After a policyholder submits a claim to an insurance company, the insurer investigates to determine whether to pay the claim, as the insurer is permitted to do under its insurance policy. On occasion, after an insurer has begun to investigate a claim, it may come to believe that the claim is fraudulent, or at least that it requires further investigation to determine whether it is fraudulent or should not be paid for other reasons.

Typically, when investigating a claim, an insurer will seek the cooperation of the policyholder, as the insurer also is permitted to do under its insurance policy. The policyholder's cooperation, which is required under the policy, can help persuade the insurer to pay the claim, or may confirm to the insurer that the claim should not be paid.

In some instances, however, a policyholder refuses to cooperate with the insurer. Under well-established New York law, that alone may entitle the insurer to deny the claim.

Or, it may lead the policyholder to sue the insurer for breach of the insurance contract.

That's what happened in a case decided in January by a federal court in New York. In Fernandez v. Philadelphia Indemnity Ins. Co., No. 16 Civ. 2533 (JCM) (S.D.N.Y. Jan. 19, 2018), the court made it clear that a policyholder's duty to cooperate was paramount, and that the policyholder's failure to cooperate was enough to permit the insurer to deny the policyholder's claim—whether or not the claim actually was fraudulent.

The 'Fernandez' Case

In June 2012, Diego Fernandez purchased a 1962 Chevrolet Impala that he insured with the Philadelphia Indemnity Insurance Company for $120,000; the insured value later rose to $165,000.

On the morning of July 1, 2014, Fernandez called the police to report that his Impala had been stolen while parked inside his garage. He told the police that he had purchased the Impala in 2007 for $30,000.

On July 29, 2014, PICC requested information from Fernandez in connection with the alleged theft, including documents pertaining to his purchase of the Impala and its subsequent upgrades. PIIC also requested Fernandez's personal and business tax returns dating back to Jan. 1, 2009.

On Aug. 11, 2014, Fernandez provided PIIC with a police report and the first page of the 2013 tax return for his business. PIIC then requested the remaining documents from Fernandez and informed him that his failure to produce the documents would be a material breach of the insurance policy. PICC sent another demand for the documents to Fernandez on Oct. 2, 2014.

On Oct. 6, 2014, Fernandez provided the following documents to PIIC:

(1) a Nov. 20, 2007 bill of sale signed by “Shayne Alterton,” which acknowledged receipt of $30,000 in cash for the sale of the Impala;

(2) a Sept. 7, 2009 invoice issued by Golden Customs, Inc., which indicated that Fernandez had paid $151,750 in cash to upgrade the Impala; and

(3) an Oct. 5, 2013 invoice issued by Golden Customs indicating that Fernandez had paid $71,500 in cash for additional upgrades.

Fernandez, however, objected to PIIC's requests for his tax returns.

In October 2014, PIIC sent two demands to Fernandez insisting that he comply with its July 29, 2014 document request. On Dec. 17, 2014, PIIC informed Fernandez that it would not process his claim if he continued to refuse to comply with all previous requests. PIIC never received a response to its December 17 letter.

On Feb. 22, 2016, Fernandez sued PIIC, alleging that the insurer had breached the insurance contract by failing to pay him $165,000 after the theft of his insured vehicle. Fernandez produced the bill of sale and the two invoices from Golden Customs that he had previously provided to PIIC, but he objected to PIIC's requests for his tax returns and documents pertaining to the Impala's upgrades, contending that the information was neither relevant nor material.

In October 2016, PIIC's investigators obtained title documents for the Impala from the Oregon and California Departments of Motor Vehicles that indicated that Jimmy Ferrer of California had acquired title on or about Aug. 20, 2006 and that title had been transferred to “Shayne Atterton” of Oregon on or about Oct. 15, 2010.

On Oct. 27, 2016, PIIC served another set of document requests on Fernandez, seeking his bank statements and documentation of the Impala's upgrades. Fernandez subsequently indicated that “the dates listed on the following documents previously provided” to PIIC—the bill of sale dated Nov. 20, 2007 and invoices from Golden Customs dated Sept. 7, 2009 and Oct. 5, 2013—were “not accurate.” He added that he was “not currently aware of the actual date[s] of payments and the amounts paid to Golden Customs, Inc., and/or to Bennie Padilla for upgrades to the Insured Vehicle,” and that, “to correct any prior misleading statements,” he had purchased the Impala “from Shayne Atterton on or about June 12, 2012 for the sum of $33,300.”

PIIC moved for summary judgment, arguing among other things that Fernandez had breached his duty to cooperate under the policy.

For his part, Fernandez asserted that he had supplied all relevant requested information to PIIC throughout the investigation and that he had not breached the duty to cooperate.

The Court's Decision

The court granted PIIC's motion.

