4 + 2 ≠ "Residence Premises"

Last week I received a favorable decision and order for one of my insurer clients from the United States District Court for the Southern District of New York in a number-of-families homeowners policy application misrepresentation case. My client had denied coverage for the Brooklyn, NY fire loss based, in part, on the application misrepresentation but did not rescind the homeowners policy (that's a thing). I conducted the policyholder's EUO and defended the policyholder's subsequent breach of contract action.

The Decision & Order begins:

The material facts, which cannot be disputed, are simple: In his insurance application, plaintiff stated that his property had three units, with three families living in them. The policy that Nationwide issued to him covered "one, two, three or four-family" dwellings. In fact, plaintiff's building had at least six units, rented to unrelated tenants. After the fire, Nationwide discovered the additional units and denied coverage. As explained below, Nationwide was entitled to do so and consequently will be granted summary judgment.

And adds:

Plaintiff contends that the language of the Policy is ambiguous, preventing the Court from granting summary judgment. * * * He argues that because the Policy uses the term “one, two, three, or four family dwelling” rather than “one, two, three, or four unit building,” it is irrelevant that there were at least six separate residential units in the Subject Premises. ***

Neither logic nor precedent supports plaintiff's hair-splitting argument. To the contrary: the New York courts have repeatedly explained that terms like “four family dwelling” are unambiguous. 

The Court granted summary judgment to Nationwide based solely on the uncontroverted fact that at the time of the fire, the dwelling did not meet the policy's definition of a "residence premises" (because it was MORE than a four-family dwelling).

The Court also rejected plaintiff's negligence argument (viz, that Nationwide could've and should've discovered the extra, illegal apartments before the fire) and, given its ruling on the residence premises issue, did not reach Nationwide's alternative argument that the Policy was void because plaintiff intentionally misrepresented the material fact or circumstance of how many families lived within and how many units comprised the Subject Premises at the time he filled out his application.

You can read the decision by clicking the image below:

Communications Between Outside Coverage Counsel and His Insurer Client Regarding "the Investigation and Potential Rescission of a Claim" Ordered Disclosed

HOMEOWNERS -- APPLICATION MISREPRESENTATION -- RESCISSION -- ATTORNEY-CLIENT PRIVILEGE -- DISCOVERY

Prorokovic v. United Property & Casualty Ins. Co.

(S.D.N.Y. 02/02/2022)

From time to time I remind my insurer clients that before a first-party insurance claim has been investigated and coverage denied, not everything they or their adjusters write to me or I write to them is protected from discovery by the doctrine of attorney-client privilege.  I also remind them that my role is not to assist them in the investigation of a claim, but to provide a legal advice and opinion to them regarding whether a particular loss and its related claim are covered under the particular policy at issue.  

Why do I remind my insurer clients of this?  Because some New York courts consider outside counsel who assist their insurer clients in investigating first-party property losses and claims to be performing "claim handling activities" that are subject to discovery.  And because of cases like this one.  

On November 5, 2020 the plaintiffs suffered a total fire loss of their recently purchased New City, New York home and initiated a claim with defendant UPCIC under their homeowners insurance policy.  They had applied for and obtained their homeowners policy in August 2020, stating , among other things, on the policy's application that the home's "roof age" was 18 years and that "the dwelling both has a Certificate of Occupancy and is not an incomplete newly constructed home. If under additional construction or renovation, will be completed within the next 90 days."

On October 13, 2020 UPCIC issued a notice of cancellation, citing the policyholder's failure to send requested self-inspection photos to confirm the property's condition.  On October 16, 2020, UPCIC emailed the insured's agent to advise that home inspection photos showed the roof to be in very poor condition, but that UPCIC would rescind the policy cancellation if the roof was fully replaced before the cancellation date of November 17, 2020.  

In investigating the fire, UPCIC learned that:

• the roof was approximately 27 years old; 
• construction of a substantial addition to the home had begun after the September 17, 2020 closing date, was underway at the time of the fire, and was not expected to be complete until January 2021; and
•  the plaintiffs were not occupying the home at the time of the policy's application, but had moved into the house on October 1, 2020.

UPCIC's investigation of the loss and claim included retaining outside counsel on November 17, 2020 to conduct an examination under oath of the policyholder, which was done on December 11, 2020.  

On January 19 2021, UPCIC rescinded the policy and denied coverage, stating, in part: 

UPC has determined that you made material misrepresentations and/or false statements on the Application for Insurance. The misrepresentations identified include, but are not limited to, false statements and/or concealment of the age of the roof, condition of the roof, concealment of renovations and/or construction efforts, questionable habitability of the subject premise, occupancy, etc. Had UPC known the true facts, the policy would not have been issued or would have been written under different terms, conditions, and premiums. As a result, the policy issued by UPC, policy number *****, will be rescinded and any policy premiums paid to date will be refunded. Therefore, there is no coverage available for the above-referenced loss. UPC denies any and all coverage.

According to UPCIC's counterclaim in this action, on January 20, 2021, a UPCIC underwriter signed an affidavit stating that "if the Insured had provided the correct information regarding the roof update year, the occupancy prior to September 17, 2020, the fact that construction on the property would not be completed in ninety (90) days, or answered 'no' in response to a question on the Application regarding the occupancy and roof, then United would either not have written the policy or have written it under different terms."

On January 22, 2021, UPCIC sent the plaintiffs a "Policy Voidance" letter based on “[m]isrepresentation of material facts in obtaining a homeowners insurance policy with UPC Insurance Company for the property located at [address], by falsely providing the incorrect roof age, incorrect occupancy type and number of months the risk is occupied or rented. In addition, there is existing damage to premises which was not disclosed on application."  A week later UPCIC refunded plaintiffs the $1,366.35 they had paid in premiums up to that point by direct deposit into their bank account. 

On March 8, 2021, plaintiffs commenced this action, seeking $600,000 in compensatory damages and $1,000,000 in punitive damages based on UPCIC allegedly having acted "intentionally, maliciously, wrongfully, and in bad faith" in disclaiming coverage.

In the course of discovery plaintiffs sought production of communications between retained outside counsel and UPCIC from when counsel was retained on November 17, 2020  through the date of UPCIC's January 19, 2021 declination.  When UPCIC refused to disclose those communications, plaintiffs' counsel wrote to the court on December 15, 2021 to request a conference, claiming 

Defendant has asserted the frivolous position that virtually its entire claim file, underwriting guidelines and communications with attorneys and non-attorneys pre-dating its declination decision, are protected from disclosure under the attorney-client and work product privileges. The parties have met and conferred in good faith on multiple occasions but have reached an impasse.

