questioning begins, preferably a week before the date scheduled for the EUO, the insured has produced documents required to be produced so that the interviewer can review the documents and prepare the questions needed to be asked at the EUO.

Health Insurance Fraud Convictions

Florida Birth-Related Neurological Injury Compensation Plan and Association to Pay $51 Million to Resolve False Claims Act Allegations

The Florida Birth-Related Neurological Injury Compensation Plan and its administrator, the Florida Birth-Related Neurological Injury Compensation Association (collectively, “NICA”), have agreed to pay $51 million to resolve allegations that they violated the False Claims Act by causing NICA participants to submit their healthcare claims to Medicaid rather than NICA, in violation of Medicaid’s status as the payer of last resort under federal law.

The civil settlement resolves a lawsuit filed and pursued by Veronica N. Arven and the estate of Theodore Arven III against NICA under the qui tam or whistleblower provisions of the False Claims Act, which permit a private party (known as a relator) to file a lawsuit on behalf of the United States and receive a portion of any recovery. Although the United States did not intervene in this case, it continued to investigate the whistleblowers’ allegations, provided substantial assistance to the whistleblowers in defending against a motion to dismiss, and negotiated the settlement announced today. The Arvens will receive $12,750,000 as their share of the recovery in this case.

Read the full article about multiple insurance fraud convictions at ZIFL-12-01-2022

Post Loss Underwriting is Rare

When an insurer decides to rescind a policy of insurance it is often accused of “Post Loss Underwriting.” Although considered in some states, post loss underwriting is an oxymoron. Underwriting is the decision, based on information provided by a proposed insured, to accept the risk of certain losses needed by the proposed insured. Underwriting, by definition, must be conducted before a policy comes into existence except in the event when a policy is bound subject to a physical inspection of the property. If the inspection shows the risk to be other than that promised by the insured, the policy will be cancelled. Rescission, on the other hand, happens when an insurer learns, after a policy is written, that it was deceived by a material misrepresentation or a concealment of a material fact or by fraud.

In Lewis v. Equity Nat'l Life Ins. Co., 637 So.2d 183, 185–86 (Miss.1994) the Mississippi Supreme Court found merit in the plaintiff-insured's claims that the insurer engaged in post-claim underwriting and that the insurer's agent misrepresented information in a policy application. The Court found no evidence of any similar “extreme factual situations” presented by the Plaintiffs in the case. Post-claim underwriting occurs when “an insurer, rather than refusing to write a policy, will wait until after a claim is filed to deny coverage on grounds that the policy should not have been written in the first place.” [Dixie Ins. Co. v. Mooneyhan, 684 So.2d 574, 589 (Miss.1996) (McRae, J., dissenting)]. The Mississippi Supreme Court has held:

An insurer has the obligation to its insureds to do its underwriting at the time a policy application is made, not after a claim is filed. It is patently unfair for a claimant to obtain a policy, pay his premiums and operate under the assumption that he is insured against a specified risk, only to learn after he submits a claim that he is not insured, and, therefore, cannot obtain any other policy to cover his loss. The insurer controls when underwriting occurs. It therefore should be estopped from determining whether to accept an insured six months or more after a policy is issued. If the insured is not an acceptable risk, the application should [be] denied up front, not after a policy is issued. This allows the proposed insured to seek other coverage with another company since no company will insure an individual who has suffered serious illness or injury.

As logical as is the analysis of the Mississippi Supreme Court it does not take into consideration the fact that people lie to their insurance companies to obtain insurance. If the lie is not obvious an application revealing an excellent risk may be a total fraud. In such a case the lie is usually never discovered until a claim is made. Post loss underwriting should, in logic, only be applied if the insurer knew the truth at the time the application was submitted and did not exercise the right to refuse the risk. As a result, in Eagle Transp., LLC v. Scott, F.Supp.2d, 2012 WL 1712352, (SD Miss., 2012) the USDC concluded that since the insurer asked for the information it needed and since the insured provided false answers to the insurer it did not engage in post-claim underwriting and the policy was properly rescinded.

Illinois law has no prohibition on post-claim underwriting.?However, while an insurance company might have no duty to investigate the truthfulness of an applicant's answer, if it wishes to rescind certain types of policies based on a misrepresentation in the application for that policy, the plain language of Illinois statutes[1] limits the amount of time in which it can do so.

