Fraudulent Claim Voids Coverage

When Insured Admits Tax and Bankruptcy Fraud They Should Be Prosecuted

Making false reports to the IRS and to Bankruptcy Courts about the value of a business or its property to avoid taxes and paying legitimate debts seems to be a popular sport in the United States. The problem, of course, is that the lies bite the person making an insurance claim based upon the truth rather than the claim made.

In Ahmadpoor v. Truck Insurance Exchange, Court of Appeal, California, Not Reported in Cal.Rptr.3d ___, 2017 WL 1230462 (4/4/2017) an insurer rejected the claim because of the evidence of fraud when making a claim to Truck Insurance Exchange.

The Appeal

This appeal arises from the trial court’s order granting a defense summary judgment motion in an insurance coverage action. Jahangir Ahmadpoor (Father), as the legal owner of an automobile repair business named European Coach (the business or Plaintiff), sued its commercial property insurance carrier, Farmers Insurance Company (Truck), on breach of contract theories.

After investigation of a burglary claim, Truck denied the claim on the basis that the business’s representatives made several types of material misrepresentations during the processing of the claim, in breach of the policy terms. Truck’s summary judgment motion contended this conduct voided the terms of the policy.

Plaintiff claims the trial court misapplied the analysis of Cummings v. Fire Ins. Exchange (1988) 202 Cal.App.3d 1407 (Cummings ), which held that an insured’s misrepresentation with respect to a claim is material if the “misrepresentation concerns a subject reasonably relevant to the insurer’s investigation, and if a reasonable insurer would attach importance to the fact misrepresented.”  An insured’s intent to defraud the insurer is necessarily implied from the insured’s willfully false material misrepresentations made during the claims process. Plaintiff argues the trial court was unjustified in finding that certain misrepresentations relied on by Truck to deny the claim were properly relevant or material to the insurer’s investigation, or to the ultimate disposition of the claim.

Plaintiff admitted to Truck, through Son, that it had underreported its income and cash flow to the Internal Revenue Service (IRS) when paying its taxes for several years before the burglary occurred. Father did not know anything about the business’s taxes. In any event, since those representations about the business’s income were made to a third party, not Truck, and also predated the claim, Plaintiff argues triable issues of fact must remain about liability.

In pursuing its claims for stolen property, Plaintiff supplied Truck with information that some of the stolen tools and equipment had been obtained by the business from other similar companies previously owned by Son, the business’s operator. Although Son had declared a personal bankruptcy in 2008 and made filings and disclosures about some of these other companies he previously operated, he never disclosed his ownership of such tools in that bankruptcy action.

The Policy

In its clause entitled “Concealment, Misrepresentation or Fraud,” the policy provides that it becomes “void in any case of fraud by you as it relates to this policy at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact concerning: 1. This policy; 2. The Covered Property; 3. Your interest in the Covered Property; or 4. A claim under this policy.”

The Claim Presentation

Plaintiff sent Truck a 160-page proof of loss document that included numerous photographs of tools taken by Son, handwritten lists of equipment with price estimates, and $68,814.36 in quotations from suppliers for tools similar to those the business was claiming were stolen.

Plaintiff provided a supplemental proof of loss that included monthly estimates of the business interruption losses, from April 9 to October 9, totaling $257,825.

The Claim Denial

Truck denied Plaintiff’s claim in writing on October 29, 2012, giving as reasons that the business and its principals had failed to fully cooperate with their duties under the policy, by misrepresenting and concealing material information during the presentation of the claim. Because of the misrepresentations and concealments of material information in the presentation of the claim, Truck declared the policy void due to breaches of the policy conditions.

Discussion

A fraud and concealment clause in an insurance policy generally voids the policy upon the insured’s attempts to deceive the insurer. Deceit may involve false representations to obtain insurance coverage or to obtain benefits after a claimed loss. Material representations are those relating to the insurer’s investigation to determine its obligations under the policy.

Materiality is a mixed question of law and fact that can be decided as a matter of law if reasonable minds could not disagree on the materiality of the misrepresentations.  In Cummings, the trial court found it to be beyond question that the insured’s false statements, about the cause of a loss, were made with knowledge of falsity and an intent of defrauding the insurer.  The intent to defraud the insurer is necessarily implied when the misrepresentation is material and the insured willfully makes it with knowledge of its falsity.

Son admitted in his examination under oath that the business’s 2009 and 2010 tax forms provided to Truck did not accurately reflect the business’s income. According to Son’s wife Galynne Ahmadpoor, when assisting with the business bookkeeping, she would normally take the invoices and expenses and combine them into summaries and turn them over to the accountant. For tax purposes, she gave the accountant all the sales receipts, unless the customer was nontaxable or it was a cash deal.

In explanation of its position on appeal, Plaintiff argues that its misrepresentations to the IRS about cash sales in 2009 and 2010 could not have materially influenced Truck, because they were made to a third party and therefore were not directly designed to defraud the insurer.  Even though the business’s representatives admitted to misleading the IRS, they also admitted to misleading Truck on the amounts of losses being claimed, a material issue in the investigation. Their motive for doing so is irrelevant in this context.

In its order, the trial court concluded “The tax records are falsified because they do not accurately reflect the income of the business,” and “[s]ince the tax information provided by Plaintiff was submitted in support of the claim for lost profits and was admittedly inaccurate, the information provided by Plaintiff constitutes a material misrepresentation which was relevant to the investigation and constitutes a valid basis for denial of coverage.”

Plaintiff’s deceptive representations were material in nature and on this record, the court properly determined that Plaintiff’s misrepresentations about the level of the business’s income during relevant time periods were, as a matter of law, material, because they were reasonably related to the claims being made for business interruption amounts. There is sufficient evidence in the record to support the finding that a reasonable insurer such as Truck would attach significance to the false statements made by Plaintiff regarding this aspect of the claim.

In the order, the court noted that in addition to its incomplete tax records, Plaintiff had supplied Truck with contradictory information about its ownership interest in different pieces of the stolen property. The trial court was correct in determining that Plaintiff had failed to comply with its obligations under the policy of supplying adequate documentation of the claimed losses, thus breaching its duties and justifying a decision to declare the policy void. The evidence supports the conclusion that the misrepresentations made in pursuing Plaintiff’s claims for lost property were material.

Plaintiff’s false statements about the origin of the tools and its ownership interest in them, made in the current proceedings as contrasted to the earlier bankruptcy matter, concerned a subject that was “reasonably related” to Truck’s investigation of Plaintiff’s claim. The motive was irrelevant.

ZALMA OPINION

This is a case that should never have been brought to a court. The insureds claimed that their insurer had no right to consider when evaluating their claim that they had provided falsely sworn statements to the IRS and a Bankruptcy court. They asked the court to ignore their criminal conduct and make their insurer pay for property and business earnings they really earned rather than what they submitted to the IRS under oath. The court should have referred the case to the U.S. Attorney for both tax and bankruptcy fraud.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness 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 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 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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