This decision is the result of that conference.  

In opposing plaintiffs' demand for production of outside counsel communications in this case, UPCIC argued that these communications were protected by attorney-client privilege because 

they relate to the retention of outside counsel for legal advice relating to the investigation and potential rescission of a claim. This is fundamentally different than advice relating to the processing of a claim, or the denial of a claim, in the ordinary course of business. UPC is in the business of processing claims, but is not in the business of rescinded policies.

Aside from the fact that claims aren't rescinded (policies are), the judge rejected UPCIC's attempted "fine line" distinction, and ordered UPCIC to produce all responsive communications with outside counsel between November 17, 2020 and January 19, 2021: 

"New York law governs the applicability of the attorney-client privilege in this diversity case." Roc Nation LLC v. HCC Int'l Ins. Co., PLC, No. 19 Civ. 554, 2020 WL 1970697, at *2 (Apr. 24, 2020). "[U]nder New York law, an insurance company's claim handling activities are generally subject to discovery even if they were performed by an attorney. Id. This rule is grounded in an obvious principle: "The payment or rejection of claims is part of the regular business of an insurance company." Advanced Chimney, Inc. v. Graziano, 153 A.D.3d 478, 480, 60 N.Y.S.3d 210 (2d Dep't 2017). Thus, "[t]he key question is whether the attorney is predominantly investigating an insurance claim or providing legal advice." Roc Nation, 2020 WL 1970697, at *2 (quotation marks and citations omitted). This approach extends to evaluations of assertions of attorney-client privilege in the context of an insurance company's decision to rescind a policy based upon alleged material misrepresentations made by the insured in the procurement of the policy. See Advanced Chimney, 153 A.D.3d at 479-80. 

Here, defendant attempts to draw a fine line between its handling of plaintiffs' claim and its evaluation of the rescission option. In the first place, defendant's proposition that it is "not in the business of rescinded policies" defies logic. Defendant is in the business of providing insurance coverage; it assesses risk (and determines whether or not to provide insurance) based (at least in part) on a potential insured's application. That is precisely why policy rescissions are often based upon misrepresentations or false statements in insurance applications. Defendant's point — that it makes no money from rescinded policies — is facially true, but ignores situations (like the one at bar) where defendant rescinds a policy and avoids paying a substantial claim. In any event, in this case, defendant's decision to rescind plaintiffs' policy was inexorably intertwined with its denial of plaintiffs' claim. In other words, any advice from outside counsel related to rescission of plaintiffs' policy cannot be parsed from defendant's denial of plaintiffs' claim. Thus, defendant's communications with outside counsel were not predominantly of a legal nature and, therefore, are not protected by attorney-client privilege.[2]

I'm not fond of UPCIC's argument that there's an important difference between claim investigations and potential policy rescission investigations.  The better argument IMO would have been on the nature of each of outside counsel's communications.  

Nevertheless, this decision is another reminder to insurers in New York that not all communications with their outside counsel made prior to a declination of coverage are protected from discovery by attorney-client privilege.  If your outside counsel is not aware of this, PLEASE pass this post along to them.

Bottom line: each of outside counsel's pre-declination communications with insurers should be one of only two, distinct kinds: 

1. routine communications (requesting file materials, scheduling, etc.);
2. communications rendering legal advice that are --key words/concept -- predominantly of a legal nature.  

Not a blend of both.  One or the other. Keeping the communications separate will support  the more forceful and likely convincing argument that outside counsel communications which render only legal advice (are predominantly of a legal nature), even if made prior to the insurer-client's coverage declination, are protected from discovery by the doctrine of attorney-client privilege.  

Rate Evasion/Garaging Fraud -- Obtaining a Declaratory Judgment of No No-Fault Coverage Owed

NO-FAULT – AUTO POLICY – APPLICATION MISREPRESENATION – RATE EVASION – GARAGING FRAUD 

State Farm Fire & Cas. Co. v. AutoRx
(Sup. Ct., NY Co., 11/10/2021)

Here's a good example of successfully investigating, denying and litigating a rate evasion/garaging fraud case.  

Mikheal Bogle applies for an auto policy from State Farm in February 2019, representing on his application that he lives and garages his vehicle in Lake Peekskill, Orange County, New York. 

That was false.  Although he once lived in Lake Peekskill (once, as in 12 years earlier), in reality he lived and garaged his vehicle in Rosedale, Queens County, New York, approximately 60 miles away.  

Problem (for State Farm, not initially for Bogle): had Bogle truthfully disclosed the Rosedale garaging address, his 6-month auto policy premium would have been $4,483.82 more than what it was for the Lake Peekskill address he gave. 

On April 28, 2019, Bogle allegedly was injured in a motor vehicle accident (in New York City, of course) and treated with the defendant medical providers, who took assignments of benefits from him and billed State Farm.  After conducting Bogle's EUO, "State Farm timely denied the numerous claims for benefits (see 11 NYCRR 65-3.8[a][1]), concluding that, based on Bogle's testimony at the EUO and its own investigation, Bogle made material misrepresentations in his initial application for the issuance of the subject insurance policy with respect to where the insured vehicle was usually garaged and maintained in order to lower the cost of obtaining the policy, and that coverage was thus vitiated."

State Farm then commenced this affirmative declaratory judgment action to confirm its no-fault coverage denials.  None of the defendants appeared and State Farm moved for a default judgment against all of them.  

Finding that State Farm had not properly served the FDNY defendant (emergency responder), the court denied State Farm's motion for a default judgment.  

But finding proper service of process against all other defendants, the court reviewed State Farm's burden of proof on its motion and State Farm's proof and GRANTED default judgment to State Farm those non-appearing defendants declaring that State Farm "is not obligated to pay no-fault benefits to the defendant Mikheal Bogle in connection with injuries that he sustained in a motor vehicle accident on April 28, 2019, or to reimburse the defendants Autorx, LLC, CHC Chiropractic, P.C., Ocean Spine and Joint Medical Care, P.C., also known as Comprehensive Chiropractic Center, Kanwarpaul Grewal, D.O., JCB Acupuncture, P.C., Ocean Valley Physical Medicine, P.C., or Stand-Up MRI of Lynbrook for treatment that they rendered or equipment and supplies that they provided to him for those injuries[.]" 

