How to find it. How to fight it

By Barry Zalma

Excerpts from Barry Zalms's Insurance Fraud Newsletter
published on the Internet at www.zalma.com.

Table of Contents

The IME -- An Ethical Quagmire

California Imposes New Emergency SIU Regulations

The Civil Burden of Proof

A typical breach of contract action only requires a party who wishes to avoid the contract need only prove the breach by a preponderance of the evidence. It is a long-standing and accepted difference between civil contract actions and criminal actions that require proof of the crime beyond a reasonable doubt. The burden on the plaintiff asserting a claim in a civil action is to prove every essential element of its claim by only a preponderance of the evidence. [Interstate Petroleum Corporation v. Morgan, 249 F.3d 215 (4th Cir. 05/01/2001)]

The United States Supreme Court has explained that under "[c]onventional rules of civil litigation . . . parties . . . need only prove their case by a preponderance of the evidence ...and that ...[e]xceptions to this standard are uncommon. Price Waterhouse v. Hopkins, 490 U.S. 228, 253 (1989) "Because the preponderance-of-the evidence standard results in a roughly equal allocation of the risk of error between litigants, we presume that this standard is applicable in civil actions between private litigants unless particularly important individual interests or rights are at stake. "Grogan v. Garner, 498 U.S. 279, 286 (1991) (quoting Herman & McLean v. Huddleston, 459 U.S. 375, 389 (1983)).

The clear and convincing evidence standard has been applied in certain cases involving fraudulent or bad faith conduct like Grossman v. Comm'r of Internal Revenue, 182 F.3d 275, 277 (4th Cir. 1999) (clear and convincing evidence required to prove intent to defraud in civil tax fraud case under the Internal Revenue Code); Shepherd v. ABC, 62 F.3d 1469, 1477-78 (D.C. Cir. 1995) (litigation misconduct must be proven by clear and convincing evidence in order for the district court to enter default judgment as a sanction for such misconduct). But while clear and convincing evidence is required for some fraud-based claims, in many instances a heightened burden of proof is not required. Grogan, 498 U.S. at 288-89 (listing federal fraud-related statutes to which the preponderance standard applies.)

Insurance fraud investigators perform their work on the understanding that they need only prove the defense of fraud by a preponderance of the evidence and consider the direction of the United States Supreme Court is binding so that if 50% + 1% of the evidence proves fraud, there is no coverage available to the insured.

The Majority Rule

The majority rule is that an insurance company must prove its affirmative defense for refusal to pay a fire claim by a preponderance of the evidence. Godwin v. Farmers Ins. Co. of America, 129 Ariz. 416, 418-19, 631 P.2d 571, 573-74 (1981) and Pacheco v. SAFECO, 780 P.2d 116; 116 Idaho 794 (1989).

The Arizona decision in American Pepper seems to accept a disturbing trend in a few courts across the country. For example, in McGory v. Allstate Ins. Co., 527 So. 2d 632 (Miss. 1988) the insurance company brought suit against the insureds to divest them of proceeds paid under a fire insurance policy. The insurance company alleged that the McGorys had deliberately burned their home to fraudulently obtain insurance proceeds. The Mississippi Supreme Court, however, found only a preponderance was required, citing Davis v. Continental Cas. Co., 560 F. Supp. 723 (N.D. Miss. 1983). The Supreme Court of Mississippi held that while that [federal] case is not controlling, in light of the obvious majority of other jurisdictions applying the same quantum of proof, we are persuaded that the Chancellor applied a correct legal standard in this case. And rejected the dissents belief that a clear and convincing standard, as opposed to the preponderance of the evidence standard commonly used in civil cases. [Dill v. Southern Farm Bureau Life Insurance Co., 797 So.2d 858 (Miss. 01/25/2001)]

