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By Barry Zalma
The story that follows is based on fact. It is, however, a work of fiction. The names, places and descriptions have been changed to protect the guilty. Any resemblance to real people is purely coincidental. This story was written for the purpose of providing insurers, those in the insurance business, and the insurance buying public sufficient information to recognize and join in the fight against insurance fraud.
The Insured purchased, for the first time in his life, a policy of Personal Articles Floater Insurance (PAF) scheduling $125,000 worth of ladies jewelry. When he first acquired the insurance he advised the insurer that the jewelry was always kept in a class E safe (one that requires at least 30 minutes to drill out the lock) at his residence. He also told the insurer that he was employed full time as the owner of a gasoline service station and that he had never been canceled or suffered a previous loss.
One month after the policy was issued, just before the first installment of the premium finance contract was due, the Insured reported a loss. He claimed that two armed robbers came to his door at midnight (while his wife and child were fortuitously away helping a neighbor fill out immigration and naturalization forms) and forced him, at gun point, to open the safe. They removed only the jewels, struck him on the head with the weapon, and tied him up like a mummy with 56 feet of rope they just happened to have the foresight to bring with them.
On investigation, it was learned that the Insured had owned the jewelry for over twenty years. The Insured received the jewelry as a gift from his grandmother when he immigrated to the United States. The Insured came from what was then known as Soviet Armenia with his entire family of six. His jewels had been stored in his closet without incident for the full twenty years. Neither the Insured’s father nor any of his relatives knew about the gift because “it was not their business to know.”
The Insured, also because it was not his business to know, did not know whether his father or his brothers had received a similar gift from his grandmother. The Insured had resided in an apartment building owned by his father for many years, but just two months before buying insurance, he had moved into this new residence. Shortly after the robbery, he moved back to the family owned apartment house.
In truth, the Insured did not own a service station and was, in fact, unemployed for two years before the robbery. His father owned a service station and the Insured would sometimes, for no pay, help his father. Further, just before the policy was issued, his residence was burglarized of jewelry not scheduled on the PAF, but he claimed he “forgot” to tell the insurer about the burglary.
The Insured had once owned a service station. He lost his franchise when the franchiser found out he was running multiple credit card slips from customers and forging their signatures on the slips. He eventually pleaded guilty to a forgery charge and was placed on probation by the court.
The jeweler who appraised the jewelry stated to the insurance adjuster that he could replace it all for 50% of the appraised value. The Insured had, in the past, suffered multiple losses of automobiles (the same car was stolen three times in two years) and earned large sums from automobile accidents. The Insured and his entire extended family were always together in the car and went to the same chiropractor for treatment whenever an accident happened. The Insured and the family used the same lawyer to represent their interest against the insurers for the parties who they claimed caused the accidents.
The Insurer denied the claim for the loss of the jewelry because the insured obtained the policy by means of misrepresentation of material fact and concealment of material fact. The Insured sued it for breach of contract and breach of the covenant of good faith and fair dealing seeking both compensatory and punitive damages The Court was reluctant to strike them, although evidence was ample that the insurer had good cause to reject the claim.
Discovery in the lawsuit established that the Insured and his father had reported the identical diamond ring stolen one year apart and had made the mistake of having it appraised by the same jeweler. The jeweler was willing to testify to the identity of the stones. Discovery also established two warranty violations in the policy.
Such facts were sufficient to establish fraud. However, when the defendant is an insurer, fraud is never easy to establish. The litigation dragged on for four and one half years; the trial court would not grant summary judgment. The judge wished to give the Insured his “day in court” to prove that he was but an innocent dupe of the insurer. The case was set for trial and the Insured/ Plaintiff made an offer of settlement that he would release the insurer of all liability in exchange for $30,000.00 cash.
By this time, with interest at 10% per annum, building over time, the exposure was at least $200,000.00 in compensatory damages and the possibility of excessive amounts in punitive damages if the jury disagreed with the position of the insurer. Counsel for the insurer was obligated to point out to his client that the cost, in attorneys’ fees and expert witness fees, needed to take the matter through a trial by jury would probably exceed the $30,000.00 demand, not to mention the cost to resolve any necessary post trial motions and appeals.
Although advised of the fraudulent claim police and prosecutors were not interested. The Insured had nothing to lose since he never owned the jewelry in the first place and concluded that $30,000 recovery – even after paying a contingent fee to his lawyer — was better than a judgment giving him nothing.
To the insurer the exposure was too big and the potential gain was too small. The insurer, convinced that the Insured had perpetrated a fraud, especially after he made an offer to settle for less than 15% of the amount of the insurance, paid. It was happy, in fact, to be rid of the exposure.
Members of the public, and the insurance industry as a whole, lost as a result of this economic judgment. The same Insured had presented, at least, four apparently fraudulent claims. His father also collected for the theft of the identical ring and they enjoyed the proceeds of their fraud.
If insurance fraud is to be stopped, the profit must be taken out of it. Since prosecutors seem disinterested, it is necessary for the insurance industry to take the chance on a punitive damage award and try every case where they believe fraud is being perpetrated. If they continue to take the easy, and least expensive way out, the cost to the industry as a whole will multiply.
Of course, insurers have shareholders who want to make a profit on their investment. Taking chances like those I propose will gain the ire of the shareholders and that is why this jewel theft claim – although nothing was owed – was believed to be a logical and prudent decision.
Prosecutors must be educated that insurance fraud is a serious crime that is taking multiple billions of dollars from the insurance industry. The cost of fraud is too big to continually pass on to the honest insurance consumer. If the prosecutors had taken note of the reports they received from the insurer the insureds would have been arrested and convicted and the insured’s law suit would have been immediately dismissed.
Perhaps if fraud did not make insurance so expensive the number of honest consumers would be larger. Now, it appears to be a very small group. An insurance research group has found that more than 67% of all auto insurance claims in Los Angeles are fraudulent to some degree.
Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He can be reached at firstname.lastname@example.org or www.zalma.com.FIREBUGS GO WILD in CA, NY and WI