The court explained: 

With respect to the proof of the facts constituting the claim, 

"CPLR 3215 does not contemplate that default judgments are to be rubber-stamped once jurisdiction and a failure to appear have been shown. Some proof of liability is also required to satisfy the court as to the prima facie validity of the uncontested cause of action (see, 4 Weinstein-Korn-Miller, NY Civ Prac paras. 3215.22-3215.27). The standard of proof is not stringent, amounting only to some firsthand confirmation of the facts" 

(Joosten v Gale, 129 AD2d 531, 535 [1st Dept 1987]; see Martinez v Reiner, 104 AD3d 477, 478 [1st Dept 2013]; Beltre v Babu, 32 AD3d 722, 723 [1st Dept 2006]). Stated another way, while the "quantum of proof necessary to support an application for a default judgment is not exacting ... some firsthand confirmation of the facts forming the basis of the claim must be proffered" (Guzetti v City of New York, 32 AD3d 234, 236 [1st Dept 2006]). In other words, the proof submitted must establish a prima facie case (see id.; Silberstein v Presbyterian Hosp., 95 AD2d 773 [2d Dept 1983]). 

"Where a valid cause of action is not stated, the party moving for judgment is not entitled to the requested relief, even on default" (Green v Dolphy Constr. Co., 187 AD2d 635, 636 [2d Dept 1992]; see Walley v Leatherstocking Healthcare, LLC, 79 AD3d 1236, 1238 [3d Dept 2010]). In moving for leave to enter a default judgment, the plaintiff must "state a viable cause of action" (Fappiano v City of New York, 5 AD3d 627, 628 [2d Dept 2004]). In evaluating whether the plaintiff has fulfilled this obligation, the defendant, as the defaulting party, is "deemed to have admitted all factual allegations contained in the complaint and all reasonable inferences that flow from them" (Woodson v Mendon Leasing Corp., 100 NY2d 62, 71 [2003]). The court, however, must still reach the legal conclusion that those factual allegations establish a prima facie case (see Matter of Dyno v Rose, 260 AD2d 694, 698 [3d Dept 1999]). 

Proof that the plaintiff has submitted "enough facts to enable [the] court to determine that a viable" cause of action exists (Woodson v Mendon Leasing Corp., 100 NY2d at 71; see Gray v Doyle, 170 AD3d at 971) may be established by an affidavit of a party or someone with knowledge, authenticated documentary proof, or by complaint verified by the plaintiff that sufficiently details the facts and the basis for the defendant's liability (see CPLR 105[u]; Woodson v Mendon Leasing Corp., 100 NY2d at 71; Gray v Doyle, 170 AD3d at 971; Voelker v Bodum USA, Inc., 149 AD3d 587, 587 [1st Dept 2017]; Al Fayed v Barak, 39 AD3d 371, 371 [1st Dept 2007]; see also Michael v Atlas Restoration Corp., 159 AD3d 980, 982 [2d Dept 2018]; Zino v Joab Taxi, Inc., 20 AD3d 521, 522 [2d Dept 2005]; see generally Mitrani Plasterers Co., Inc. v SCG Contr. Corp., 97 AD3d 552, 553 [2d Dept 2012]). 

Where an insured makes material misrepresentations on his or her application for insurance as to where he or she regularly garages a vehicle sought to be insured, coverage is defeated (see Remedial Med. Care, P.C. v Infinity Prop. & Cas. Co., 2017 NY Slip Op 50391 [U], 55 Misc 3d 130[A] [App Term, 2d, 11th & 13th Jud Dists, Mar. 31, 2017]; Jamaica Dedicated Med. Care, P.C. v Praetorian Ins. Co., 2015 NY Slip Op 50756[U], 47 Misc 3d 147[A] [App Term, 2d, 11th & 13th Jud Dists, May 6, 2015]; see also Liberty Mut. Ins. Co. v Mendez, 2021 NY Slip Op 30071[U], *4, 2021 NY Misc LEXIS 85, *6-7 [Sup Ct, N.Y. County, Jan. 7, 2021]; see generally State Farm Fire & Cas. Co. v Jewsbury, 169 AD3d 949, 950 [2d Dept 2019]). State Farm's proof establishes, prima facie, the facts underpinning its contentions, namely, that when Bogle first applied for insurance coverage on February 2, 2019, he represented that he resided at 93 Hollowbrook Road, Apartment 2, Lake Peekskill, New York 10537, and garaged the insured vehicle there, but actually lived at 244-07 136th Avenue, Rosedale, New York 11422, an address located in Queens County, and kept the vehicle garaged there, where premium rates are substantially higher than those for vehicles garaged in Lake Peekskill. 

As set forth in the affidavit of State Farm's claims specialist Tim Dacey, who investigated the claim, the subject collision occurred in Queens County, Bogle's Queens County address is listed on all no-fault benefit forms submitted by Bogle and the medical defendants, Bogle treated and received therapy in Queens County, Bogle is registered to vote at the Rosedale address in Queens County, and a video search revealed that all sightings of the insured vehicle were in Queens County and western Nassau County, with no sightings at or near Lake Peekskill. In addition, Dacey averred that a State Farm representative visited Bogle's Rosedale address, and confirmed with an occupant of those premises, a neighbor, and a postal delivery employee that Bogle resided there, while another representative visited the Peekskill Lake address, and was informed by a long-time resident at a neighboring address that he had never seen Bogle at the Peekskill Lake address identified on Bogle's application. Dacey further explained that the garaging the vehicle at the Queens County address costs $4,483.82 more, for each six-month period of coverage, than garaging the vehicle at Peekskill Lake. 

In fact, although Bogle procured the policy on February 2, 2019, he testified at his EUO on July 26, 2019 that he had resided solely at the Rosedale address since 2013, and that although he had lived in Peekskill Lake in 2007, he hadn't lived there since for 12 years. He averred that he receives all of his mail in Rosedale, has all of his credit cards issued to that address, and maintains of his personal property there. Bogle admitted that he had never garaged the insured vehicle in Peekskill Lake, but used that address on his application because of his poor driving record and his understanding that he would not be able to procure insurance had he used his actual residence address. 

The denial-of-claim statements show that the relevant denials of coverage were expressly based on the ground that Bogle made material misrepresentations in connection with his application for insurance with respect to the where the vehicle was regularly garaged in order to reduce her insurance premium rates. 

Hence, State Farm is entitled to a declaratory judgment against the defendants that were properly served with process.

See?  Rate evasion on a personal auto policy in New York CAN have negative first-party (physical damage/PIP/UM/UIM) coverage consequences provided, especially in a no-fault claim context, the suspected garaging fraud is timely identified and investigated (and coverage denied).  

