Monday, July 27, 2009

Auto Premium Rate Evasion -- Insidious Brand of Outright Fraud Results in Denial of No-Fault Benefits

AA Acupuncture Serv., P.C. a/a/o Dupont-Desir Ivrose v. Safeco Ins. Co. of Am.
(App. Term, 1st Dept., decided 7/22/2009)

If a woman living in Brooklyn falsely gives a Connecticut residence and garaging address when applying for auto insurance in order to obtain a lower premium, may her insurer deny no-fault benefits to her and her assignees if she's injured in a motor vehicle accident?

In the words of concurring the Appellate Term, First Department's Presiding Justice McKeon, "a question asked is often as powerful as a question answered."  And the answer, in the opinion of the Appellate Term, First Department, is yes, no-fault benefits may be denied to the policy applicant and her assignees. 

In this medical provider no-fault recovery action with three assignees, Safeco moved for summary judgment to dismiss the complaint based on the assignor's misrepresentation of her residence address in applying for her Safeco auto policy.  Safeco's motion papers showed that when the insured-assignor applied for her auto insurance, she listed a Connecticut address as her place of residence and the location where the insured vehicle would be garaged; that two months later, the insured notified Safeco that she had changed her address, listing a second Connecticut address as her place of residence; that when the insured renewed her policy, she again listed a Connecticut address as her place of residence; that the Connecticut address listed by the insured as her residence was a commercial store located in a strip mall; and that the insured, at all relevant time, actually resided in Brooklyn, New York.

New York Civil denied Safeco's motion for summary judgment and Safeco appealed.  In an opinion by Justice Sherry Klein Heitler, the Appellate Term, First Department, REVERSED and granted summary judgment to Safeco, holding: 
Although Vehicle and Traffic Law § 313 does not permit an insurer to cancel an automobile insurance policy retroactively on the grounds of fraud or misrepresentation (see Matter of Liberty Mut. Ins. Co. v McClellan, 127 AD2d 767, 769 [1987]), an insurer may assert misrepresentation or fraud as an affirmative defense in an action by an insured to recover benefits under the policy (see Matter of Insurance Co. of N. Am. v Kaplun, 274 AD2d 293, 298-299 [2000]; Matter of Liberty Mut. Ins. Co. v McClellan, 127 AD2d at 770). [In addition to the evidence Safeco submitted regarding the insured's misrepresentations regarding her residence], [d]efendant further demonstrated that the annual insurance premium of $1,236 paid by the insured was based on her representation that she resided in Connecticut, and that the annual premium for the same policy based on her Brooklyn address would have been $4,807. This evidence was sufficient to establish prima facie that the insured intentionally misrepresented her address in order to obtain insurance at reduced premiums, and that the misrepresentation was material, since defendant would not have issued the policy under the same terms had it known that the insured resided in Brooklyn (see Matter of Insurance Co. of N. Am. v Kaplun, 274 AD2d at 299-230). Contrary to the motion court's determination, defendant was not required to show that the insurance policy had actually been cancelled in order to establish a prima facie showing of entitlement to summary judgment based on its fraud/misrepresentation defense.

In opposition, plaintiffs, as assignees "stand[ing] in the shoes" of their assignor (see Long Is. Radiology v Allstate Ins. Co., 36 AD3d 763, 765 [2007]), failed to submit any competent evidence sufficient to defeat summary judgment.
Presiding Justice Douglas McKeon wrote a passionate concurring opinion that deserves republication in full here:
I wholeheartedly agree with Justice Heitler that the brazen act of a Brooklyn resident registering an automobile from a shopping mall in Connecticut for the sole purpose of obtaining a cheaper insurance premium is outright fraud, but write separately to express my concern that the practice of New Yorkers fraudulently registering motor vehicles in foreign states seems to be burgeoning, likely costing our State government, insurance companies and honest consumers significant sums in lost revenue and increased premiums and casting a pall over the integrity of automobile registry systems in New York and other states.

Some might argue that more persons travel greater distances to work in New York City and that the abundance of automobiles bearing Connecticut or Pennsylvania license plates can be explained as an increase in long distance commuters. But the trend is not limited to nearby states. Cars with license plates from states all along the east coast and sometimes beyond are a frequent sight in the metropolitan area. Granted, some might be tourists, but there is a justifiable and growing level of suspicion that many of these vehicles registered in other states are owned and operated by New Yorkers, connected to the state whose name appears on their license plates only through a dubious address and a desire to pay less for insurance coverage.

