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).  

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. 

The AAA Insurance Reporter & The Impact of Fraudulent Procurement of Auto Policies on New York No-Fault Claims

In 2017, after a six-year hiatus, the American Arbitration Association's New York State Insurance Division brought back a "new and improved" quarterly newsletter.  If you work with either New York no-fault or SUM claims, you should have received the four quarterly issues of the AAA Insurance Reporter for 2017.  If you aren't on the email distribution list for that newsletter, don't bother looking on the AAA's website for those quarterly issues.  They're not there.  I don't know why.

The newsletters reside on the Web, however, and their URLs make it easy to find 2017's four issues:

• 2017 Issue 1
• 2017 Issue 2
• 2017 Issue 3
• 2017 Issue 4

Each issue contains a "Developments in New York No-Fault" section that digests "a cross section of recent, well-reasoned arbitration awards that are consistent with current New York precedent and address commonly raised issues in the No-Fault forum."  According to Issue 1, the reported and digested awards "were objectively selected by an editorial board consisting of No-Fault arbitrators with a view toward promoting discussion and analysis of relevant issues."  Could it be that sitting AAA no-fault arbitrators want participants to pay more attention to these issues?

Issue 1 digested no-fault arbitration awards regarding:

• the finality of a Worker's Compensation Board's decision; 
• IME no-shows; 
• verification requests; 
• reasonable justification/45-day rule; 
• medical necessity; and
• use or operation (including an arbitration decision holding that the birth of a healthy baby following the mother's involvement in a MVA is not a compensable "injury" under New York no-fault law). 

Issue 2 treated:

• lost earnings; 
• post-EUO/Mallela verification requests;
• partial response to verification; 
• medical necessity--IME awards; and
• verification requested not under applicant’s control or possession.

Issue 3 addressed:

• jurisdiction; 
• intoxication;
• New Jersey certificate of authority;
• surgery fee schedule; and
• EUO no-shows.

Rounding out the year, Issue 4 included abstracts regarding:

• DME & verification request for wholesale invoice;
• death benefit claims;
• fraudulent procurement of the policy;
• 30-day notice of accident and late receipt of NF-2; and
• additional verification requested after a denial on a workers’ compensation defense.

Issue 4's abstracts on the impact of fraudulent procurement of the auto insurance policy on the applicant's no-fault claim are copied below (I've added links to the actual awards):

M.G. & State Farm Fire & Cas. Co.,
AAA Case No. 17-15-1021-8978 (4/15/16) (Gary Peters, Arb.)

Arbitrator Peters addressed whether respondent established its defense based upon fraudulent procurement of the policy. Respondent submitted an affidavit from an employee of State Farm Mutual Insurance Company in the Underwriting Department, which referenced that although applicant’s vehicle was insured at a residence in Yonkers, New York, an investigation revealed that applicant was not residing in Yonkers, New York, and that the vehicle was principally garaged in the Bronx. The affidavit further referenced that had State Farm been aware of this, they would not have issued the subject policy. The applicant/injured person provided testimony at the hearing before arbitrator Peters. The applicant/injured person testified that at the time of accident, he resided in Yonkers, New York, and was the operator of a motor vehicle that was registered to his wife at the Yonkers address. The applicant/injured person also testified that he resided in the Bronx “off and on” due to marital difficulties. The applicant/injured person testified that he never misrepresented the location of where the vehicle was garaged in order to obtain cheaper rates. However, due to marital difficulties, his wife moved out of the marital residence in Yonkers, New York, to live with her sister in Mayopac, New York and took the vehicle with her. Arbitrator Peters reviewed the EUO transcript of testimony taken of the applicant/injured person in which he testified that in November, 2014, the policy was changed to the Mayopac, New York address. Despite marital problems, he stayed at the Mayopac address on and off. Arbitrator Peters found that although the applicant/injured person had “multiple residences” wherein he lived in the Bronx, Yonkers and Mayopac for different periods of time, the applicant/injured person believed that the vehicle was garaged primarily in Mayopac, New York, and he was only utilizing the car a few days per week. Arbitrator Peters noted that Insurance Law Sec. 3105 governs material misrepresentation and fraudulent procurement of insurance contracts and that there was no intentional false misrepresentation in this case, since the applicant/injured person did in fact reside at three (3) different locations and his wife principally used the vehicle to care for his children’s needs. 