NYSSIU Legal Update 2019-2020 Edition

 LEGAL UPDATE

I have been privileged since incorporating the New York State Chapter of Special Investigation Units (NYSSIU) in 1997 to serve as its Counsel.  Many times I have prepared and presented the NYSSIU Legal Update to members and guests at NYSSIU meetings.  Some of those updates even made it to NYSSIU's website.  

On May 6, 2020, my son Ryan Mura prepared and virtually presented the 2019-2020 edition of the NYSSIU Legal Update.  That edition digests eight no-fault, six property and two criminal law case decisions, as well as providing updates on New York legislative and regulatory developments affecting New York property and casualty insurers. 

You can read that Legal Update here.  Case decisions are hyperlinked within.  Questions can/should be directed to Ryan.

No-Fault Insurer's Denial Based on Rate Evasion Upheld in Arbitration

NO-FAULT – RATE EVASION – AAA ARBITRATION DECISION

Matter of Classic Medical Diagnostic Rehab, P.C.  aao SI and State Farm Fire & Cas. Co.
(AAA Case No. 17-18-1095-2802, issued 1/7/2020)

Here's another AAA award/decision that upholds our client's denial of no-fault benefits based on the assignor's proven rate evasion:

In its written submission, Respondent submitted the following evidence and made the following contentions in support of its position: 

* * * * *  

6. Assignor appeared for an EUO on 12/11/17 at which she testified that she lived in Albany, New York with her three children, two of whom attend school in Brooklyn, but that she could not remember if they had a different residence listed for their school in Brooklyn. Assignor testified that she moved to Albany in 2015 but that she and her children commute to Brooklyn four or five days per week and that they drive about 2 1/2 hours "coming and going." Assignor testified that she presently works full-time in Brooklyn, and that her previous jobs were also located in Brooklyn. The Albany address which she provided in her application for insurance benefits and at which she stated she lived in her deposition is a home owned by her aunt to whom she pays rent. Assignor testified that the home is in the middle of the block, she could not recall its color, and stated that there was a covered porch in the front of the house. Respondent revised her testimony on the errata sheet to reflect that the house is on the corner and that there is no porch. Assignor could not fully describe the route she takes from Brooklyn to Albany on her commute. Assignor is registered to vote at her old address in Brooklyn and voted in the last election at a school in Brooklyn.

At the hearing of this matter, counsel for Applicant asserted that the EUO transcript alone is not sufficient to substantiate the alleged discrepancies contained therein without additional information, and further asserted that Assignor stated that she was in fact living in Albany New York. I am not convinced by Applicant's position, however.  Assignor provided sworn testimony under oath. Assignor subsequently amended her testimony with respect to the location of the house in which she purportedly resides in Albany, and whether it had a porch. Respondent submitted a form NF 2 executed by Assignor which lists her address in Brooklyn, New York. Likewise, the Assignment of Benefits form executed by Assignor on 10/24/17 lists an address in Brooklyn, New York. In addition, I find that Applicant's testimony that she drives 4 to 5 days per week from Albany to Brooklyn to get to her job in Brooklyn and to bring her children to school in Brooklyn is not credible, given the distance such a commute would involve, as described in Respondent's submission.

Upon consideration of the arguments of counsel and upon a review of the evidence submitted in this case, I find that Respondent has submitted sufficient evidence to meet its burden of demonstrating that Assignor made material misrepresentations in the procurement of the underlying automobile insurance policy. Applicant's claims for reimbursement are therefore denied. 

In this case, the assignor's EUO, which my office conducted, proved to be key in supporting the insurer's rate evasion-based denial of first-party benefits.

Do you know the color of your home and where it sits on its street/block?

Denial of No-Fault Benefits to Assignee of Rate Evader Upheld in Arbitration

NO-FAULT – RATE EVASION – AAA ARBITRATION DECISION

Matter of Bronx Chiropractic Health Services, PC aao SB and State Farm Fire & Cas. Co.
(AAA Case No. 17-18-1114-9479, issued 8/23/2019)

This morning my office received this AAA award/decision, upholding our client's denial of no-fault benefits based on the assignor's proven rate evasion:

The EUO on the EIP/insured took place on October 29, 2018. The information that was provided based upon the testimony of the insured is that there was no real connection to the state of Maine, the policy under which the car was insured. The EIP's driver's license was NY and she was employed at Columbia Hospital. There was no real nexus between the EIP and Maine. The Respondent therefore provided the affidavit of Christina XXXX and [sic] underwriter for the Respondent. Had the Respondent been aware of the false information the policy would never had been issued. 

Applicant has not submitted any evidence to rebut the contentions made by the Respondent. 

Based upon the facts herein and the evidence provided, I find that Respondent has demonstrated by a preponderance of the evidence as a matter of law that EIP made material misrepresentations as to the facts surrounding the issuance of the policy. 

Applicant's claim is therefore denied.

In this case, the assignor's EUO, which my office conducted, proved to be key in supporting the insurer's rate evasion-based denial of first-party benefits. 

How to Lose a Rate Evasion Defense in Arbitration

NO-FAULT – APPLICATION FRAUD – MATERIAL MISREPRESENTATION – RATE EVASION – ARBITRATION
Matter of Comprehensive Psychological Evaluation PC and Esurance Insurance Co.
AAA Case No. 412009047088
Arbitrator Andrew M. Horn, decided 3/31/2010

While doing some research earlier this week on no-fault claim presentment fraud and the concept of "fraud in part, fraud in whole" as it applies to no-fault claims, I ran across a number of American Arbitration Association no-fault arbitration decisions on policy procurement or application fraud and misrepresentation. 

Provable insurance fraud is often a moving target, as insureds and claimants are often slippery and indefinite in their answers about conduct suspected to have been fraudulent.  Sometimes what looks like, sounds like and walks like a duck, however, turns out to not be a duck.  And sometimes even honest insureds and claimants who perceive they are being investigated for possible fraud understandably will be guarded in their answers, requiring more effort in obtaining definite and precise answers.  My experience is that insurers know this and require an appreciable quantum of evidence before they will deny a claim based on fraud in the policy application, loss commission, or claim presentment. 

This was a $339 claim for a psychiatric diagnostic interview examination, psychotherapy and review of records by the applicant's owner.  The insurer denied and defended the claim based on the assignor's asserted policy application misrepresentation about her residence, a/k/a rate evasion.  Arbitrator Horn's decision lays out  a road map of what a no-fault insurer must do to establish a rate evasion/application material misrepresentation defense, economies of scale notwithstanding.

