True Crime of Insurance Fraud Video Number 67

Policy Obtained by Fraud Requires Insured to Reimburse Insurer for Defense and Indemnity

See the full video at and at

Diverting from stories where I was personally involved this story comes from the U.S. Tenth Circuit Court of Appeal.

An insurer asserted claims against its insured for fraud and unjust enrichment. The Tenth Circuit was asked to determine if Colorado law permits an insurer to recover a settlement payment made on behalf of its insured for fraud.

The insured fraudulently obtained an insurance policy for its inpatient-drug-treatment center, and when the insured was sued by a former patient, the insurer assumed the insured’s defense, subject to a reservation of rights. Even after learning that the insured had fraudulently obtained the policy, the insurer settled with the former patient under pressure from the insured and threats of bad faith litigation. The insurer sought to recover from its insured the settlement payment.

In Evanston Insurance Company v. Aminokit Laboratories, Inc., No. 19-1065, D.C. No. 1:15-CV-02665-RM-NYW, United States Court of Appeals for The Tenth Circuit (decided March 18, 2020). Aminokit Laboratories, Inc., a Colorado Corporation, owned and operated an addiction-treatment center in Lone Tree, Colorado. On October 19, 2014, Aminokit procured an insurance policy for this treatment center from Evanston Insurance Company. The policy covered “outpatient drug/alcohol rehab services[.]” To secure the policy, Aminokit made several material misrepresentations and omissions.

For example, Aminokit failed to disclose that it maintained overnight beds for its patients, instead claiming that it operated its business solely between 10:00 a.m. and 5:00 p.m. Aminokit also falsely denied that any of its employees had ever been evaluated or treated for alcoholism or drug addiction and misrepresented the circumstances by which its CEO had lost her chiropractic license.

Brandon Lassley, a former Aminokit patient, sued Aminokit, Dr. Jonathan Lee (Aminokit’s Medical Director), and Tamea Rae Sisco (Aminokit’s CEO) in the District of Colorado. Evanston initially declined to provide a defense to Aminokit, concluding that the claims were outside the scope of coverage, because they alleged intentional and fraudulent conduct.

Lassley amended his complaint, adding state claims against Aminokit and Dr. Lee for negligence and breach of fiduciary duty. Evanston, which again concluded that no coverage was afforded for the Lassley suit but, because of the amendment, Evanston accepted Aminokit’s defense “subject to a full reservation of rights—including the right to withdraw the defense and the right to pursue reimbursement from Aminokit . . . while it s[ought] a declaration of its rights and duties under the policy.”

At a mediation Aminokit’s attorney, Jerad West, pressured Evanston to pay the full $260,000 settlement amount demanded by the plaintiff Lassley by threatening to bring a bad-faith claim against Evanston. In the communications that followed, Evanston made clear to West that if it settled the case, it would “seek reimbursement for the entire cost of defense and indemnity.” Faced with the deadline and threat of bad faith litigation Evanston agreed to fund the $260,000 settlement, while reserving the right to seek full reimbursement from Aminokit.

In a declaratory relief action filed before the payment Evanston had sought a declaration that no defense or indemnity coverage was owed pursuant to Aminokit’s insurance policy for the Lassley Suit and asserted unjust enrichment and sought recovery of Litigation Expenses and Settlement Payment in the Lassley Case from Aminokit, Dr. Lee, and Sisco, because the claims and damages were not covered or cannot be covered pursuant to Colorado law and public policy.

The final two claims alleged that Aminokit and Sisco had made fraudulent misrepresentations and concealments in Aminokit’s insurance-policy application and sought damages for this fraud, including the settlement payment.

Aminokit’s lawyers withdrew and Aminokit failed to gain new counsel. The insurer, in due course, obtained a default against Aminokit and the district court entered judgment that held Aminokit liable to reimburse Evanston for the settlement payment as damages for both fraud and unjust enrichment for $427,280.30 ($286,407.36 for the settlement payment, $63,304.07 for defense costs, and $77,568.87 for prejudgment interest).

