Material Misrepresentation Concerning the Extent of Loss Voids Policy
After the district court ruled for the defendant insurance company on cross-motions for summary judgment, ending the action, the plaintiff appealed that summary-judgment ruling. In Meat Town Inc. v. Sentinel Insurance Company, Case No. 19-2351, United States Court Of Appeals For The Sixth Circuit (March 30, 2021) was asked to find the fraud wasn’t big enough to stop the insured from collecting the remainder of its loss.
INSURANCE POLICY INTERPRETATION
A fundamental tenet of Michigan law is that unambiguous contracts must be enforced as written according to their unambiguous terms because doing so respects the freedom of individuals freely to arrange their affairs via contract.
Consequently, while exclusionary clauses in insurance policies are strictly construed in favor of the insured, it is impossible to hold an insurance company liable for a risk it did not assume, and, thus, clear and specific exclusions must be enforced.
The insurance policy in this case voids all coverage if the insured conceals or misrepresents material facts concerning its claim; e.g., commits fraud. Under Michigan law, to effectuate such a provision, the insurer must prove that the claim was (1) knowingly false or made in reckless disregard for the truth, and (2) material, such that the insured intended to induce the insurer to act upon it. Furthermore, under Michigan law, it matters not that the fraud was perpetrated in connection with only a portion of the loss claimed by an insured.
To void the policy, the insured is not required to lie about all of his or her losses; rather a lie related to a single loss operates to void the policy. In simple language you can’t be a little bit dead.
Meat Town Inc. was a retail butcher and grocer in Detroit, Michigan. Meat Town was the insured of a “Business Owner’s Policy” with Sentinel Insurance Company, Ltd., that insures against the risk of loss of the real property, fixtures and equipment, inventory, and business interests due to, among other things, vandalism or fire.
On December 24, 2015, Meat Town filed a claim under this policy for losses arising from an after hours break-in, robbery, and vandalism that occurred on November 10, 2015, which is referred to as the “Vandalism Event.” On March 7, 2016, Meat Town filed a second, separate claim for losses arising from a fire on December 19, 2015, which is referred to as “the Fire.” On October 4, 2016, Meat Town’s President, Pete Demopolis, signed, with notarization, a “Sworn Statement in Proof of Loss,” claiming $487,879 in loss and damages from the Vandalism Event.
Sentinel was suspicious that the claims were fraudulent and began an investigation, which eventually turned those suspicions into convictions that the claims were fraudulent. In August 2018, while discovery was underway, Sentinel sent Meat Town a four-page letter denying both claims. The letter quoted several provisions from the policy, with the most pertinent being the misrepresentation, concealment or fraud condition.
Just before noon the day of a large delivery the electric utility company shut off Meat Town’s electricity. Neither Meat Town’s owner, Peter Demopolis, nor its manager, Alan Gluck, was at Meat Town when the electricity went off, but the floor manager called them and was told to “sit tight.” After about 30 minutes of sitting in the dark, the floor manager locked the store, activated the security system, and left with the other three employees.
According to the security company, the Vandalism Event began at 5:25 p.m., when the vandals breached the front door and triggered the alarm. Meat Town never reopened for business after the November 10 Vandalism Event and, on December 19, 2015, while Meat Town’s landlord was in the process of evicting Meat Town from the property, an arsonist set the Fire. Ultimately, Sentinel concluded that Meat Town’s claims were not merely erroneous or exaggerated, but were knowingly, irrefutably, and indefensibly fraudulent.
As a ready example, Sentinel pointed to the November 10 delivery from Kap’s. Kap’s controller, Allen Cohn, attested in an affidavit that those orders were cancelled “without sale or delivery to Meat Town,” such that Meat Town neither paid for nor received “any of the products reflected on th[ose] invoices.” In addition, among its claims of loss for the meat discarded from its vandalized display cases and freezers, Meat Town claimed $8,739 for the meat received from Quality Meats. Meat Town supported this claim with copies of four bills of lading from Quality Meats. Significantly, none of those bills was dated. The President/CEO of Quality Meats, Jeff Davis, attested in an affidavit that Quality Meats did not sell or deliver any meat to Meat Town in November 2015. When Quality Meats produced its copies of those same four bills, each clearly depicted a date (three dated September 12 and one dated October 3). A comparison of the respective copies revealed that Meat Town’s copies had no visible dates, but instead had an unmistakable white space where the date was located on Quality Meats’ copies.
The district court found that Meat Town had made material misrepresentations in its claims to Sentinel, that those misrepresentations voided the policy, and that Sentinel—and not Meat Town—was entitled to summary judgment. Meat Town v. Sentinel Ins. Co., Ltd., 413 F. Supp. 3d 671, 671 (E.D. Mich. 2019).
Even though the false Kap’s claims were enough to decide the case, the court added the Quality Meats analysis to “bolster” its conclusion. The false representation about Quality Meats was Meat Town’s claim that it purchased that meat on November 7 and 10, when, in reality, Quality Meats had delivered the last of those orders on October 3rd.
On the intent issue, the district court considered Meat Town’s argument that—even accepting that it did not receive the Kap’s products—its claims that it had received those products and seen them in its shattered display cases covered in glass and debris were not deceitful but simply mistaken, due to the dark and disarrayed condition of the store. To survive summary judgment, Meat Town had to do more than hypothesize that these might have been inaccuracies, inconsistencies, or honest and innocent mistakes. Meat Town had to produce some evidence, such as an affidavit or other evidence admissible at trial, that could persuade a reasonable juror that this was a mistake that did not rise to the level of reckless disregard for the truth. Meat Town did not produce any evidence to challenge, much less disprove, this inference.
The first thing to recognize here is that Sentinel’s position was that Meat Town violated the policy and Meat Town’s entire small-portion theory or argument, though accepted and analyzed by the district court, is entirely irrelevant to the Sixth Circuit’s analysis. Sentinel argued successfully that the small-portion position of Meat Town had no basis in Michigan law. A statement is material if it is reasonably relevant to the insurer’s investigation of a claim. Under Michigan law, it matters not that the fraud be perpetrated in connection with only a portion of the loss claimed by an insured. To void the policy, the insured is not required to lie about all of his or her losses; rather a lie related to a single loss operates to void the policy.
Nothing in any case the Sixth Circuit identified in its research supported the contention that a knowing, intentional, and “clearly culpable” misrepresentation by the insured cannot satisfy a policy’s fraud provision unless the jury finds the amount sufficiently large.
The trial court found that Meat Town had not produced any evidence to prove that Kap’s had delivered the order and, therefore, that question was not in dispute. The same is true for the Quality Meats bills of lading: Meat Town produced no evidence to explain how or why its copies were missing the dates, thus failing to dispute the unmistakable inference that Meat Town had removed them.
If the only consequence of a fraudulent misrepresentation is to reduce the amount paid under the policy, there is every incentive for insureds to lie. If the lie is undetected the insured will have obtained excessive coverage for which he has not paid. If the lie is detected the insured will still obtain what he could have had if he had told the truth. In essence, the insured has everything to gain and nothing to lose by lying. The victims will be the honest insureds who tell the truth and whose premiums will rise over the long run to pay for the excessive insurance proceeds paid out as a result of undetected misrepresentations in fraudulent claims [New York Life Ins. Co. v. Johnson, 923 F.2d 279 (3d Cir. 01/15/1991)].
© 2021 – Barry Zalma
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
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