Fatal to Esurance's application fraud defense in this matter were:

• what Arbitrator Horn determined was unclear and indefinite proof from the assignor's EUO of her misrepresentations about her Rhinebeck, New York residence in applying for her personal auto policy;
• the lack of the policy application offered into evidence; and
• the lack of an underwriter's affidavit averring either that the policy would not have been issued or that its premium would have been higher had the assignor revealed her Brooklyn residence address.

The fact that Esurance's counsel, who appeared by telephone, attempted to prove that the Rhinebeck address given by the assignor during the application process was a commercial building by stating that she had called the building's owner and he had told her so probably didn't help. 

Arbitration Horn's decision does set forth some seminal statutory and case law on this issue, however, that is worth bookmarking:

Applicant's attorney objected to the timeliness of the denial. However, I find that it was made within the statutory 30-day period as extended by a valid and timely verification request -- namely, the EUO of the provider's assignor. In any event, "the defense of fraudulent procurement of an insurance policy ... is nonwaivable and hence exempt from the 30-day preclusion rule, (and) may be asserted as against ... providers in this action seeking to recover assigned no-fault benefits". A.B. Med. Servs. PLLC v. Commercial Mut. Ins. Co., 12 Misc.3d 8, 2006 NY Slip Op 26118 (App Term 2d Dept.).

* * * * *

In the arena of No-Fault insurance coverage, it is well settled that a policy cannot be cancelled retroactively under Insurance Law § 3105 (b) even if an insured has made misrepresentations in procuring it. See, e.g., Matter of Insurance Co. of N. Am. v. Kaplun, 274 A.D.2d 293, 713 N.Y.S.2d 214 (2000); Matter of Liberty Mut. Ins. Co. v. McClellan, 127 A.D.2d 767, 512 N.Y.S.2d 161 (1987); Teeter v. Allstate Ins. Co., 9 A.D.2d 176, 192 N.Y.S.2d 610 (1959), affd 9 NY2d 655, 173 N.E.2d 47, 212 N.Y.S.2d 71 (1961). Rather, 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 A.D.2d 767, 769, 512 N.Y.S.2d 161 (1987).  See Cruz v New Millennium Constr. & Restoration Corp., 17 A.D.3d 19, 793 N.Y.S.2d 548, 2005 N.Y. Slip Op. 02336 (3rd Dept., March 24, 2005); Matter of Insurance Co. of N. Am. v. Kaplun, 272 A.D.2d 293 (2d Dept. 2000). See DiDonna v. State Farm Mut. Auto. Ins. Co., 259 A.D.2d 727, 687 N.Y.S.2d 175 (1999).

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, 272 A.D.2d 293 (2d Dept. 2000). (There has been no allegation that the instant insurance carrier effectively cancelled the subject insurance policy pursuant to section 313 prior to the accident).

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. See AA Acupuncture Serv., P.C. v. Safeco Ins. Co. of Am., 25 Misc.3d 30, 2009 NY Slip Op 29311 (App Term 1st Dept.); A.B. Med. Servs. PLLC v. Commercial Mut. Ins. Co., 12 Misc.3d 8, 2006 NY Slip Op 26118 (App Term 2d Dept.).

To be entitled to bar recovery, an insurer must establish by clear and convincing evidence that an applicant obtained the subject insurance policy by making “material misrepresentations” on the insurance policy application. See Insurance Law § 3105 (b). A misrepresentation is deemed “material” if “knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract”. Id.

Without clear and convincing proof of both a misrepresentation and the materiality of that misrepresentation, a policy application fraud/misrepresentation defense will fail.  Every time.  Even if the amount in dispute is only $339.

Consequence of Rate Evasion on a No-Fault Claim

Over at our sister blog, Arbiters of NY No-Fault, my associate Bethany Mazur reports on a recent arbitration decision we obtained for an insurer client in which Arbitrator Veronica O’Connor ruled that the assignor's proven participation in rate evasion disqualified the assignee from recovery of no-fault benefits, and that the rate evasion/application misrepresentation or fraud defense was not subject to the 30-day preclusion rule, citing A.B. Medical Services, PLLC a/a/o Yevgenya Ioffe v. Commercial Mut. Ins. Co., 12 Misc.3d 8 (App. Term, 2nd Dept., 2006), in which the Appellate Term stated:

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]). 

You can read Bethany's post about the arbitration decision here.

Insurer's Proof of Fraud on Default Judgment Application Found Insufficient

AUTO – NO-FAULT – FRAUDULENT MISREPRESENTATIONS – DECLARATORY JUDGMENT – PROOF REQUIRED FOR DEFAULT JUDGMENT IN FAVOR OF PLAINTIFF INSURER
New South Ins. Co. v. Dobbins
(2nd Dept., decided 3/2/2010)

It's not easy for plaintiff insurers to obtain default judgments in declaratory judgment actions.  In addition to establishing the defendants' defaults, the plaintiff insurers must establish, prima facie, that they are entitled to the relief sought.  That usually entails demonstrating, in evidentiary form, the merits of the coverage defenses which form the basis of the DJ action.  A verified complaint, by itself, won't suffice if the insurer's coverage defenses are based on facts outside the personal knowledge of the person who verified the complaint.

New South insured Adrienne Dorns, who allowed James Dobbins, Sr., to drive her vehicle.  On July 31, 2006, Dobbins Sr. was involved in a collision with a vehicle owned by Quadrozzi Concrete Corp. and operated by Emanuel Paradiso.  Dobbins Sr., James Dobbins, Jr., Felita Dobbins, and Jamie Dobbins all claimed to be within the Dorns vehicle at the time of the accident, and all made no-fault claims to New South.  In his MV-104 and subsequent interview, Paradiso indicated that there was only one occupant of the Dorns vehicle at the time of the accident.  New South conducted examinations under oath of the Dobbins claimants and then commenced this DJ action against Dorns and the four Dobbins, seeking a declaration that its policy with Dorns afforded no liability, no-fault or uninsured motorists coverage in relation to the July 31, 2006 accident by reason of: (1) Dorns's policy application misrepresentations; and (2) the Dobbins' fraudulent misrepresentations of the identities and numbers of the occupants of the Dorns vehicle.  All defendants failed to appear, and New South moved for a default judgment against all.

