Recouping Good Faith Payments

By July 27, 2012 Insurance

INSURANCE COMPANY RECOUPS GOOD FAITH PAYMENTS AFTER FRAUD IS UNCOVERED IN FIRE CLAIM

Highlights

  • Larry Arnold of Cummins & White, LLP, an expert in insurance, real estate, and business law, successfully represented an insurance company through the claim process and trial when it sued a business owner to recoup good faith payments made in connection with a fire that destroyed a dry cleaning business.
  • Though portions of the claim were legitimate, the owner had submitted a forged contract as part of his claim for lost business income, as well as other false evidence.  Based on this false claim for payment, the court ordered the owner to repay approximately $450,000.
  • This decision bolsters insurance company efforts to fight insurance fraud, providing an option of rescinding a policy and suing insureds to recover good faith payments if fraud is uncovered.

Attorneys

Case Study

Larry Arnold of Cummins & White, LLP, successfully represented an insurance company when it sued a business owner who falsified claims in connection with a fire that destroyed his dry cleaning business.  Good faith payments had been made to the owner, but when a fraudulent contract for laundry services was uncovered, the insurance company declined the claim, rescinded the policy, and sued the owner for monies already paid.  As part of the lawsuit,  false evidence was uncovered and presented at trial.  The judge ruled in favor of the insurance company, ordering the owner to repay approximately $450,000.

Background

The insurer issued a fire insurance policy to the insured located in Southern California.  In September 2007, a fire destroyed the business, and the owner submitted claims for replacement equipment, debris removal, and loss of business income.  Based on these claims, the insurance company paid the owner and customers $527,000.

However, during the insurance company’s investigation of the claims, inconsistencies were uncovered in a laundry services contract submitted as part of the owner’s claim for loss of business income.  The owner was asked to sit for an Examination Under Oath, but he declined and withdrew his pending claim.  The insurance company then declined the claim, rescinded the policy, and sued the business owner to recoup all loss payments.

Legal Strategy

Larry Arnold of Cummins & White, LLP, represented the insurance company throughout the process, including the claims investigation and trial.  At trial, Mr. Arnold presented evidence and witness testimony showing that the owner had falsified the laundry contract and also inflated amounts paid for replacement equipment, debris removal, and payroll, among other items.

Results/Implications

The judge ruled in favor of the insurance company and its rescission of the fire insurance policy.  The owner was ordered to repay $452,064, which represented all payments, less monies paid to customers who lost clothing in the fire and the policy premium.

According to Mr. Arnold, this decision is important as it reinforces the rights of insurance companies not to just decline a claim when fraud is uncovered, but also to rescind a policy and sue the insured to collect good faith payments.  “Previously, the law was not clear what happens to monies paid as part of a legitimate claim, or the legitimate portion of a claim, when fraud is discovered in a separate part,” he said.  “The ruling confirms the proposition that insurance companies are entitled to recover all of the monies previously paid.  It is now clear that fraud in part of a claim translates to fraud in the entire claim.  This decision definitely will affect how insurance companies handle fraudulent claims in the future.”