Denying Coverage Where Fraud OccurredSeptember 4, 2015
More than 30 years ago, in 1984, a divided New York Court of Appeals decided in Barker v. Kallash that a person who committed an illegal act of a serious nature should not be able to profit from that wrongdoing.1 By 1997, the court, in Manning v. Brown, seemed to have no doubt about this rule, unanimously declaring that a plaintiff’s “knowing participation” in a serious violation of the law precluded her recovery for injuries resulting from that conduct.2 Since then, numerous other courts in New York have relied on Barker and Manning to deny recovery to plaintiffs who had engaged in a wide variety of different illegal acts.3
People who engage in insurance fraud similarly have to deal with the consequences. That’s because, in New York, both the common law and the Insurance Law permit an insurance carrier to rescind or void a life or property insurance policy where a material misrepresentation was made at the time of the procurement of the policy.4
Historically, however, an insurance company’s right to cancel an automobile insurance policy for fraud has been somewhat more limited. Vehicle and Traffic Law (VTL) §313(1)(a)5 prohibits the termination of an insurance policy until after the insurer mails a notice of termination to the insured, thus altering an insurance carrier’s right to retroactively cancel an automobile insurance contract on the grounds of fraud or misrepresentation and mandating that the cancellation only may be effected prospectively.6 Cancellation of an automobile insurance policy also may not necessarily affect “innocent” third parties who have been injured and who seek to recover under the insured’s policy.7
Recently, though, courts have been willing to treat automobile insurance fraud—in particular, no-fault insurance fraud—like other kinds of fraud and, even more recently, like other serious violations of law. This is evident in cases involving claims brought against insurance companies by health-care providers who have been assigned the right to recover no-fault benefits by policyholders. Perhaps even more significantly, a court has just relied on the Barker and Manning line of cases to preclude recovery to a plaintiff in an alleged “staged accident” automobile insurance fraud case.
The decision by the Appellate Term, Second Department, in A.B. Medical Services v. Commercial Mutual Ins. Co.,8 illustrates the willingness of courts to limit the ability of a health-care provider to profit from an insured’s fraud via an assignment of first-party no-fault benefits for medical services the provider asserted it rendered to its assignor.
In this case, the plaintiff health-care provider moved for partial summary judgment. In opposition to the plaintiff’s motion, the defendant insurance company asserted the defense that the plaintiff’s assignor had been involved in a fraudulent scheme to procure an insurance policy in order to pay reduced insurance premiums. Consequently, the insurance company argued, the plaintiff should not be deemed eligible to recover assigned no-fault benefits.
The trial court denied the plaintiff’s motion for partial summary judgment, and the plaintiff appealed.
The Appellate Term, Second Department, affirmed. In its decision, the appellate court noted that the insurance company had not asserted that it had effectively canceled the insurance policy pursuant to VTL §313. However, the appellate court continued, although a policy may not be retroactively cancelled, thereby protecting “innocent third parties who may be injured due to the insured’s negligence,” 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.”
In this case, the appellate court explained, the issue was whether, assuming the insurance policy had been fraudulently procured, the plaintiff health-care provider was an “innocent” third party protected by the law. The appellate court ruled that it was not so protected, declaring that an assignee of an insured who allegedly perpetrated a fraud did not acquire greater rights than those had by the assignor. The appellate court held that “only innocent third parties” who were injured were protected, 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.”
The appellate court found that the insurance company’s submissions in support of its defense were sufficient to raise issues of fact as to whether the insurance policy had been fraudulently procured. Accordingly, it concluded, the plaintiff’s motion for partial summary judgment had properly been denied.
Two noteworthy decisions involve alleged staged accidents, one decided in 2003 and one decided this past July.
State Farm Mutual Automobile Ins. Co. v. Laguerre,9 in which the author and his firm represented the insurer, was a lawsuit filed by an insurance company seeking a declaration that it was not obligated to provide liability coverage to Jacques Laguerre for a lawsuit brought against him by Peter A. Gozzi, the driver of a motor vehicle involved in a collision with a vehicle owned by Laguerre that occurred on Feb. 11, 1999. The insurer moved for summary judgment, but its motion was denied by the Supreme Court, Kings County. Instead, the trial court granted Gozzi’s motion and declared that the insurer was obligated to defend and indemnify Laguerre in Gozzi’s lawsuit. The insurer appealed.
The Second Department reversed. In its decision, the appellate court explained that, within weeks after the insurer had issued insurance policies for vehicles registered to Laguerre, the vehicles were involved in three collisions, including the one with Gozzi. The insurer investigated and concluded that the collisions were not accidents but had been intentionally caused to fraudulently obtain insurance benefits.
The Second Department reasoned that a “deliberate collision caused in furtherance of an insurance fraud scheme” was not a covered accident. It decided that the insurer had established its prima facie entitlement to judgment as a matter of law by demonstrating that the Feb. 11, 1999, collision was one of three collisions that had been deliberately caused to fraudulently obtain insurance benefits. The appellate court concluded that Gozzi had failed to raise a triable issue of fact as to whether the collision was intentional and, thus, was not entitled to coverage under the policy.