Nassau County Supreme Court Justice F. Dana Winslow denied New South's initial motion, based primarily on New South's failure to submit a complete copy of Dorns's insurance policy with New South in support of its motion.  Justice Winslow also found that New South could only cancel the policy prospectively for application fraud and noted:

[A]lthough the DOBBINS defendants' [EUO] testimony seems evasive and inconsistent , and is contradicted, in some respects, by the accident report, the record to date does not unequivocally demonstrate that any individual defendant was not in the vehicle at the time of the accident.  Plaintiff has not sufficiently established that it is entitled to wholesale relief from its obligations under the policy with respect to any individual defendant. To the extent that plaintiff assert that a particular claim is fraudulent, its remedy is to issue a disclaimer pursuant to the Insurance Law and applicable regulations, or to defend against such claim in any
proceeding in which coverage is sought.

New South moved to renew and reargue, this time submitting a complete copy of the insurance policy at issue. On that motion to renew and reargue, Justice Winslow granted New South a default judgment as to no-fault claimant Jaime Dobbins, but denied the motion as to no-fault claimants James Dobbins, Jr. and Felita Dobbins.  The court found that New South had not established via evidentiary material that James Jr. and Felita were not in the Dorns vehicle at the time of the accident:

Plaintiff relies on the Form MV-104 filed by the driver of the adverse vehicle, Manny E. Paradiso, which indicates only one occupant in the vehicle driven by DOBBINS. The Affidavit of Brinton Max Esty, plaintiff's investigator, sworn to on July 17, 2007, refers to Mr. Paradiso's statement, in the MV-104 and in a subsequent interview, that DOBBINS was the sole occupant.  These statements, however, are inadmissible hearsay, and cannot be relied upon to support plaintiff's prima facie showing of entitlement to the relief sought. Although, as plaintiff contends, defaulters may be deemed to have admitted the facts alleged in the complaint, that rule can only apply where the allegations were made or verified by someone with first-hand knowledge. See Woodson v. Mendon Leasing Corp., 100 NY2d 62; State v. Wiliams, 44 AD3d 1149.  In the case at bar, plaintiff's attorney verified the Complaint, and plaintiff's investigator lacked first-hand knowledge of who was in the DOBBINS vehicle at the time of the Incident.

Plaintiff also cites inconsistencies in the testimony of JAMES JR., FELITA and JAMIE in their No-Fault examinations under oath, with respect to the circumstances of the Incident and the description of the adverse vehicle. The Court finds these to be inconclusive and insufficient to demonstrate that the purported passengers were not in the DOBBINS vehicle at the time of the Incident.

In granting New South a default judgment as to Jaime Dobbins, however, the court found that Dobbins Sr.'s admissions in his MV-104 and telephone report to New South supported the inference that there were only two adult passengers -- James Jr. and Felita -- in the vehicle at the time of the accident.

New South appealed the second order to the Appellate Division, and the Second Department AFFIRMED, holding:

The Supreme Court properly, upon renewal and reargument, adhered to so much of its original determination as denied the plaintiff leave to enter judgment against the defendants James Dobbins, Jr., and Felita Dobbins, upon their default in answering the complaint.  In support of its motion, the plaintiff offered the complaint, which was verified by plaintiff's counsel, and an affidavit of the plaintiff's investigator, neither of whom possessed personal knowledge of the facts constituting the claim (see CPLR 3215; Woodson v Mendon Leasing Corp., 100 NY2d 62, 70-71; Hosten v Oladapo, 44 AD3d 1006; Finnegan v Sheahan, 269 AD2d 491). The statements from the driver of the other vehicle that the plaintiff's investigator relied upon in his affidavit constituted inadmissible hearsay (see CPLR 4518[a]; Hochhauser v Electric Ins. Co., 46 AD3d 174, 179-183; Metropolitan Cas. Ins. Co. v Shaid, 23 Misc 3d 1140[A]). Accordingly, entry of a default judgment against these defendants was properly denied on the papers before the Supreme Court. 

If New South had obtained an affidavit from the adverse driver that there was only one occupant of the Dorns vehicle at the time of the accident, would that have been enough?  Perhaps.   But relying on hearsay statements and affidavits from those lacking first-hand knowledge in moving for a default judgment in a insurer-commenced declaratory judgment action will probably never be enough.

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

NO-FAULT – APPLICATION MISREPRESENTATION – FRAUD – RATE EVASION
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]).

Application Misrepresentations, Even If Innocently or Unintentionally Made, May Void Policy Ab Initio -- Trial Court's Charge Was Erroneous, Requiring New Trial

COMMERCIAL PROPERTY – APPLICATION MISREPRESENTATION – REVERSIBLE TRIAL ERROR
Rafi v. Rutgers Cas. Ins. Co.
(4th Dept., decided 2/6/2009)

At a recent meeting of insurance fraud investigators and claims representatives, I reminded the group that insurance fraud and misrepresentation can occur at three points of the fraud/misrep continuum:  before the loss, during the loss, and after the loss.  Before the loss fraud/misrep typically pertains to the application process, during which the insured, then as applicant, misstates facts on the application material to the insurer's acceptance of the application and underwriting of the risk.  I explained to the group that unlike during and after fraud/misrep, application misrepresentation need not be intentional under New York law to warrant a rescission of the policy ab initio, or from inception.

The Fourth Department, Appellate Division, also knows this.  In this case, Rutgers Casualty apparently defended a denial of coverage to the plaintiffs, its insureds, by arguing that plaintiffs' policy was void from inception by reason of the insureds' material application misrepresentations.  The trial judge charged the jury that Rutgers was required to prove that those alleged misrepresentations were intentional, and the jury apparently found in favor of the insureds, prompting this appeal. 

In unanimously REVERSING the judgment, the Fourth Department held:

We agree with defendant that Supreme Court committed reversible error in charging the jury that defendant was required to prove that the alleged misrepresentations made by plaintiffs on their insurance application were intentional in order to prevail on its affirmative defense, seeking to void the insurance policy. Rather, although misrepresentations made by an insured must be material, they may be innocently or unintentionally made (see Curanovic v New York Cent. Mut. Fire Ins. Co., 307 AD2d 435, 436-437; see generally Insurance Law § 3105 [a], [b]), in which event the insurance policy is void ab initio (see Precision Auto Accessories, Inc. v Utica First Ins. Co., 52 AD3d 1198, 1201, lv denied 11 NY3d 709; see also Taradena v Nationwide Mut. Ins. Co., 239 AD2d 876, 877). Thus, the court should have charged the jury that, in order to prevail on its affirmative defense, defendant was required to submit "proof concerning its underwriting practices with respect to applicants with similar circumstances" in order to meet its burden of establishing that it would not have issued the same policy had the correct information been included in the application (Campese v National Grange Mut. Ins. Co., 259 AD2d 957, 958; see Precision Auto Accessories, Inc., 52 AD3d at 1200; Curanovic, 307 AD2d at 437; see also § 3105 [c]). We cannot conclude that the error in the court's charge is harmless, and we therefore reverse the judgment and grant a new trial (see Wilson v Nationwide Mut. Ins. Co., 168 AD2d 912, lv dismissed 77 NY2d 940).

