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Threat of A Bad Faith Suit Adds Proof of Fraud

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

View entire video at https://youtu.be/680jE78g0L4

An insurer asserts 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. The insurer seeks to recover the settlement payment from its insured.

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 (March 18, 2020) the Tenth Circuit decided whether the insurer could recover from its insured for defense and indemnity payments made under a reservation of rights.


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. If not, even with the judgment the fraud succeeded.


© 2020 – 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 52 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.

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the Insurance Claims Library 

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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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