13.3 Concealment and Fraud

• Library: Insurance Law in Virginia (Virginia CLE) (2020 Ed.)

13.3 CONCEALMENT AND FRAUD

13.301 In General. Insurance fraud has been and remains a serious problem, particularly with respect to fire insurance. Fraud in this context can take many forms. The classic case involves an insured who intentionally sets a fire in an effort to recover the proceeds of the policy. However, the antifraud provisions of the modern fire insurance policy also prohibit coverage for any loss that is tainted by fraud. For example, the "concealment and fraud" condition in most policies would void coverage not only for the intentional and fraudulent loss but also for the accidental loss where the insured conceals or misrepresents a material fact or circumstance.

It is important to note that the fraud and concealment clause is not an exclusion under the policy. By its very terms, it is a condition that, if violated, voids the policy. Compliance with the condition by refraining from the commission of a fraudulent act or by engaging in concealment is, therefore, something of a condition precedent to the existence of coverage. Consequently, the law applicable to exclusions (discussed in paragraph 13.103 above) differs substantially from the legal principles affecting the fraud and concealment condition. One of the chief differences is that the violation of the condition by the insured does not merely result in an exclusion of the subject loss; it results in the voiding of the entire policy.

13.302 Basis of the Defense.

A. Policy Language. Virtually every policy of fire insurance issued in the United States today contains a provision purporting to void the policy in the event of fraud or concealment on the part of the insured. The Virginia standard fire insurance policy, section 38.2-2105 of the Virginia Code, is no exception:

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

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of the insured therein, or in case of any fraud or false swearing by the insured relating thereto.

As discussed above, many if not most policies that are issued in Virginia today vary to some degree from the language of section 38.2-2105, and insurers have taken advantage of this freedom with respect to the fraud and concealment provision. ¹¹⁰ Common examples include Insurance Services Office (ISO) Form HO-300, ¹¹¹ which contains the following language:

Concealment or Fraud. The entire policy will be void if, whether before or after a loss, an insured has:

		1.	Intentionally concealed or misrepresented any material fact or circumstances;
2.	Engaged in fraudulent conduct; or
3.	Made false statements relating to this insurance.

B. Public Policy. Although most modern fire insurance policies contain some version of the "fraud and concealment" provision, there is substantial case law to support the proposition that, irrespective of the policy language, where an insured has acted fraudulently, recovery will be prohibited in order to uphold the basic public policy against permitting one to profit by his or her own intentional wrongful act. ¹¹² However, where the insurance policy does contain a provision addressing fraud on the part of the insured, the parties' contractual rights under the policy should be determined before public policy considerations are made. ¹¹³

Although no reported opinion in Virginia has specifically adopted this rule, there are strong indications that the Virginia Supreme Court would

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embrace this principle. In Eagle, Star & British Dominions Insurance Co. v. Heller, ¹¹⁴ the court held that an insured who is convicted of arson forfeits his or her right to bring an action against his or her insurer. "To permit a recovery under a policy of fire insurance by one who has been convicted of burning the property insured would be to disregard the contract, be illogical, would discredit the administration of justice, defy public policy and shock the most unenlightened conscience." ¹¹⁵

The Virginia Supreme Court has also assessed the public policy issue as it relates to life insurance. In Peoples Security Life Insurance Co. v. Arrington, ¹¹⁶ the court reaffirmed the Virginia common law doctrine that "no person shall be allowed to profit by his own wrong." In that case, a life insurance company took the position that the beneficiary had killed the insured and, therefore, could not recover under the policy. The court concluded that the fact the "slayer statute," section 64.2-2500 of the Virginia Code, defines "slayer" as someone who has either been convicted of murder or is unavailable for prosecution (and whom the insurer proves was responsible for the death of the insured) does not preclude the insurer from proving that someone available for prosecution but not charged was responsible and, therefore, ineligible for coverage.