Isurply, LLC & State Farm Mut. Automobile Ins. Co.,
AAA Case No. 17-16-1026-4904 (12/9/16) (Jeffrey Silber, Arb.)

Arbitrator Silber addressed whether respondent established its defense based upon fraudulent procurement of the policy. Arbitrator Silber noted that although VTL Sec. 313 does not permit an insurer to cancel an automobile insurance policy retroactively on the grounds of fraud or misrepresentation, an insurer is entitled to raise the affirmative defense of fraudulent procurement of the policy in an action to recover benefits thereunder. Arbitrator Silber cited to relevant case law that referenced that misrepresenting residency status for the purpose of rate evasion, if proven, constitutes a material misrepresentation that precludes recovery under the policy. The injured person provided testimony at an examination under oath (EUO), and respondent “outlined” a list of eighteen (18) discrepancies, which the respondent argued established that the injured person actually resided in Brooklyn and not Port Jervis, and thus the injured person made intentional and material misrepresentations in the application for his insurance policy. Arbitrator Silber considered all of the evidence and found that respondent failed to establish its defense based upon fraudulent procurement of the policy. Arbitrator Silber noted that the injured person worked in Brooklyn, where the accident occurred and lived in Port Jervis. Although the injured person testified that she travelled for one and a half hours every day to work, arbitrator Silber found that this did not constitute a misrepresentation, as many people travel that amount of time to work. The injured person testified that her grandmother lives in Brooklyn and that she stayed there the night before the accident. The injured person also testified that her children attend school in Brooklyn and that she was treated at a Brooklyn medical facility. However, the injured person was registered to vote in Port Jervis, and all her mail was delivered to the policy address. Thus, respondent’s defense was not established. 

Jacobson Chiropractic, PC & National Liability & Fire Ins. Co.,
AAA Case No. 17-16-1026-5243 (2/9/17) (Lucille S. DiGirolomo, Arb.)

Arbitrator DiGirolomo addressed whether respondent established its defense based upon fraudulent procurement of the policy. Respondent argued that the assignor used a Saranac Lake, New York, address to procure the policy of insurance when he never lived there. Respondent submitted an SIU report wherein the investigator advised that he went to the Saranac Lake address and spoke to various occupants who had no knowledge of applicant residing at the premises. Moreover, the SIU investigator was advised that the apartment allegedly rented by the assignor was occupied by a different individual, who was a pilot at the local airport and had resided there since February, 2015. Respondent submitted an EUO transcript of testimony in which the assignor testified that although he planned on moving to Saranac Lake for school and would start in September, he never lived in Saranac Lake. Arbitrator DiGirolomo cited to relevant case law that referenced that the standard for determining residency for purposes of insurance coverage requires something more than temporary or physical presence and requires at least some degree of permanence and intention to remain. Arbitrator DiGirolomo found that the mere intention to reside at certain premises is not sufficient. Accordingly, arbitrator DiGirolomo found that respondent’s defense was established. 

New York Community Hospital & Utica National Ins. Co.,
AAA Case No. 17-15-1016-6707 (4/21/16) (Rhonda Barry, Arb.)

Arbitrator Barry addressed whether respondent established its defense based upon fraudulent procurement of the policy. Arbitrator Barry noted that although pursuant to VTL Sec. 313, a policy may not be canceled retroactively, the insurance carrier may assert the fraudulent procurement of the policy by the assignor in an action by a health care provider assignee for no-fault benefits. To sustain its defense, the insurer must provide that the subject insurance policy was procured through material misrepresentation. See, Insurance Law Sec. 3105. Arbitrator Barry cited to relevant case law noting that a misrepresentation is material only if the insurer would not have issued the policy had it known the facts misrepresented. Arbitrator Barry reviewed the available record, which included the EUO transcript of testimony taken of the injured person. The injured person testified that he lived in Rochester from January, 2014 through the date of accident in November, 2014. However, the injured person had no bills, receipts or cancelled checks documenting that he resided at that location. The injured person testified that he paid rent to his friend in Rochester for the last six months of 2013 in cash and traveled back and forth between Rochester and Brooklyn. The injured person was unable to testify regarding the amount of time spent at either location and could not adequately describe his residence in Rochester. Arbitrator Barry noted that the no-fault application provided a Brooklyn address and the injured person had a New York State commercial driver’s license that provided a Brooklyn address. Respondent also submitted an investigative report that referenced that the investigator spoke with the landlord of the premises in Rochester where the injured person purportedly resided and the landlord did not know the injured person. Respondent provided the affidavit of its underwriter who averred that the injured person listed a Rochester, New York, address as his place of residence and the location where the insured vehicle would be garaged when in fact he resided in Brooklyn. This was done to save on policy premiums, as the cost of the policy premiums for a vehicle to be listed as principally garaged in Rochester, New York, as opposed to Brooklyn, New York, is significantly less. Respondent maintained that it would not have issued the policy to the injured person at the same rate had the insured provided truthful information. Based on the foregoing, arbitrator Barry found that respondent’s defense based upon fraudulent procurement was established.

