What Did She Know and When Did She Know It: Winning an Application Fraud Case - DD 12/03

Defense Digest

What Did She Know and When Did She Know It:  Winning an Application Fraud Case

On May 19, 1999, Mr. Max West had an accident that started a claim which would be tried twice; appealed; consolidated with a declaratory judgment action; and end on September 19, 2003, with a finding that his wife, Marlene West, violated the New Jersey Fraud Prevention Act (N.J.S.A. 17:33A-1) ("Fraud Act") by making material misrepresentations on the insurance application covering the car driven by Max West.  In order to prevail, all the carrier had to do was prove, by clear and convincing evidence, what the insured knew and when she knew it.

The Facts

On January 19, 1999, Ms. West signed the application which contained several "inaccuracies."  The application failed to list Mr. West as a resident and driver.  The only reference to Mr. West was in the "Remarks" section where it stated, "Husband is disabled and unlicensed."  Lastly, it was denied that any policies of insurance had been "declined, cancelled or non-renewed within the last three years."  Based upon the answers, the carrier approved Ms. West as the only driver and her Jeep Cherokee as the only vehicle.

On May 5, 1999, Ms. West requested the agent add a second vehicle.  The request set off a red flag in underwriting because of one driver with two cars.  The next day, the underwriter e-mailed the agent about the new vehicle.  The agent mailed Ms. West; however, Ms. West never responded to the request before the accident.  The medical treatment Max West received following the accident amounted to approximately $150,000, although some of it was for an unrelated neurological disorder which was discovered. 

In its investigation, underwriting determined that the application had serious problems and recorded interviews were done with the insureds and the agent.  The interviews uncovered a prior business relationship between the Wests and the agent, and established that they knew each other outside of the agent/customer relationship.  This raised concerns of collusion.  The policy was rescinded after Examination Under Oaths (EUO's) of the Wests were done in August of 1999. 

The Wests filed suit on August 20, 1999,  to recover the damage to the vehicle.  At trial, the judge struck the defenses of the carrier relating to the Fraud Act.  Although only the property damage was at issue in the suit, the concern was that if coverage was ordered, the medical bills for the husband would become an issue, so an appeal was taken and a declaratory action was filed against the insureds and the agent for violations of the Fraud Act.  When the Appellate Division reversed, the declaratory action was consolidated.

The motive for Ms. West was simple -- Mr. West was a "high risk" for automobile insurance because he had 15 insurance rating "points" resulting from three "at fault" accidents and he could only obtain insurance in the assigned risk program.  Ms. West, however, had no "points." If Mr. West was on the coverage, the premium for their ten year-old high-mileage vehicles would have exceeded $4,000.  Without Mr. West, it was under $2, 000.

Records from another agency that handled the Wests' insurance in 1998 revealed two policy cancellations/rescissions:  Motor Club of America because of Max West and a Selective policy because the check written by Ms. West bounced.  The file also documented  a phone call to Marlene West on December 18, 1998, which confirmed she knew of the cancellation of the Selective policy before she signed the new application. 

Deposition testimony disclosed that, although Ms. West telephoned the carrier's agent to obtain an auto policy in early December, 1998, she did not complete the application until January 19, 1999.  The first part of the meeting discussed the health of Mr. West.  Ms. West said he was in the hospital and his prognosis was uncertain.  The application was completed "line-by-line" by the agent, on his computer, while Ms. West sat at his desk.  Ms. West signed the application in front of the agent.  However, she said she did not read the application as she was too distraught over her husband.  After depositions, the agent was dismissed from the declaratory action as there was no way to prove either collusion or an independent act of fraud by the agent.  The issues with the agency are being resolved, pursuant to the agency agreement, in arbitration.

The Law

The Fraud Act,  N.J.S.A. 17:33A-4, reads in relevant part:

(a)   A person or practitioner violates this act if he: …

(4)  Prepares or makes any written or oral statement, intended to be presented to any insurance company or producer for the purpose of obtaining: …

(b)  an insurance policy, knowing that the statement contains any false or misleading information concerning any fact or thing material to an insurance application or contract …;

A misrepresentation is material if "a reasonable insurer would have considered the misrepresented fact relevant to its concerns and important in determining its course of action."  Longabardi v. Chubb Ins. Co. of N.J. 121 N.J. 530 (1990).   Materiality "is judged according to a test of prospective relevancy." Id.  On September 9, 2003,  a bench trial was held.  Ms. West argued that since the carrier was at least "on notice" of the existence of her husband, the processing practices of the carrier did not allow it to perform the requisite "due diligence" in the five months before the accident.  Her arguments failed, and by clear and convincing evidence it was shown that she was aware of the prior cancellations and knowingly failed to disclose them.  Also, Ms. West's testimony that she did not read the application before signing was disregarded by the court.  Therefore, the court found a violation of N.J.S.A. 17:33A-4 and awarded reasonable attorneys fees and costs for the defense of the suit.

Conclusion

While at times difficult to prove, the application fraud case can be won when there is coordination between underwriting, claims and SIU.  Moreover, establishing a motive, such as lower premiums, although not required, is essential to persuading the court of the fraud.  In the end, we were able to prove what Ms. West knew, when she knew it, and why it mattered that she did.

*John is a shareholder in our Cherry Hill, New Jersey office.  He can be reached at (845) 414-6029 jmastronardi@mdwcg.com.