This point could be important in cases where, for whatever reason, a fraud and concealment provision was omitted from the policy or the language of which was found to be invalid under Virginia law. Moreover, the public policy argument may have application where the perpetrator of the fraud is not technically an "insured" under the policy but stands to benefit from the payment of policy proceeds.

13.303 Affirmative Defense. Although as a general rule, it is incumbent upon the insured to prove compliance with conditions precedent to coverage under a policy of insurance, courts have universally recognized that an allegation that an insured has engaged in fraudulent conduct is an affirmative defense that must be specifically pled and proven by the insurer. Counsel representing an insurer should, therefore, be careful to designate the violation of the fraud and concealment provision as an affirmative defense in the initial pleading.

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Since the essential nature of any defense in this regard is fraud, counsel should also be careful to comply with the requirement that fraud be pled specifically. ¹¹⁷

13.304 Burden of Proof. Since this is an affirmative defense, the insurer has the obligation of proving the violation of the provision. Actions between an insured and insurer to determine the existence of coverage under a policy of insurance are clearly actions ex contractu in Virginia. ¹¹⁸ In essence, the carrier is attempting to prove that the insured breached the insurance contract. Therefore, it would stand to reason that the insured must prove its allegations by a preponderance of the evidence. ¹¹⁹

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However, Virginia appears to follow a minority of jurisdictions ¹²⁰ and requires that the insurer prove its defense by "clear and convincing" evidence. ¹²¹ The rationale is not clear. In Virginia Fire & Marine Insurance Co. v. Hogue, ¹²² the case that seems to be at the root of the holdings that clear and convincing evidence is required, the court reasoned that

[i]n a case, as in this, where the defense made to the action involves the charge of an unlawful act, fraud, or even bad faith, a preponderance of the evidence, as in any other civil case, is sufficient to sustain the charge, provided the proof is clear and strong enough to preponderate over the general and reasonable presumption that men are honest and do not ordinarily commit fraud, or act in bad faith—i.e., the preponderance rule continues to operate in such cases, the adverse presumption in favor of honesty and fair dealing merely requiring more evidence to constitute a preponderance than where this presumption does not exist . . . [w]e are of the opinion, therefore, that "clear and satisfactory proof," in cases involving fraud or false swearing, may be defined to be a preponderance of [the] evidence sufficient to overcome the presumption of innocence of moral turpitude or crime. . . . ¹²³

In other cases involving allegations of bad faith or even criminal conduct pertaining to an insurance policy, the court has required only a preponderance of the evidence. For example, in Peoples Security Life Insurance Co. v. Arrington, ¹²⁴ a life insurer defended an action by the beneficiary upon the contention that the beneficiary procured, participated in, or otherwise directed the felonious killing of the insured. The court ruled that the preponderance standard was the proper burden of proof.

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Unless and until the court makes a definitive statement in a future case, some doubt will remain. Nevertheless, the most recent reported opinion directly on point imposed the clear and convincing standard. ¹²⁵

13.305 Arson.

A. In General. Perhaps the most common scenario under the fraud and concealment provision involves the intentional burning of the property by the insured. Arson cases are heavily dependent upon particular facts, and not surprisingly, the primary legal issues revolve around whether the proof offered by the insurer is sufficient to warrant the conclusion that the insured violated the fraud and concealment provision.

B. Circumstantial Evidence. Because the deliberate burning of a building is invariably performed in secret, direct proof of the intentional act defense is rarely possible. Therefore, courts from other jurisdictions have universally recognized that proof of the defense may be, and virtually always is, circumstantial. ¹²⁶ Many of those courts also recognize that this necessity of circumstantial evidence has a liberalizing effect on the rules of evidence. ¹²⁷

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C. Elements of a Prima Facie Case. There has been a great deal of litigation on the issue of whether circumstantial evidence offered by an insurer is sufficient to warrant the conclusion that the insured was in fact responsible for the fire. In analyzing these cases, courts often attempt to define a sufficient case and classify the circumstantial evidence in terms of "elements."

A number of courts have recognized what could be termed the "classic" definition of a circumstantial case of incendiary insurance fraud. Those courts have...