For sure, there are those, in these dire economic times, who might ask, "What's the big deal?" In the minds of many, insurance companies charge too much for too little. Perhaps there are those who simply cannot afford to insure a vehicle in New York, yet need a car for work or personal necessity. True, theirs is a choice not motivated by ill gain, but by economic considerations. Whatever the reason, the reality remains that the spiraling cost of automobile insurance premiums in New York is directly linked to ever increasing instances of insurance fraud, a fact recognized by this state's highest court (see Matter of Medical Soc'y of the State of NY v Serio,100 NY2d 854, 861 [2003]). Thus, the New Yorker deceitfully claiming to be a Pennsylvanian for purposes of registering a car might pay less, but the rest of us pay more. Soon, New Yorkers will pay higher fees to register their vehicles. Those of our neighbors who do so elsewhere will escape that cost and our State will be shortchanged much-needed revenue.

However, the sad truth is that this insidious brand of fraud produces consequences beyond higher fees and insurance premiums. What about the innocent family involved in an accident with one of these out-of-state registrants? Are they assured of a financially responsible source of compensation for physical injury or the death of a loved one, or must they deal with a "fly by night" local insurer, little regulated and beyond the jurisdictional reach of New York courts? What about the disclaimer jurisprudence in these foreign states? Will the innocent victim of the tortious wrong of a fraudulent out-of-state registrant still have the benefit of insurance once the fraud is discovered? The questions are myriad and the potential for harm to New Yorkers is real and significant.

Ready answers will not be found in courthouse writings, this included. That should not be our purpose, for regulatory and legislative matters are best left to others. Fortunately, there are gifted professionals in the remaining branches of government possessed of the experience and wisdom to address these issues. On the other hand, courts are not required to turn a blind eye to the gathering legal clouds about them. Indeed, this ordinary lawsuit involving the questionable registration of a car in a foreign state should serve to remind us that we "[w]rite not only for this case and this day alone" (Carroll v Lanza, 349 US 408, 413 [1955]), but for the future, ever mindful that a question asked is often as powerful as a question answered. 
Strong but accurate words that should put to rest any doubt that rate evasion is insurance fraud which can result in the loss of first-party coverage rights of those complicit in it.  The takeaway points from this decision are:
  • although New York personal auto insurers generally may not retroactively cancel or rescind an auto policy for application misrepresentation/fraud, they may deny first-party coverage benefits, including no-fault coverage, to those complicit in the application misrepresentation/fraud;
  • to sustain a denial of first-party coverage, including no-fault benefits, for application misrepresentation/fraud, the auto insurer need not demonstrate that it would not have issued the policy at all, but only that it would not have issued the particular policy at issue under the same terms; a significant difference in premium is such proof; 
  • proof that the policy was actually canceled is, under the ruling of this decision, not required to establish a prima facie showing of entitlement to summary judgment based on a policy application fraud/misrepresentation defense.
Over at The Rojak Report, Larry Rojak reminds that in 2006, his office obtained a similar result from the Appellate Term, Second Department, in A.B. Med. Servs. PLLC a/a/o Yevgenya Ioffe v Commercial Mut. Ins. Co., 2006 NY Slip Op 26118, 12 Misc 3d 8 (App. Term, 2d Dept., 2006).  Although evidence of application misrepresentation/fraud was used to deny summary judgment to the plaintiff medical provider-assignees in that case rather than grant summary judgment to the no-fault insurer, the court's reasoning in that case is similarly instructive:
In opposition to plaintiffs' motion, defendant also asserted the defense that plaintiffs' assignor was involved in a fraudulent scheme to procure the subject insurance policy in order to pay reduced insurance premiums, and that, consequently, plaintiffs providers were not eligible to recover assigned no-fault benefits. Vehicle and Traffic Law § 313 provides in pertinent part: "(1) (a) No contract of insurance . . . shall be terminated by cancellation by the insurer until . . . after mailing to the named insured . . . a notice of termination by regular mail . . . ." Vehicle and Traffic Law § 313 "supplants an insurance carrier's common-law right to cancel a contract of insurance retroactively on the grounds of fraud or misrepresentation, and mandates that the cancellation of a contract pursuant to its provisions may only be effected prospectively" (Matter of Liberty Mut. Ins. Co. v McClellan, 127 AD2d 767, 769 [1987]; see also Matter of Cruz v New Millennium Constr. & Restoration Corp., 17 AD3d 19 [2005]; Matter of Metlife Auto & Home v Agudelo, 8 AD3d 571 [2004]; Matter of Integon Ins. Co. v Goldson, 300 AD2d 396 [2002]; Matter of Insurance Co. of N. Am. v Kaplun, 274 AD2d 293 [2000]). The statute "places the burden on the insurer to discover any fraud before issuing the policy, or as soon as possible thereafter, and protects innocent third parties who may be injured due to the insured's negligence" (Matter of Insurance Co. of N. Am. v Kaplun, 274 AD2d at 298). There has been no allegation that defendant effectively cancelled the subject insurance policy pursuant to section 313.