The more recent decision by the Second Department, relying on the Court of Appeals’ rulings in Barker and Manning, came in Oriental v. U-Haul Co. of Arizona.10
Here, Johnny Oriental filed a lawsuit in a New York state court seeking to recover damages for injuries he allegedly sustained when a livery vehicle in which he was a passenger was struck in the rear by a rental van. The defendants were Girlee Enterprises, which owned the livery vehicle; Bernard Jacques, who was driving it; U-Haul Co. of Arizona, the alleged owner of the rental van; and Jgor J. Georges, the operator of the rental van.
Girlee Enterprises and Jacques moved for summary judgment dismissing the complaint and all cross claims insofar as asserted against them, submitting evidence, including an affidavit that the plaintiff had executed during an investigation by U-Haul’s insurer, indicating that the plaintiff and Georges had knowingly and voluntarily participated in the staging of the accident in order to fraudulently obtain insurance payments.
There was no opposition, but the Supreme Court, Kings County, denied the motion. Girlee Enterprises and Jacques appealed.
The Second Department reversed. It found that Girlee Enterprises and Jacques had demonstrated their prima facie entitlement to judgment as a matter of law by submitting uncontroverted evidence that the plaintiff had engaged in the “unlawful and highly dangerous activity of staging a motor vehicle accident for pecuniary gain,” and that any alleged injury he might have suffered was the direct result of that unlawful conduct. Relying on Barker and Manning, the appellate court concluded that staging an accident was a serious violation of law such that the plaintiff’s complaint should have been dismissed.
The application of the New York Court of Appeals’ line of cases regarding illegal conduct by plaintiffs to automobile insurance fraud may very well turn out to be a significant deterrent to no-fault fraud in New York. If more courts in the state are willing to permit insurance companies to challenge fraudulent payouts, the incentive to engage in insurance fraud is likely to diminish.
1. Barker v. Kallash, 63 N.Y.2d 19 (1984) (plaintiff who allegedly was injured while building a “pipe bomb” may not recover as court holds that where a plaintiff engaged in unlawful conduct, courts will not entertain suit if plaintiff’s conduct constituted a serious violation of law and injuries for which plaintiff sought recovery were the direct result of that violation).
2. Manning v. Brown, 91 N.Y.2d 116 (1997) (case involved “crime commonly referred to as joyriding”).
3. See, e.g., Hathaway v. Eastman, 122 A.D.3d 964 (3d Dept. 2014) (plaintiff may not recover for injuries allegedly suffered while engaging in “grossly reckless” and unlawful conduct of drag racing); Wolfe v. Hatch, 95 A.D.3d 1394 (3d Dept. 2012) (plaintiff may not recover regardless of whether his conduct was viewed as “unlawfully dealing with fireworks and dangerous fireworks…or criminal possession of a weapon in the third degree”); Moore v. County of Suffolk, 11 A.D.3d 591 (2d Dept. 2004) (plaintiff may not recover for injuries sustained when, by his own admission, he fled from police to avoid arrest for possession of controlled substances and was struck by police car as he crossed in front of it); Gaither v. City of New York, 300 A.D.2d 255 (1st Dept. 2002) (same, “elevator surfing”).
4. See, e.g., Vermont Mutual Ins. Co. v. Moslem, No. 07 CIV 7962 (SAS) (S.D.N.Y. July 14, 2011); Varshavskaya v. Metropolitan Life Ins. Co., 68 A.D.3d 855 (2d Dept. 2009); Stracar Medical Services v. Nationwide Mut. Ins. Co., 39 Misc.3d 1216[A] (Civ. Ct. Kings Co. 2013); Ins. Law §3105.
5. Vehicle and Traffic Law §313(1)(a) provides that an insurance company may not cancel a policy until after it mails a termination notice to the named insured.
6. See, e.g., Liberty Mut. Ins. Co. v. McClellan, 127 A.D.2d 767 (2d Dept. 1987). As a practical matter, VTL §313(1)(a) “places the burden on the insurer to discover any fraud before issuing the policy, or as soon as possible thereafter.” Matter of Ins. Co. of North America v. Kaplan, 274 A.D.2d 293 (2d Dept. 2000).
7. See, e.g., Matter of Ins. Co. of North America v. Kaplun, 274 A.D.2d 293 (2d Dep’t 2000); Canarsie Chiropractic v. Auto Club Ins. Ass’n, 42 Misc.3d 1236(A) (Civ. Ct. Kings Co. 2014). See, also, Citizens United Reciprocal Exchange v. Perez, No. A-67 (N.J. Aug. 13, 2015) (where policyholder purchased basic policy’s optional $10,000 coverage for third-party bodily injury in the original contract, insurer was liable for coverage to innocent third party in that contracted $10,000 amount).
8. A.B. Medical Services v. Commercial Mutual Ins. Co., 12 Misc.3d 8 (App. Term 2d Dept. 2006).
9. 305 A.D.2d 490 (2d Dept. 2003).
10. 2015 N.Y. Slip Op. 05923 (2d Dept. July 8, 2015).
Reprinted with permission from the September 4, 2015 issue of the New York Law Journal. All rights reserved.