5.3 Misrepresentations in the Claim Process

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

5.3 MISREPRESENTATIONS IN THE CLAIM PROCESS

5.301 Rationale Behind the Rule in the Claim Process. The rationale behind Virginia's rule on material misrepresentation, fraud, and false swearing by the insured in the context of the claim process is summarized as follows:

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A policy of insurance is a contract, in the making of which, peculiar and great confidence must, of necessity, be reposed by the insurer in the insured. Good faith and fair dealing are especially required by the former of the latter. The former must mainly depend on the oath of the latter, and the account he may render to show the fact of the loss of the property insured, and the amount of the damage incurred by him, for which he claims indemnity under the policy. Where there is no good reason to suspect fraud or false swearing on the part of the insured, in making out his preliminary proof of loss, the insurer generally requires no further evidence to sustain the claim of the insured than his own oath and account. ²²⁷

It is reasonable to believe that an insured provides his or her insurer with "an accurate claim of loss" that does not "exaggerate her claim of loss and risk the chance of her insurance carrier denying her claim altogether." ²²⁸ "[N]othing is better settled than that the assured must observe, in dealing with the insurer, the utmost good faith, without which there can be no recovery." ²²⁹

5.302 False Swearing Provisions.

A. In General. Insurance policies, particularly fire insurance policies, contain standard false swearing provisions. ²³⁰ Those provisions typically provide that the entire policy will become void and the insurer is not liable if "any false swearing or fraud, or attempt at fraud, is made by the [insured], before or after the loss or damage, in support of his claim for loss, or in the proofs of loss hereinafter mentioned, or otherwise in connection with this policy or any claim under it." ²³¹

An insured violates the policy's false swearing provision if he or she makes a false statement concerning some fact material to the policy or a

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claim under the policy. ²³² Violation of the false swearing provision results in a forfeiture of all rights to recover under the policy. ²³³ Likewise, an insurer can avoid its contractual obligations under the policy if the insured commits fraud. ²³⁴

These false swearing policy provisions are similar to section 38.2-2105(A) of the Virginia Code, which is mandatory ²³⁵ and read into every fire insurance policy issued or delivered in Virginia. ²³⁶ Section 38.2-2105(A), provides that

[t]his entire policy shall be void, if whether before or after a loss, the insured 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.

Policy provisions that deviate from the language prescribed by section 38.2-2105 are allowed, provided that they are at least as favorable as the statutory provisions and are approved by the State Corporation Commission. ²³⁷

The mere fact that a policy provides coverage for perils other than fire and provides for liability for the insurer on a basis other than fair market value (such as replacement cost coverage) does not mean that the insurer is not subject to the standard provisions required for fire insurance policies pursuant to chapter 21 of title 38.2 of the Virginia Code, including the concealment

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and fraud provisions of section 38.2-2105(A). ²³⁸ Denial of coverage under a fire insurance policy to an innocent coinsured for the fraudulent acts of another coinsured under the policy's fraud provision does not violate section 38.2-2105 or the public policy underlying that statute. ²³⁹ A new 2019 statute prohibits insurers who have issued a new or renewal fire insurance policy on commercial Virginia property from changing the amount of coverage unless the first named insured has consented in writing to the change. ²⁴⁰

B. Proof of Loss. When the insurance policy requires the insured to file a claim and submit proof of loss, that requirement is a condition precedent to coverage, and performance or waiver of this proof of loss requirement must be shown by the insured in order for there to be a recovery under the policy. ²⁴¹ "[T]he purpose of the proof of loss is to enable the insurer to investigate the insured's losses, to estimate its rights and liabilities, and to prevent assertion of fraudulent or unjust claims." ²⁴²

"The burden of proving compliance with the necessary requirements of an insurance policy as to proof of loss, or the waiver of such compliance on the part of the company, is on the insured; and if he fails to establish the same by a preponderance of the evidence, his action must fail." ²⁴³ The insured's burden here is to show that the information that he or she has provided to the insurer constitutes reasonable and substantial compliance with the requirement that a proof of loss be submitted to the insurer. ²⁴⁴

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However, merely providing the insurer with only the fact of the loss does not constitute the requisite reasonable and substantial compliance. ²⁴⁵

While the insured's providing the insurer with his or her estimate of the loss undoubtedly will assist the insurer in settlement of the claim, the insurer's ultimate liability is not determined by the dollar amount the insured places on his or her proof of loss form but instead "determined by the loss itself, the policy's coverage restrictions, and the limit of the policy." ²⁴⁶ Even if the proof of loss form received from the insured fails to specify the dollar amount of his or her claim, the insurer still has the ability to conduct its own investigation to determine the amount of its liability. ²⁴⁷

C. Burden and Degree of Proof. ²⁴⁸ While the insured has the burden of proving his or her compliance with the policy's conditions precedent such as the proof of loss, the insurer has the burden of proving fraud and false swearing by the insured. ²⁴⁹ Although the degree of proof required to prove fraud in any context is clear and convincing evidence, ²⁵⁰ the most compelling arguments support the more common preponderance of the evidence standard as the degree of proof by which an insurer must prove anything other than fraud, such as false swearing, willful concealment, or misrepresentation in a claim. At least one court has ruled that the insurer need only prove material misrepresentations in the claims process by a preponderance of the evidence. ²⁵¹

D. Knowledge and Intent. In order for a misstatement in the proof of loss to result in forfeiture of the policy, it must be willfully false. ²⁵² A

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mere innocent misrepresentation will not amount to fraud or false swearing. ²⁵³

However, where the insured swears to a loss in excess of the actual loss and these sworn statements are upon a material matter, it will be inferred that the sworn statements were known by the insured to be false, and the law will presume that they were made with intent to deceive. ²⁵⁴ In other words, if the insured makes an intentional and willful false statement as to a material matter, the requisite intent to deceive and defraud is implied. ²⁵⁵ "[W]hen an insured has been shown to have submitted false information to an insurer, he can only rescind if he presents explanations which show that his actions were not in fact fraudulent." ²⁵⁶

E. Prejudice. Proof of prejudice to the insurer is not required if the insured has committed a material misrepresentation in the claims process. ²⁵⁷

F. Materiality. The misrepresentation must concern a fact that is material to the claim. ²⁵⁸ While there are many cases applying Virginia law dealing with materiality in the context of the insurance application process, ²⁵⁹ there are only a few cases addressing the issue in the context of a claim.

In the absence of any published decisions from the Supreme Court of Virginia, federal courts applying Virginia law have used the "reasonable influence" test or some variation thereof in determining whether a misrepresentation during the claims process was material. In Winston v. State

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Farm Fire & Casualty Co., ²⁶⁰ the Fourth Circuit cited the "reasonable influence" test applied in the context of an insurance application in Time Insurance Co. v. Bishop ²⁶¹ and then ruled that "[s]imilarly, material misrepresentations during loss investigations would reasonably influence the insurance company not to pay a submitted claim." ²⁶²

In Chase v. CNA Insurance Co., ²⁶³ the court adopted the framework for analyzing the materiality of a misrepresentation of a claim enunciated by the United States Court of Appeals for the Second Circuit in Fine v. Bellefonte Underwriters Insurance Co....