This economy has produced a substantial increase in fraudulent claims against insurance carriers.  If a carrier determines that an insured committed fraud (e.g. made material misrepresentations, fraudulent statements and/or concealed material facts regarding the facts and circumstances surrounding the loss), the claim is usually denied pursuant to the fraud and concealment provision contained in most, if not all, insurance policies.  Most insurance policies contain a variation of the following provision:

Fraud and Concealment

This entire policy shall be void, if whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein, or in case of any fraud or false swearing by the insured relating thereto.1

Unfortunately, where an insurance carrier denies a claim, there is a chance that the insured will commence a lawsuit for breach of contract, bad faith and/or violations of the state’s consumer protection act.  The insurance carrier can then rely upon the fraud and concealment provision as an affirmative and/or special defense, alleging that there is no coverage for the loss because of the insured’s fraudulent conduct.

In other cases, rather than denying the claim, an insurance carrier may, in good faith, advance partial payment to the insured for claims involving lost profits, business interruption, personal property, additional living expenses and/or rental vehicles while the investigation is ongoing.  What happens then if the insurance carrier’s investigation often reveals that the insured committed fraud?  If a lawsuit had been commenced by the insured due to a dispute over value of the claim, an insurance carrier can once again plead the policy’s fraud and concealment provision as an affirmative and/or special defense.  In the alternative, the insurance carrier can file a lawsuit or a counterclaim against the insured for breach of the fraud provision and seek to recover the amounts advanced during the investigation of the claim.  The counterclaim creates a risk that the insured will face a judgment for the amount of any advanced payment issued by the insurance carrier plus interest.  Some states may even authorize the recovery of attorneys’ fees and/or costs of litigation.  In addition, if the facts reveal that an insured breached the covenant of good faith and fair dealing which is inherent in all contracts of insurance, the insurance carrier may be able to maintain a cause of action for common law bad faith.

For example, in Parasco v. Pacific Indemnity Co., 920 F. Supp. 647 (E.D.Pa. 1996), the plaintiff-insured made a claim for insurance proceeds under a homeowners insurance policy in connection with a fire loss.  Id. at 649.  During the investigation of the claim, the defendant-insurance carrier issued payment in the amount of $167,011.54 to the mortgagee on the policy, as well as a $5,000 advance payment to the insured.  Id. at 657.  Following its investigation, the insurance carrier concluded that the insured set the fire, and the insurance carrier refused to pay the remainder of the claim.  Id. at 649.  The insured then commenced a lawsuit for breach of contract, bad faith and violation of Pennsylvania’s Consumer Protection Law.  Id.  In response, the insurance carrier filed a counterclaim seeking to recover all payments made under the policy.  Id.  The Court noted that the insurer was entitled to recover the money it paid to the insured under the policy “if it is later determined that the insured violated the fraud and concealment provision of the insurance contract.”  Id. at 657.  As a result, the Court awarded summary judgment to the insurance carrier in the amount of $172,011.54 representing the insurance carrier’s payments to the insured and the mortgagee under the policy.

Similarly, in Parovich v. Glen Falls Ins. Co., 401 F.2d 145 (9th Cir. 1968), the insurance carrier paid $10,268.35 to compensate the insured for a theft. Id. at 146.  Thereafter, the insurance carrier discovered that the insured made numerous material misrepresentations regarding the value of the stolen items.  Id.  Because the misrepresentations voided the contract of insurance, the insurance carrier commenced a lawsuit against the insured.  Id.  The Court held that an insurance company is entitled to recover money paid in reasonable reliance on its insured’s fraudulent claim.  Id.  Because the policy was void if the insured made misrepresentations of material facts, the insurance carrier was entitled to recover the full payment made under the policy.  Id.

In Northwestern National Ins. Co. v. Barnhart, 713 P.2d 1360, 1361 (Colo. App. 1985), the insurance carrier brought an action against the insured to recover the amount paid to the insured after his automobile repair shop and gas station were burglarized.  The insured submitted a proof of loss in which the carrier paid the amount of the claimed loss.  Id.  The insured later admitted that he “padded” his insurance claim.  Id.  As a result, the court granted a directed verdict and held that the insured violated the fraud clause.  Id.  In so holding, the court cited to American Divers and Manufacturing Corp. v. Boltz, 482 F.2d 795 (10th Cir. 1973), in which the court held “[t]he penalty for attempted fraud in an insurance case where a fraud clause exists . . . is not simply forfeiture of the excess or inflated recovery amount but the voiding of all actual loss benefits as well.”  Id. at 1361-1362.

In Frontier Exploration, Inc. v. American National Fire Insurance Company, 849 P.2d 887, 889 (Colo. App. 1992), the plaintiff-insured sustained a loss to seismic equipment damaged in a motor vehicle accident.  The defendant-insurance carrier and the insured agreed that the total value of the claim was $175,050.  Id.  However, the insured replaced the truck and seismic unit at a cost less than the repair estimates provided by the defendant carrier.  Id.  The insurance carrier paid $117,050 to the insured, but refused to pay the remaining balance of $58,000.  Id.  Ultimately, the jury found that the insured falsely represented or concealed material facts which induced the insurance carrier to pay more than the actual loss incurred.  Id. at 893.  As a result, the Court held that the insurance carrier was released from any obligation to the insured and the jury properly awarded damages to the insurance carrier for the entire amount paid to the insured.  Id.

As these cases demonstrate, when an insurance carrier has issued advanced payments during the investigation of a claim, and later concludes that the insured committed fraud, the insurance carrier can seek to recover the amount paid by filing a lawsuit or a counterclaim against the insured.  Whether to file suit, as opposed to simply asserting an affirmative or special defense, must be determined on a case-by-case basis.

1  See generally Conn. Gen. Stat. Sec. 38s-307 Standard Form of a Fire Insurance Policy.