When "Clear and Convincing" Evidence is Required

"Clear and Convincing" evidence is only required, in almost every jurisdiction, to prove the existence of an oral contract, not to prove breach [Canal Insurance Company v. Bush and King, 247 Miss. 87 (Miss.06/03/1963)] or to allow punitive damages [Life Ins. Co. of Georgia v. Parker, 706 So.2d 1108 (Ala. 11/07/1997) and Iddings v. Mee-Lee, 919 P.2d 263, 82 Haw. 1 (Haw. 06/20/1996), Crookston v. Fire Insurance, 164 Utah Adv. Rep. 3 (1991); Best Place Inc. v. Penn America Insurance Co., 920 P.2d 334, 82 Haw. 120 (Haw. 06/05/1996)] or to allow reformation of a policy of insurance [National Premium Budget Plan Corp. v. National Fire Insurance Co., 234 A.2d 683, 97 N.J.Super. 149 (N.J.Super.Law Div. 09/13/1967)] or to prove a willful fraud in the inception of a policy of insurance [Aluminum Co. of America v. Aetna Casualty & Surety Co., 140 Wash.2d 517, 140 Wash.2d 517, 998 P.2d 856, 998 P.2d 856 (Wash. 05/04/2000)] or to prove that an insurer committed fraud in its claims handling [Hartford v. Foster, 528 So. 2d 255 (1988)] or to prove a waiver of insurance policy defenses [Waller v. Truck Ins. Exch., 44 Cal. Rptr.2d 370, 387, 900 P.2d 619, 636 (1995); Brown v. State Farm Mut. Auto Ins. Co., 776 S.W.2d 384, 387 (en banc) (Mo. 1989); and Farm Bureau Mut. Auto. Ins. Co. v. Houle, 118 Vt. 154, 160, 102 A.2d 326, 330 (1954)); Potesta v. United States Fidelity & Guaranty Co., 504 S.E.2d 135 (W.Va. 05/15/1998)].

"Clear and Convincing" evidence is only required, in almost every jurisdiction, to prove the existence of an oral contract, not to prove breach

 Other courts have made the same error as the Arizona American Pepper decision. In Howard v. Golden State, 231 N.W.2d 655, 60 Mich. App. 469 (1975) the Michigan Court of Appeals that held: Substantiation of a claim of misrepresentation to avoid payment of insurance proceeds requires an insurance company to prove with clear and convincing force that a misrepresentation was made, that the insurer relied upon the statement, and that the misrepresentation was material to the risk and hazard accepted by the insurer; the insurance policy will be liberally construed in favor of the insured.

In Ashline v. Genesee Patrons, 638 N.Y.S.2d 217, 224 A.D.2d 847 (1996) on which the Arizona Court relied, the court found that arson was proved by clear and convincing evidence and that failure to cooperate by making misrepresentations about involvement in the arson was sufficient for the insurer to deny the claim based upon a preponderance of the evidence. Ruling in favor of the insurer the New York court applied both standards. Even if the Arizona Court believed that fraud must be proved by clear and convincing evidence, the failure to cooperate in the investigation could have, as it did in Ashline, been applied to refuse indemnity in the American Pepper case.

In New York, before Ashline, the courts held that the defendant clearly has the burden of proof and concluded that the clear and convincing evidence standard of proof applicable to fraud cases has been held applicable to defenses of arson and false swearing (Hutt v Lumbermens Mut. Cas. Co., 95 A.D.2d 255). This standard has not been expressly applied to the affirmative defense of refusal to comply with policy requirements where only a preponderance of the evidence is required to prove failure to cooperate.

The defendant's burden of proving lack of cooperation on the part of its insured has been described as a heavy one (Dyno-Bite, Inc. v Travelers Cos., 80 A.D.2d 471, 475, appeal dismissed 54 N.Y.2d 1027), especially in cases where an innocent accident victim would be deprived of his source of payment because a liability carrier claims that its assured has failed to cooperate (Thrasher v United States Liab. Ins. Co., 19 N.Y.2d 159, 168; Van Opdorp v Merchants Mut. Ins. Co., 55 A.D.2d 810). "Notwithstanding this characterization, we hold that the standard of proof applicable for establishing a breach of the policy's cooperation clause in a case involving an indemnity carrier seeking to avoid payment to a fire insured, which is a party in control of its own fate (see, Dyno-Bite, Inc. v Travelers Cos., supra, at pp 475-476), is a preponderance of the evidence. Accordingly, the trial court erred in applying the clear and convincing evidence standard with respect to the second affirmative defense, but not with respect to the third affirmative defense." [Ausch v. St. Paul, 511 N.Y.S.2d 919; 125 A.D.2d 43 (1987)]

Where the Court of Appeal, in American Pepper failed was to apply a tort standard to a contract dispute. The insurer was not suing American Pepper for damages as a result of fraud. It was, rather, asserting that the contract of insurance does not provide indemnity, and is void, because of the breach of a material provision of the policy. Once the insurer proved beyond a preponderance of the evidence that the insured misrepresented a material fact, failed to cooperate in the investigation by attempting the fraud and to conceal the truth from the insurer, the denial should have been established.

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