When challenging a default judgment, a defendant admits to a complaint’s well-pleaded facts and forfeits his or her ability to contest those facts. But even in default, a defendant is not prohibited from challenging the legal sufficiency.

Under Colorado law, the defrauded party may recover such damages as are a natural and proximate consequence of the fraud. The damages must stem from the plaintiff’s reliance on the fraud. To claim damages from allegedly fraudulent statements, the plaintiff must establish detrimental reliance on the statements.

Evidence established that Evanston would not have issued the policy had Aminokit disclosed or communicated the true facts of its operation. Aminokit argued that because Evanston knew of the fraud when it settled, it could not have relied on the fraud when it agreed to fund the settlement. Generally, a defrauded party cannot recover damages for the period after the victim discovers the fraud, because he no longer has any basis for relying on the misrepresentations. But where the defrauded party discovers the fraud after substantial performance or where it would be economically unreasonable to terminate the relationship, he may affirm or continue the contract and then bring suit for his entire damages.

The Tenth Circuit concluded that it would have been “economically unreasonable” for Evanston to refuse to pay the settlement because doing so would have placed Evanston at risk of a bad-faith lawsuit and its insured of a verdict larger than the settlement amount if the case went to trial.

An insurer owes its insured a duty of good faith and fair dealing. Violation of this duty can result in a “bad faith” claim against the insurer, judged by a reasonableness standard. In this case, Evanston was rightfully concerned about a potential bad-faith suit by Aminokit given the threats made by its attorney after Evanston originally balked at paying the settlement. After learning of the fraud, Evanston was in no position to abandon its defense without risking substantial liability, or at least incurring substantial litigation costs from defending a bad-faith lawsuit. Given these considerations, the Tenth Circuit concluded that the settlement payment was a natural and proximate consequence of Aminokit’s fraud.

Colorado has adopted a general policy against insurance fraud. Allowing insureds to receive the benefit of insurance coverage, even when they have fraudulently obtained it, would foster—not deter—insurance fraud. It would signal to potential fraudsters that if they can convince their insurance company to settle via the threat of bad-faith litigation, they will benefit from their fraud. Such a result would not comport with Colorado public policy. Therefore, the Tenth Circuit concluded that Evanston can recover the settlement payment made on behalf of Aminokit as fraud damages.

Insurance fraud perpetrators should never be allowed to profit from the fraud. Since the policy was subject to rescission or voidance as a result of a blatant and admitted fraud, the insured had no right to defense or indemnity. However, since the fraud was not detected until after the insurer agreed to defend subject to a reservation of rights, it had no good way to escape the obligation without facing a bad faith lawsuit seeking both contract and tort damages. The insured’s threat forced the insurer to fund the settlement and seek reimbursement.

The Tenth Circuit enforced the right to reimbursement and, hopefully, the defendants have sufficient funds to pay the judgment. Since Aminokit did not respond to the insurer’s suit and allowed a default judgment to be rendered, the chances of collecting the judgment are slim.

If the insurer is unable to collect the judgment the fraud succeeded.


The tort of bad faith often prevents, because of the threat of punitive damages, insurers to allow themselves to be willing victims of fraud. In the case where the victim gets a judgment against the fraudsters is a deterrent, it is only useful if the fraudsters have any assets that the insurer can collect. Best to ignore the threat and take your chances if the insurer has sufficient evidence to establish it was defrauded.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

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 and

Subscribe to Zalma on Insurance at

Subscribe to Excellence in Claims Handling at

Write to Mr. Zalma at;;; daily articles are published at Go to the podcast Zalma On Insurance at; Follow Mr. Zalma on Twitter at; Go to Barry Zalma videos at at; Go to Barry Zalma on YouTube-; Go to the Insurance Claims Library –

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.
This entry was posted in Zalma on Insurance. Bookmark the permalink.

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.