Bear in mind that the alleged misrepresentations at issue in this case were made on the insurance policy's application, not in the presentment of the claim.  This holding accords with New York appellate case law and New York Insurance Law § 3105, which provides, in pertinent part:

§ 3105. Representations by the insured. (a)  A representation is a statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof. A misrepresentation is a false representation, and the facts misrepresented are those facts which make the representation false.

(b)  No misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless such misrepresentation was material. No misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract.

(c)  In determining the question of materiality, evidence of the practice of the insurer which made such contract with respect to the acceptance or rejection of similar risks shall be admissible.

Also note that the salient question of materiality under New York law is not whether the insurer would have issued any policy at all to the insured had there been no application misrepresentations,but whether it would have refused to make "such contract", i.e., the very same policy for the same premium and under the same terms and conditions.

Auto Policy Renewed Years After Registrant's Death Voided Ab Initio

UM – APPLICATION MISREPRESENTATION – STAY OF ARBITRATION
Matter of Geico Ins. Co. v. Battaglia
(4th Dept., decided 10/10/2008)

In January 2004, Battaglia was injured when his vehicle collided with a vehicle registered to O'Donnell and being operated by Ramos. GEICO insured the Battaglia vehicle, and New York Central Mutual Fire Insurance Company (NYCM) insured the O'Donnell vehicle.

One small problem. O'Donnell had died in 1998. NYCM disclaimed coverage to/for Ramos, and Battaglia demanded arbitration of his UM (decision incorrectly says SUM) claim. GEICO then commenced this special proceeding to permanently stay arbitration of that claim.

In AFFIRMING Erie Supreme's denial of GEICO's petition and granting of NYCM's cross motion to dismiss the petition against it, the Fourt Department ruled:

We conclude on the record before us that NYCM established as a matter of law that its policy, as renewed, was void ab initio based on the material misrepresentation with respect to O'Donnell's status, i.e., that O'Donnell was deceased (see generally Matter of Mercury Ins. Group v Ocana, 46 AD3d 561). NYCM established that it would not have renewed the policy covering the O'Donnell vehicle had it known that O'Donnell was deceased at that time (see Insurance Law § 3105 [b]; Precision Auto Accessories, Inc. v Utica First Ins. Co., 52 AD3d 1198, 1200).

Yeah, that would be kinda material to underwriting the risk.

Summary Judgment Granted Not on Application Misrepresentation Defense, But on Insured's 1-Year Late Notice of Accident

HOMEOWNERS – APPLICATION MISREPRESENTATION – "INSURED LOCATION" – LATE NOTICE – SIGNED STATEMENT
Tower Ins. Co. of New York v. Kravtchouk
(Sup. Ct., New York Co., decided 9/10/2008)

Kid falls off bicycle in Staten Island in front of defendant's property, insured by Tower under a homeowners policy. Tower investigates and learns that the defendant lives in Brooklyn, never lived at the Staten Island house, and was having a general contractor add an extension to the front of that existing house. Tower denies coverage based on the named insured's material misrepresentations in the policy application, the property not being an "insured location" because defendant never lived there, and late notice of one year.

Tower then commenced this action, seeking declaratory relief on its coverage defenses. All but the injured party defendants defaulted, including the named insured, and Tower moved for judgment against the defaulting parties.

Although an application misrepresentation defense had worked a month earlier in Tower v. Rajaram, this time New York County Supreme Court Justice Eileen Rakower rejected that defense, finding that the statement Tower's investigator had obtained from the named insured "fail[ed] to demonstrate that the premises were non-owner occupied or non-primary residences."

Justice Rakower also correctly ruled noted that Tower’s motion for a default judgment could not be granted solely on the basis of the named insured's and general contractor's failure to appear in the action. “Declaratory relief should not issue merely on the basis of a default by one side to the controversy. The plaintiff stills bears the burden of affirmatively proving its right to the declaratory relief it seeks.” (Mount Vernon Fire Ins. Co. v. NIBA Const. Inc., 195 AD2d 425 [lst Dept. 1993], Sullivan, J. concurring).

The court did, however, grant Tower's motion for summary judgment based on the insured's 12-month delay in notifying Tower of the accident. In his statement to Tower's investigator, the named insured indicated that he was aware of the incident on June 26, 2006 through an “attorney’s letter” but did not report the incident directly to Tower. Rather, he contacted his attorney and relied on the attorney to inform Tower of the incident. The attorney did not do so until almost one year later, June 4, 2007, and the injured party also failed to notify Tower of the accident.

As she did in the Rajaram case, Justice Rakower accepted and relied upon the named insured's signed but unsworn statement:

While generally, unsworn statements should not be considered in a motion for summary judgment, the statement by [the named insured] Kravtchouk is annexed to a sworn affidavit of [Tower's investigator] Eric Chappe. That affidavit attests that at the end of his conversation with Kravtchouk, Mr. Chappe accurately transcribed what Kravtchouk told him and Kravtchouk reviewed and signed the statement Chappe transcribed. Admissions by a party of any fact material to the issue are always competent evidence against that party. (Reed v. McCord, 160 NY 330,341).

On the insured's and injured party's late notice, the court ruled:

Where there is no reasonable excuse or mitigating circumstances offered for the delay, “the issue of reasonableness poses a legal question for the court, rather than an issue for the trier of fact.” (Id. at 307). The nearly one year delay in notifying Tower of the claim is unreasonable as a matter of law. (see Holmes v. Morgan Guar. and Trust Co. of New York, 223 AD2d 441 [1st Dept. 1996]; where court found that a ten month delay was unreasonable; and see Heydt Contracting Corp. v. American Home Assur. Co., 146 AD2d 497 [1st Dept. 1989]; where court found a nearly four month delay unreasonable as a matter of law).

An injured party has an independent right to notify an insurance carrier of his or her accident. (Id. at 308). In order to assert that right, the injured party must show that she diligently attempted to ascertain coverage and to promptly notify the carrier of the accident. If those steps are taken, the injured party is not charged with the delay of the insured. If the injured party fails to show that she asserted her own right to provide notice, but “rather, relied on the insured to do so, her rights are derivative of the insured’s.’’ Here, Galati failed to notify Tower of the accident, thus Kravtchouk’s late notice is imputed to her.