Refusing to apply a post-claim underwriting argument the District Court for the Southern District of West Virginia held that the insurer, MassMutual, put Billy Jordan and Defendant on notice that a material misrepresentation could result in the Policy being rescinded and that there was a two year period after which the policy is incontestable. Further, this notice was provided both when Billy Jordan was applying for the Policy, and in the Policy itself. The insurer was granted summary judgment on its claim of rescission.[2]

When a policyholder claims his or her insurer waited until a claim has been filed to obtain information and make underwriting decisions which should have been made when the application was made, not after the policy was issued. [Lewis v. Equity Nat'l Life Ins. Co., 637 So.2d 183, 186 (Miss. 1994)].

The insurer established, however, that post-claim underwriting is not prohibited in Illinois. [Brandt v. Time Ins. Co., 704 N.E.2d 843, 846-47 (Ill. App. Ct. 1998)] Illinois law imposes no duty on an insurer to conduct an independent investigation of insurability before issuing an insurance policy.?[Commercial Life Ins. Co. v. Lone Star Life Ins. Co., 727 F. Supp. 467, 471 (N.D. Ill. 1989)] An insurance company has the right to rely on the truthfulness of the answers given by an insurance applicant. [Apolskis v. Concord Life Ins. Co., 445 F.2d 31, 36 (7th Cir. 1971) and Arch Ins. Co. v. PCH Healthcare Holdings, LLC (N.D. Ill., 2019)]

Remember, the duty of good faith and fair dealing is an obligation imposed on both parties to the insurance contract. Believing that a prospective insured is dealing with the insurer in good faith there is no need to conduct an investigation to affirm the truthfulness of the application. If there was such a requirement the cost of insurance would be prohibitive.

That is why misrepresentation or concealment of material facts are usually discovered after a claim is made. To use the concept of post loss or post claim underwriting to defeat the proper rescission of a policy would allow the unscrupulous to obtain insurance based on deception and allow fraud to flourish.

In Harper v. Fidelity and Guar. Life Ins. Co., 234 P.3d 1211, 2010 WY 89 (Wyo 2010) the Wyoming Supreme Court rejected claims of post-claim underwriting and affirmed the rescission of an insurance policy because Mr. Harper's application contained omissions and misrepresentations, and summary judgment was appropriate where the misrepresentation was of such a nature that there can be no dispute as to its materiality.

Furthermore, the Wyoming Supreme Court concluded that an insurer is under no duty to investigate the truthfulness of an applicant's responses unless it has notice that those responses might not be truthful or accurate.

The theory of “post-claim underwriting” does not apply to commercial insurance. Decisions that have restricted an insurer's post-claim authority to rescind or limit coverage apply only in the areas of disability, health and personal automobile insurance. [Colony Ins. Co. v. Crusader Ins. Co., 188 Cal.App.4th 743 (2010)].

In rejecting the argument that an insurer could not engage in post claim underwriting, the Colony Insurance court observed: "the relevant law requires an applicant for insurance to disclose material facts and permits rescission and other remedies absent such disclosure." [California Ins. Code, §§ 331, 359; Resure, Inc. v. Superior Court, 42 Cal.App.4th 156, 161 (1996)]. Thus, California courts have been hesitant to extend the prohibition on post-claim underwriting to health, disability and personal auto areas of insurance. [United Farm Workers of Am. v. Hudson Ins. Co. (E.D. Cal., 2019)]

The Third Circuit Court of Appeal noted that the concept of “post-claim underwriting” itself is nebulous, particularly because it is difficult to draw a distinction between post-claim eligibility investigation and post-claim underwriting. For example, Pennsylvania law provides that it is not bad faith to conduct a thorough investigation into a questionable claim. The insured’s concept of “post-claim underwriting” would usurp this general principal and prevent insurers from engaging in post-claim investigations, even in the face of incontrovertible evidence that an insured made a clear misrepresentation.[3] The Third Circuit, so finding, recognized that claims of post-claim underwriting as a method of preventing an insurer from rescinding a policy, was an invitation to fraud and deprived the insurer of the fairness essential to a claim of rescission.

In Hornback v. Bankers Life Ins. Co., 176 S.W.3d 699 Ky App, 2005, the Kentucky court of appeal concluded that an insurance company that issues a policy based on the applicant's answers, without any investigation, is not precluded from raising the defense of fraud or material misrepresentation after a claim is submitted. (State Farm Mut. Auto. Ins. Co. v. Crouch, 706 S.W.2d 203, 206 (Ky.App.1986)). When an insured misrepresents material facts on the application, the insurer is justified in denying coverage and rescinding the policy immediately upon discovering that it had been deceived. In so finding the Court of Appeal refused to consider claims of post-claim underwriting and affirmed the rescission.

