Leave to Amend Answer to Assert Fraudulent Proof of Loss Defense Granted

HOMEOWNERS – PROPERTY – LEAVE TO AMEND ANSWER – FRAUDULENT CLAIM EXAGGERATION
Forsythe v. Otsego Mut. Fire Ins. Co.
(1st Dept., decided 3/23/2010)

Two years after answering plaintiffs' complaint, defendant Otsego Mutual Fire Insurance Company moved for leave to amend its answer to assert a fraud affirmative defense and for summary judgment based on that defense.  Otsego Mutual contended that plaintiffs' proof of loss was fraudulently overstated.  New York Supreme (Jane S. Solomon, JSC) denied Otsego's motion in all respects and Otsego Mutual appealed.

In MODIFYING the lower court's order to grant leave to Otsego Mutual to amend its answer but sustaining the lower court's denial of summary judgment, the Appellate Division, First Department held:

Although defendant did not move for leave to amend until approximately two years after it answered the complaint, plaintiffs do not show, or even allege, prejudice or surprise as a result of the delay (see CPLR 3025[b]; Arellano v HSBC Bank USA, 67 AD3d 554 [2009]).

However, defendant failed to demonstrate as a matter of law that plaintiffs' proof of loss was fraudulent (see Saks & Co. v Continental Ins. Co., 23 NY2d 161, 164-165 [1968]). Plaintiffs' explanation for their overvaluation of the loss, that the house was uninhabitable and all their furniture destroyed, raises an issue of fact whether they intended to defraud defendant (see Latha Rest. Corp. v Tower Ins. Co., 38 AD3d 321 [2007], lv denied 9 NY3d 803 [2007], cert denied 552 US 1010 [2007]; Kyong Nam Chang v General Acc. Ins. Co. of Am., 193 AD2d 521 [1993]). 

I've posted before that obtaining summary judgment on a fraudulent claim exaggeration defense is difficult.   Intent to defraud and materiality are issues that often involve questions of fact, requiring a trial.  The Saks & Co. v. Continental Ins. Co. case, cited by the First Department, involved an appeal and reversal of a bench trial verdict, not a pre-trial motion for summary judgment.  Still, the opening section of the New York Court of Appeals' 1968 decision in the Saks case is worth repeating: 

There is an old saying that "clothes make the man". This aphorism must have been coined (to jumble a metaphor) with the plaintiff, here, one Khaibar Khan Goodarzian, in mind.*fn1 Mr. Goodarzian's life-style can only be characterized as extravagant and flamboyant. His manner of living is typified by his wardrobe. The different types of clothing and the numbers of each type which Mr. Goodarzian claimed to have possessed is simply staggering. 

To accommodate his inventory of clothing, Goodarzian converted a bedroom of his Fifth Avenue apartment into a wardrobe room in which closets lined all four walls; a bathroom was made into a shoe closet.  Goodarzian's extravagance for clothing is amply documented in the record and supports his self-proclaimed title of the "World's Best Dressed Man".  He even went so far as to monogram his clothing with the initials WBDM, an acrostic made up of the first letters of his title. 

Mr. Goodarzian sued the defendant insurance companies for $411,952, the full coverage of the policies issued by the companies, alleging that he had sustained a loss of $985,000 as a result of a fire which occurred in his apartment in the early morning hours of November 4, 1961 while he was entertaining a group of friends at a plush nightclub. Earlier in the evening, he had been a host to an even larger group at his apartment.  Goodarzian claimed that various items of clothing, furniture, fixtures, betterments and improvements, valuable jewelry and Persian rugs were damaged, destroyed, or lost and missing as a consequence of the fire and that the loss to his property amounted to approximately $985,000. The defendants did not dispute the value placed on the property allegedly lost by the plaintiff, but resisted his claim on the ground that items included in the proof of loss, submitted as the basis for recovery under the policies, included many which were not in the apartment on the night of the fire. 

The policies issued to Goodarzian insured him against fire for the contents of his apartment to the extent of $341,000 and $57,000 for theft and mysterious disappearance.*fn2 The insured claimed that there was destruction to "in-sight" property amounting to $92,625, improvements and betterments amounting to $9,437, in debris $750, lost and missing $132,518, jewelry $745,300 and additional living expense $4,500. Goodarzian accordingly claimed the full amount of his insurance coverage to partially compensate him for his loss.

The case was tried without a jury, and the Trial Judge awarded judgment to the plaintiff for $104,316. (The sum embraced $35,645 for clothing, $17,702 for carpeting, $37,482 for damage to furnishings, and $13,487 for destruction of betterments and improvements.) The Trial Judge stated that "Claims for the other items as lost and missing are not allowed because of failure of proof by the plaintiffs." 

The Appellate Division (First Department) unanimously reversed and dismissed the plaintiff's complaint, finding as a matter of law that the proof of loss was fraudulent. We affirm.