For those keeping score, the applicant prevailed on two of these four arbitrations; the insurers prevailed on the other two.

Proven rate evasion supports the denial of no-fault benefits (and other first-party coverages) to or on behalf of any EIP who was complicit in the fraudulent procurement of the auto policy.  The operative question is NOT whether the insurer would have insured the risk at all had it known the true facts, but whether it would have issued the SAME policy on the same terms and premium.  If the answer to that question is no, the misrepresentation is material.  Although New York personal auto policies may not be rescinded (retroactively canceled) because of New York's financial responsibility laws, first-party benefits may be denied to those complicit in the fraudulent procurement of the policy.

Additionally, remember that the rate evasion/fraudulent policy procurement defense is not subject to the 30-day preclusion rule.  In A.B. Medical Services, PLLC a/a/o Yevgenya Ioffe v. Commercial Mut. Ins. Co., 12 Misc.3d 8 (App. Term, 2nd Dept., 2006), the Appellate Term , Second Department, 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]). 

For more discussion, cases and awards on this issue, click the rate evasion label below.

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.

Res Judicata and Collateral Estoppel Not Applicable to Bar Relitigation of Rate Evasion-Based Voiding of Pennsylvania Auto Policy

AUTO – UM/SUM – RATE EVASION – RES JUDISCATA – COLLATERAL ESTOPPEL
Matter of AutoOne Ins. Co. v. Valentine
(2nd Dept., decided 4/20/2010)

On January 3, 2004, Valentine was involved in an automobile accident in Queens with a motor vehicle operated by Rodriguez. The petitioner, AutoOne Insurance Company, insured the Valentine vehicle.  Rutgers Casualty Insurance Company insured the Rodriguez vehicle.

In 2005, Rutgers commenced an action in Pennsylvania state court against, among others, Rodriguez and Valentine.  AutoOne was not a party to the Pennsylvania action. Rutgers' complaint alleged that Rodriguez had fraudulently represented on his application for insurance that he resided in Pennsylvania and that his vehicle was garaged there.  Rutgers sought to have Rodriguez's policy declared void ab initio.  The complaint also stated that "[a]ll other defendants named herein are so named FOR THE PURPOSE OF NOTICE ONLY," referring to Valentine and all of the defendants other than Rodriguez.

In 2006, the Pennsylvania state court declared Rodriguez's policy void ab initio upon the default of Rodriguez and granted Rutgers' request to discontinue the Pennsylvania action against all other defendants, including Valentine.

Valentine thereafter amended his supplementary uninsured motorists (SUM) coverage claim to AutoOne and demanded arbitration.  In 2008, AutoOne commenced this special proceeding and sought leave to join Rutgers and Rodriguez as proposed additional respondents and temporarily to stay arbitration of Valentine's claim for SUM benefits pending a hearing on the determination of coverage under Rodriguez's policy with Rutgers.

Queens Supreme Court (Rios, J.) granted AutoOne's petition and Rutgers appealed.  In AFFIRMING the order appealed from, the Second Department ruled:

• the doctrine of res judicata did not apply to bar relitigation in this proceeding of the issue of insurance coverage for the Rodriguez vehicle under the Rutgers policy because the Pennsylvania court order was not a final judgment on the merits which would be entitled to res judicata effect in this proceeding;
  
  
• because the discontinuance of Rutgers' Pennsylvania state court action as to Valentine did not state that it was granted with prejudice, it did not operate as an adjudication on the merits for purposes of res judicata application; and
  
  
• the doctrine of collateral estoppel did not apply to bar relitigation in this proceeding of the insured status of the Rodriguez vehicle because that issue was not actually litigated and decided in the Pennsylvania action, since Rodriguez defaulted and the Pennsylvania court's order voiding his policy ab initio was issued on that basis.

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.

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]).