You Mean You Don't Write Homeowners Policies for Pediatric Offices? But It's In a House, With Lots of Kids...

HOMEOWNERS – POLICY RESCISSION – APPLICATION MISREPRESENTATION – USE OF SIGNED STATEMENT OF INSURED
Tower Ins. Co. v. Rajaram
(Sup. Ct., New York Co., decided 8/19/2008)

Tower issued a homeowners insurance policy to Dr. Madhu Rajaram for a residential private house located at 138 Brighton 11th Street, in Brooklyn, New York for the period January 5, 2006-2007. In her policy application, Dr. Rajaram represented that the house would be "owner occupied" and that it would be for “primary usage.” Here's a street view of the property. Note the green awning with the multi-colored lettering and white sign with the caduceus. Those are called clues.


Erna Karpilovskaya allegedly tripped and fell on the sidewalk outside the insured premises on January 15, 2006. She commenced a personal injury action in Kings County Supreme Court against the City of New York and various persons, including Dr. Rajaram.

Tower received first notice of that occurrence and Ms. Karpilovskaya's claim on November 14, 2006. It sent a representative to investigate, who found Advanced Pediatric Practice, PC, operating on the first and second floors of the building. Tower's representative took a signed statement from Dr. Rajaram, which began:

My name is Dr. Madhu Rajaram. My date of birth is (redacted). My home address is 7 Telegraph Hill Road, Homdel, NJ 07733. My contact telephone number is (redacted). I have been the Property Owner of a residential private house located at 138 Brighton 11th Street, Brooklyn, NY 11235, since January 5, 2006. I have leased the property to the former owner (I will provide their name at a later date) since January 5, 2006 until November 2006. I have never resided at the property since I purchased it on January 5,2006. I visit the premises a few times a month or whenever necessary. I do not believe I visited the premises on January 15, 2006, however ... (redacted).

By letter dated December 13, 2006, Tower disclaimed coverage for various reasons, including Dr. Rajaram's policy application misrepresentations, late notice, and the policy's business pursuits exclusion. Tower then commenced this this action in New York County Supreme Court to “confirm the propriety of its disclaimer” and moved for default judgment against certain defendants and summary judgment against the remaining defendants.

In denying Tower's motion for a default judgment against certain defendants, New York County Supreme Court Justice Eileen Rakower noted that each such defendant had answered after the prescribed time period but before September 16, 2007, the date given in Tower's letter to those defendants, which advised them: "This letter is to inform you that Tower Insurance Company of New York will move for a default judgment against you, if you fail to respond to the Complaint by September 16, 2007."

The court granted Tower's motion for summary judgment, however, adjudging and declaring that the policy was void ab initio and that Tower had no duty to defend or indemnify any party in the related Kings County Supreme Court personal injury action.

Justice Rakower rejected the defendants' argument that Tower's disclaimer was untimely under Insurance Law § 3420(d) because "the issue of a timely disclaimer is irrelevant if the policy, from its inception, never provided coverage for the particular claim at issue." The court then addressed Tower's rescission argument:

In order to establish that a fact is material so as to void ab initio an insurance contract, an insurer must show that it would not have issued the policy had that fact been revealed at the time that the policy was issued. (Interested Underwriters at Lloyd‘s v. H.D.I. III Assoc., 213 AD2d 246 [1st Dept. 1995]). “A court, in finding a material misrepresentation as a matter of law, generally relies upon two categories of evidence, an affidavit from the insurer’s underwriter and the insurer’s underwriting manual.” (Kroski v. Long Island Sav. Bank FSB, 261 AD2d 136 [1st Dept. 1999]). Tower supports its claim that it would not have issued the policy if it had known that Rajaram was not living at the residence by submitting the affidavit of Mr. Blomquist, Supervising Underwriter. Mr. Blomquist affirms that if Rajaram had indicated on her application that she did not intend to occupy the premises it would have presented an unacceptable risk and Tower would not have issued the “homeowner’s policy.” Mr. Blomquist refers to the Tower Group Homeowner’s Selection Rules (“the Rules”) which are annexed to his affidavit. Indeed, those rules state that the insured premises must be “owner occupied.’’

Rajaram represented on the “Homeowner Application” that the building would be "owner occupied” and that it would be for “primary usage.” However, in her statement to Mr. Williams, Rajaram gives her home address as “7 Telegraph Hill Road, Homdel, NJ and she states unequivocally that she “leased the property to the former owner... I have never resided at the property since I purchased it on January 5, 2006.”’ The defendant owners do not contradict the statement made by Ms. Rajaram. Where “the evidence of the materiality of the misrepresentation is clear and substantially uncontradicted, the matter is one of law for the court to determine.” (Interested Underwriters at Lloyd’s v. H.D.I. III Assoc., 213 AD2d 246 [1st Dept. 1995]).

The Rules also state that: “any risks with the following factors may not be written: Any business conducted on the premises . . .” Rajaram indicated on her application that no business was to be conducted on the premises. Contrary to this declaration, Mr. Williams affirms that he "observed a pediatrician’s office being operated from the first and second floors of the premises.”

Tower has shown that it would not have issued a homeowner’s policy had it known that Rajaram would not be residing at the subject premises and that she would be running a business at the location. It is incumbent upon the party opposing summary judgment to come forward with proof in admissible form demonstrating that there exists an issue of fact for the trier of fact to determine. Here, the defendant owners have not contradicted Tower’s showings. Indeed, they submit no evidence controverting Tower’s showing.

The defendants argued that Tower did not support its summary judgment motion with proof in admissible form because Dr. Rajaram's statement, although signed by her, "contain[ed] no jurat, no notary public or commissioner of deeds, and is neither an affidavit nor affirmed under penalties of law.” In rejecting this argument Justice Rakower noted:

While generally, unsworn statements should not be considered in a motion for summary judgment, the statement by Rajaram here is annnexed to an affidavit by Mr. Williams which attests that the statement was taken by him and that Ms. Rajaram read and signed the statement at the bottom of each page to attest to its accuracy. While hearsay, admissions by a party of any fact material to the issue are always competent evidence against that party. (Reed v. McCord, 160 NY 330, 341). Of course, the party-declarant has the right to explain it.

In policy rescission cases, it's not that the insurer would not have insured the risk at all, but that it would not have issued the particular policy on the particular terms it did. This case is a good example of that principle.

So is this how it went?

Dr. Rajaram to Broker/Agent: "I just bought a house in Brooklyn. There will be lots of kids and toys there."

Broker/Agent to Dr. Rajaram: "Okay, fill out this homeowners policy application."