False Answers on Application Equals Fraud

It’s Not Nice to Lie to Your Insurer

The covenant of good faith and fair dealing applies equally to the insured as it does the insurer. When applying for insurance the covenant requires absolute honesty in the representations made in the application for insurance.

In Joseph Smith v. United States Liability Insurance Company, J-A08019-18, No. 1287 EDA 2017, Superior Court Of Pennsylvania (August 15, 2018) an insured intentionally misrepresented material facts when applying for insurance. His suit against his insurer was lost and Joseph Smith was found by the jury to have acquired the policy by fraud. As a result the trial court ordered the policy void from its inception. Smith appealed from the order, entered in the Court of Common Pleas of Philadelphia County.


On June 17, 2015, Smith filed a complaint against the United States Liability Insurance Company (hereinafter “USLI”). Smith alleged that USLI failed to honor and pay on a claim under USLI policy CP1570291 [(“the Policy”)]. The Policy provided coverage for a commercial property owned by Smith on Tacony Street in Philadelphia, PA [(“the Property”)]. Smith filed a claim with USLI after the Property was vandalized in 2013. Adjusters for each party differed significantly on their estimates of the damage. Smith’s adjuster projected the costs to be $444,325.71. USLI’s adjuster projected the cost[s] to be $102,302.45.

As part of the USLI claim investigation, Smith participated in two [e]xaminations [u]nder [o]ath (“EUO”). During the EUO[s], USLI became aware of inconsistencies between Smith’s testimony and his application for insurance coverage with USLI.

USLI answered Smith’s complaint and counterclaimed. The counterclaim alleged that Smith procured the Policy through fraudulent representation during the application process.

Trial ocurred and the jury returned a verdict in favor of USLI on both the claim and the counterclaim.

Pursuant to the jury’s verdict, the Court entered an [o]rder on November 15, 2016, declaring Smith’s policy void ab initio.


Smith first claims that the evidence was insufficient to support a finding that he procured the Policy by fraud. Specifically, Smith claims that, while he authorized an agent to sign the Policy application, he himself never saw it, and thus, evidence of his fraudulent intent is purely circumstantial.

The burden of proof on a civil fraud claim is one of clear and convincing evidence. Clear and convincing evidence is the highest burden in our civil law and requires that the fact-finder be able to come to clear conviction, without hesitancy, of the truth of the precise fact in issue. To prove a civil fraud claim, USLI was required to prove the following elements:

(1) a representation;

(2) which is material to the transaction at hand;

(3) made falsely, with knowledge of its falsity or recklessness as to whether it is true or false;

(4) with the intent of misleading another into relying on it;

(5) justifiable reliance on the misrepresentation; and

(6) the resulting injury was proximately caused by the reliance.

Statutory insurance fraud is established when an entity knowingly and with the intent to defraud any insurer or self-insured, presents or causes to be presented to any insurer or self-insured any statement forming a part of, or in support of, a claim that contains any false, incomplete or misleading information concerning any fact or thing material to the claim.

By its very nature, “fraud can rarely if ever be shown by direct proof.” Rohm & Haas Co. v. Cont’l Cas. Co., 781 A.2d 1172, 1178 (Pa. 2001). It must necessarily be largely inferred from the surrounding circumstances.


Here, the record is replete with evidence that Smith, through an agent, knowingly provided USLI false, misleading and incomplete information in his insurance application statement. First, Smith misrepresented his insurance losses in the three-year period prior to applying for the Policy and did not disclose a relevant foreclosure complaint filed against him within five years of applying for the Policy. Additionally, Smith did not disclose that (1) he had any tax judgments against him when he applied for the Policy, and (2) prior to 2011, he incurred a federal conviction in the Eastern District of Pennsylvania for filing false corporate tax returns.

Here, the evidence was sufficient to find Smith liable for civil fraud, and thus, the appellate court agreed with the trial court that it did not err in denying Smith’s motion for a judgment not withstanding the verdict (JNOV).

Evidence is relevant if it has any tendency to make a fact more or less probable than it would be without the evidence; and the fact is of consequence in determining the action. The court may exclude the relevant evidence if its probative value is outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.

Because the USLI insurance application required the identification of any active tax liens within five years preceding the application, evidence of such liens was more probative than prejudicial. The tax liens were relevant and probative of USLI’s fraud counterclaim. Therefore, the trial court did not abuse its discretion in admitting evidence of Smith’s prior tax liens.

Smith claims that it was improper for the trial court to admit evidence of his convictions for corporate tax underpayments because they are irrelevant and prejudicial. The appellate court cautioned that the trial court is not required to sanitize the trial to eliminate all unpleasant facts (e.g., criminal convictions) from the jury’s consideration where those facts are relevant to the issues at hand. Since the criminal convictions were relevant to the issue of fraud in the inception of the policy they were properly admitted.

Instantly, the trial court determined that because the USLI’s fraud claim rested on proving to the jury that Smith intentionally misrepresented his prior convictions on the Policy application, it was not an abuse of discretion for it to allow his prior convictions into evidence. The convictions were more probative than prejudicial.

Furthermore, USLI did not proffer an underwriter, Bethel, to testify as an expert witness. Bethel’s testimony was limited in scope to inquiry regarding USLI’s underwriting criteria at the time Smith obtained his commercial insurance policy. Generally, Bethel testified only that he was exceptionally familiar with USLI’s underwriting criteria and that USLI’s 2011 underwriting criteria, which he generally outlined, was used, then, to determine whether a potential client was eligible for commercial insurance coverage. Had USLI known the true facts it would not have agreed to insure Smith.


When a person intentionally presents false material information in an application for insurance to cause an insurer to agree to insure a person it would not otherwise insure, that person commits fraud. No insurance contract can exist if it is acquired as a result of fraud and that is why the trial court and appellate court concluded that the USLI policy was void from its inception.

© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

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 also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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