Claims of post-claim or post-loss underwriting should be looked at with a great deal of skepticism. As the Hailey case made clear, even when rescission was refused and the case was sent back to the trial court for trial, the Hailey’s, on cross-examination, admitted that they intentionally misrepresented their health conditions when applying for the insurance. Their suit was immediately dismissed for fraud in the inception, and they were lucky that they were not prosecuted for attempted insurance fraud. They clearly cost their putative insurer a great deal of money defending through trial, an appeal and a second trial, only to admit fraud. They hoped, by claiming the tort of bad faith, to bludgeon the insurer into a settlement for fear of a bad faith judgment with punitive and tort damages available in addition to the benefits promised by the policy.

The theory of post-claim underwriting appears fair, on its face, sufficient to cause some states to enact legislation prohibiting it and, by so doing, encourage fraud. Once the theory is taken to its logical ending it is really a method to assist unscrupulous insureds to defraud their insurer.

For example, if a proposed insured, suffering from Ebola, applies for insurance and claims perfect health, and received a life insurance policy based on the application, the beneficiaries should not be able to claim that the insurer, when it rescinds the policy after the Ebola victim dies, to be refused rescission because it is applying post-claim underwriting.?hat it is actually doing is seeking fairness from a court to prevent it from honoring a fraud.

Similarly, if a prospective insured’s home is sitting on an active and moving landslide and acquires property insurance for damage by earthquake or earth movement and a week after the policy is issued submits a claim for destruction of the home by land movement, the insurer would be prevented from rescinding because the damage was in progress at the time the policy was acquired. If Post-claim underwriting was applied, because the insurer did no investigation and merely accepted the truth of the insured’s application, the deception would succeed.

For more information and detail see The Equitable Remedy of Rescission of Insurance, available as: A Kindle book A Paperback or a hardcover .

[1] .?Standard Mut. Ins. Co. v. Jones, 2012 IL App (4th) 110526, 965 N.E.2d 1129, 358 Ill.Dec. 650

[2] .?Massachusetts Mut. Life Ins. Co. v. Jordan, Not Reported in F.Supp.2d, 2011 WL 1770435 (S.D.W.Va.)

[3] .?Northwestern Mut. Life Ins. Co. v. Babayan, 430 F.3d 121 (CA 3 (PA) 2005)d.

Read the full article at ZIFL-12-01-2022

Other Insurance Fraud Convictions

Workers’ Compensation Fraud Convicted

Frances Davis pleaded guilty to one count of attempting to commit workers’ compensation fraud, a fifth-degree felony, and agreed to pay $17,144.79 in restitution, according to the Ohio Bureau of Workers’ Compensation. The BWC Special Investigations Department discovered that Davis potentially earned wages while collecting disability benefits from the BWC.

Davis, a Franklin County, Ohio woman was ordered to pay $17,000 in restitution she defrauded from the Ohio Bureau of Workers’ Compensation.

It was confirmed that while Davis was collecting benefits, she worked for seven different employers over the course of two years and held positions such as manager, assistant manager, packer, and machine operator.

A Franklin County judge found Davis guilty and sentenced her to five years of community control to pay the restitution as well.

Read the full article about multiple insurance fraud convictions at ZIFL-12-01-2022

It’s Time to Subscribe to Locals or Substack

For Subscribers Only I Have Published Special Insurance Videos

I published today on Locals.com Video Number 23 of the Excellence in Claims Handling program on Specific, Blanket and reporting coverages. I also published on Substack.com Video Number 9 of the Excellence in Claims Handling Program available only to Subscribers. The subscribes have access to all the videos and a webinar on “The Examination Under Oath A Tool Available to Insurers to Thoroughly Investigate Claims and Work to Defeat Fraud.”

The videos start with the history of insurance and work their way through various types of insurance and how to obtain and deal with insurance claims.

Subscribe and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://zalmaoninsurance.locals.com/subscribe.

Subscribe to my publications at substack at substack.com/refer/barryzalma

Go to substack at substack.com/refer/barryzalma

Read the full article at ZIFL-12-01-2022

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Subscribe and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://zalmaoninsurance.locals.com/subscribe.

Go to substack at substack.com/refer/barryzalma Consider subscribing to my publications at substack at substack.com/refer/barryzalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at?https://www.zalma.com [email protected]

Write to Mr. Zalma at [email protected]; https://www.zalma.com ;?https://zalma.com/blog ; daily articles are published at?https://zalma.substack.com .?Go to the podcast Zalma On Insurance at?https://anchor.fm/barry-zalma ; Follow Mr. Zalma on Twitter at?https://twitter.com/bzalma ;?Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921 ;?Go to Barry Zalma on YouTube-?https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg ;?Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library