In its decision, the court pointed out that PIIC had reason to believe that Fernandez's claim might be fraudulent. The court noted that his claim that his Impala had been stolen while parked in his locked garage was “nearly identical” to the claim he had filed with PIIC in 2010 for the theft of his 1985 Pontiac Fiero. The court recognized that it was “unusual enough for an individual living in a semi-rural area to have a vehicle stolen from home,” adding that it raised “legitimate suspicion for the same individual to report another 'theft' under nearly identical circumstances.” In addition, the court added, PIIC was aware that Fernandez had filed for bankruptcy in 2005 to discharge $32,077 of debt. According to the court, these facts raised “legitimate questions about the authenticity” of Fernandez's claim.

The court decided that PIIC's efforts had been “both diligent and reasonably calculated” to bring about Fernandez's cooperation. The court pointed out that PIIC had sent Fernandez “numerous letters” regarding his obligations under the policy and had continued to follow up even after he had failed to respond. Moreover, the court observed, PIIC had specifically informed Fernandez that his failure to comply with its requests would be a material breach of the policy.

The court then ruled that Fernandez's attitude had been one of “willful and avowed obstruction,” a standard the New York Court of Appeals had adopted in Thrasher v. U.S. Liability Ins. Co., 19 N.Y.2d 159 (1967), to protect innocent third parties and that was not technically applicable to this case, where no innocent third parties were involved. Although the court should have applied the “willful” standard, as indicated in Rosenthal v. Prudential Property & Casualty Co., 928 F.3d 493 (2d Cir. 1991), it nevertheless decided that Fernandez had breached his duty to cooperate with PIIC by providing PIIC with “false documents,” namely a “back-dated bill of sale” and invoices he had “prepared” himself.

Fernandez disputed that he had produced “fraudulent documents,” but the court pointed out that he had submitted invoices purporting to be from Golden Customs that he had “prepared” after the fact using “estimates.” It noted that Fernandez himself had admitted that “[t]here never was any paperwork” for the Impala's renovations, that he was not aware of the actual dates of payment or the amounts paid for the Impala's upgrades, and that he had “back-dated” the bill of sale. Simply put, the court ruled, Fernandez had implicitly represented to PIIC that the documents he had submitted were bona fide, “when in fact they were fabricated.” In the court's view, this could not be classified as a “technical or unimportant” omission or defect or an “honest mistake” given that Fernandez had “repeatedly submitted the 'made up' documents in an effort to recover under the [PIIC policy].”

Fernandez's actions, the court ruled, “clearly” constituted “willful and fraudulent” conduct expressly undertaken to induce PIIC to pay his claim, and his “implicit representation” that the bill of sale and invoices were genuine was particularly relevant and germane to PIIC's investigation of the alleged purchase, upgrade, and restoration of the Impala.

The court said that where the circumstances of a claim “may reasonably appear suspicious,” as in this case, producing fake documents defeated “the right of the insurer to obtain relevant information to enable it to decide upon its obligations under the policy and to protect against false claims.” The court concluded that Fernandez's violation of the cooperation provision in the PIIC policy precluded recovery of his claim from PIIC as a matter of law.

Various Breaches

Providing fake documents in an effort to persuade an insurer to pay a claim is not the only way for an insured to breach the duty to cooperate.

In one leading case, Rosenthal v. Prudential Property & Casualty Co., 928 F.3d 493, the U.S. Court of Appeals for the Second Circuit decided that an insured's willful failure to submit to an examination under oath (EUO) was a material breach of his obligations under his insurance policy and that, as a result, the insurer did not have to pay his claim. Importantly, the Second Circuit also rejected the policyholder's contention that his refusal to submit to an EUO was not “willful” because he had relied in good faith on the advice of his counsel.

In another leading case, Blakeslee v. Royal Ins. Co. of America, No. 93 Civ. 1633 (MBM) (S.D.N.Y. March 22, 1995), the insured sought to compel his insurer to pay for fire damage to an insured building. The insurer had denied the claim after an initial investigation had revealed that the fire was suspicious and that the insured may have been involved.

The court found that the insured had failed to comply with numerous requests to produce his income tax records, which the insurer claimed were necessary to determine whether the insured had a financial motive to commit arson. The court granted summary judgment to the insurer, concluding that the insured's obligation to produce financial records in compliance with a cooperation clause in an insurance policy was “particularly acute in a case of suspected arson.”

Conclusion

When insurance companies pay fraudulent claims, premiums rise and unlawful behavior is rewarded. Investigating claims with policyholder cooperation is important to help ensure that only valid claims are paid. Although policyholders may try to circumvent that process by suing their insurers for breach of the insurance contract, Fernandez makes it clear that insurers that diligently investigate and seek their policyholders' cooperation should be able to defeat those unwarranted lawsuits.

Evan H. Krinick, managing partner of Rivkin Radler, can be reached at [email protected].