However, case law has made clear that whereas the policy may not be retroactively cancelled, thereby protecting "innocent third parties who may be injured due to the insured's negligence" (id. at 298), in "an action to recover benefits under a policy, the insurance carrier may assert as an affirmative defense that the insured's misrepresentations and/or fraud in obtaining the policy precludes any recovery by the insured" (id. at 298-299). The issue presented here is whether, assuming the insurance policy was fraudulently procured, plaintiff health care provider is an "innocent" third party which case law protects and, thus, as assignee of the insured who allegedly perpetrated the fraud, acquires greater rights than had by the assignor. We hold that only innocent third parties who are injured are protected (id. at 298), and not a health care provider who deals with the assignor-insured at its peril in accepting an assignment of the insured's no-fault benefits. Contrary to plaintiffs' contention, the defense of fraudulent procurement of an insurance policy, which is nonwaivable and hence exempt from the 30-day preclusion rule, may be asserted as against plaintiffs providers in this action seeking to recover assigned no-fault benefits (cf. Matter of Metro Med. Diagnostics v Eagle Ins. Co., 293 AD2d 751, 751-752 [2002]). Upon our review of the record, we find that defendant's submissions in support of its defense were sufficient to raise issues of fact as to whether the insurance policy was fraudulently procured. Therefore, plaintiffs' motion for partial summary judgment was properly denied. To the extent that Ocean Diagnostic Imaging P.C. v Commerce Ins. Co. (7 Misc 3d 133[A], 2005 NY Slip Op 50642[U] [App Term, 2d & 11th Jud Dists 2005]) may be inconsistent with the determination herein, the dicta set forth therein should not be followed (see Ocean Diagnostic Imaging, P.C. v Nationwide Mut. Ins. Co., 11 Misc 3d 135[A], 2006 NY Slip Op 50477[U] [2006]).


Zuppa said...

Great points made by a very good judge. But he misses the point terribly.

What of the claimant/passenger that has no idea about the insured/owner's rate evasion tactic. This poor soul -- who by significant percentage may be a hardworking person without health insurance; this poor soul receives no coverage for her injuries. No medical treatment or major debt.

Perhaps the loss of the house because of medical debt -- prior to the mortgage meltdown this was the number on cause of foreclosures.

What if this poor soul claimant is a child or an elderly person not yet eligible for medicare which only pays 80%.

And the insurance company collected premiums but pays out nothing.

Why not enunciate a rule wherein the insured receives no benefits. Why did the Court decide to punish the innocent to increase insurance company profits cloaked in a half story/half baked public policy argument.

The answer was that simple Judge. So simple I thought of it. So good that Solomon thought of it centuries ago. Split the baby.

"He will layeth them low; them that dwell on the high lofty city."

Roy A. Mura said...

Zuppa -- I think you missed the point, not Justices Heitler and McKeon. The one who was left without no-fault coverage benefits in this case was the insured-applicant-assignor, not an "innocent" passenger. No need to cleave any infants.

And rate evasion is not a "half story" or "half baked public policy argument". Just drive around the neighborhoods in the boroughs and take a look at the license plates.

Or take a look at this.

Roy A. Mura said...

Ray -- Although I've not posted in a few weeks, the response comment you claim to have submitted -- and instead posted to your imaginatively illustrated website -- never made it to my blog. But claiming that I squelched it makes for better persecutory ideation, I suppose.

You may have read the decision in full, but your analysis still falls short. The holding does not encompass "innocent" passengers and it would be imperfect for anyone or any company to read it that way. The assignor was the policy applicant and vehicle registrant, and, in quoting Kaplun, the Appellate Term made it clear that "an insurer may assert misrepresentation or fraud as an affirmative defense in an action by an insured to recover benefits under the policy". When speaking no-fault, you know that EIPs are not referred to an "insureds" whether upstate or downstate, right?

Read the decision again, Harry.