Eldin v. Farmers Alliance Mutual Insurance

summary judgment for contained matters gave disputed rise to material issues

fact as to matters estop which would

County from raising the defense of statute of

limitations or indicate a basis for fraud. Cf.

Romero v. U.S. Life 242-43, (Ct.App.1986) 820-21

(affirming trial court’s determination that the

plaintiffs complaint properly allege failed to

sufficient indicating matters that statute of tolled).

limitations had been

Because we determine that the district

court in holding erred County im-

properly sought portion to utilize a proceeds

bond building refinance road

equipment, unnecessary it is to address the

remaining arguments Cross-Appellants.

We have remaining examined each of the

issues raised County the Boltons and the

and find them without merit.

CONCLUSION portion

We reverse that of the district judgment

court’s that invalidated the use of proceeds bond purpose of refi-

nancing purchase vehicles, equipment, personal property constructing maintaining public

or roads. In all other

respects, judgments of the district court parties

are affirmed. The shall bear their

own appeal. costs on

IT IS SO ORDERED. FLORES, JJ.,

PICKARD and concur.

890 P.2d 823

Elsayad Zein ELDIN and Anna Patterson Albuquerque Audio, Plaintiffs-

d/b/a

Appellants,

FARMERS ALLIANCE MUTUAL INSUR- COMPANY, Corpora-

ANCE a Kansas

tion, Defendant-Appellee.

No. 15638. Appeals

Court of of New Mexico.

Dec.

mary of Farmers Alliance judgment favor (Farmers). Company Insurance Mutual required contended that was Farmers pay on its business fraud, conceal- of Insureds’ Insureds because ment, misrepresentation in their stolen from their business and loss items cooperate in of Insureds’ failure to because investigation of that claim. We reverse.

BACKGROUND store, Albuquer- audio Insureds owned an issued a business own- que Audio. Farmers Insureds, policy to er’s common insurance poli- The them theft. which covered following provision: cy contained any This is void in case policy. this you any at time as it relates to insured, any if you It is void or other also time, intentionally or conceal misre- concerning: This present fact 1. a material 3. Your Property; 2. The Covered policy; or A Property; 4. interest the Covered this claim under provision stating The also contained loss, that, in claim of Insureds the event of a cooperate inves- duty with Farmers’ had claim, ways, among tigation of the answering questions under oath specifically claim. related to the subsequently claim on the filed a Insureds had been policy, alleging that store proof of loss burglarized. Insureds’ sworn of the items claimed that the value statement $45,797.19. In- burglary was lost portion their valua- sureds documented by submitting eight invoices claim $10,938. According costing merchandise (the invoices, “ques- merchandise merchandise”) purportedly pur- tioned Wold, Jr., A. Alexander Alexander A. occa- on four different chased P.C., Wold, Jr., plaintiffs- Albuquerque, for from store called Sound. sions appellants. language “no statement included sworn Jeffries, herein or in annexed Osnes, Sag- mentioned articles are Kristine Eric C. Scott destroyed or P.C., such as were er, Curran, but Tepper, Albu- schedules Sturges damaged said loss.” Farmers at the time of defendant-appellee. querque, for oath Insured Eldin under about

questioned examination, claim. At the start OPINION attorney in this case stated Insureds’ initial PICKARD, Judge. questioned merchan- the claims Patterson, being and advised Eldin Insureds, appeal withdrawn dise Eldin regarding that mer- to answer granting sum- trial order from the court’s chandise. No concerns were ever raised con- 607 P.2d at The Foundation Reserve cerning Concluding following language the balance of the claim. court also included the fictitious, eight risk-spreading theory invoices were Farm- its decision: “The operate ers denied Insureds’ entire claim. ‘should to afford to affected public frequently members of the innocent — Insureds then this instituted action persons protection pos- third maximum —the recovery Farmers for of their claimed loss. sible consonant with fairness to the insur- summary judgment, Farmers moved for ar- ” (quoting Oregon er.’ Id. Auto. Ins. Co. v. guing pay that it did not need to on the Salzberg, 85 Wash.2d 535 P.2d policy because Insureds breached both the (1975)). Seeing considerations in fraud, provisions regarding misrepresenta- Foundation Reserve as different from those tion, and concealment as well as the action, present judge the trial this requiring cooperation by the insured. In case believed that Foundation Reserve ad- response, ques- Insureds conceded that the prejudice dressed “the need for tioned merchandise had not in fact come policy only,” and therefore found that case to Sound, Super from but insisted that this inapplicable. judge be The trial also indicat- merchandise was nonetheless stolen in the conclusory ed that Insureds’ affidavits were burglary. through Insureds also asserted tardy explanation and in their of the false speaks English affidavit that poorly Eldin Accordingly, judge grant- invoices. the trial and as a result was under the mistaken summary judgment. ed Farmers’ motion for impression accept that Farmers would appeal, On we consider whether Farmers Sound invoices as of his loss. required prejudice was to show substantial affidavit, According to his Eldin had alleged result of Insureds’ breaches formed Farmers that invoices for some of the issue, provisions grant and whether the stolen merchandise were also stolen summary judgment in favor of Farmers was burglary and when Farmers told him that he appropriate provision. as to each invoices, produce had to he understood that DISCUSSION accept prepared Farmers would invoices purpose of the claim. Eldin maintained Prejudice A. The Requirement Substantial questioned that accurately invoices re- Not Involving Inju- Limited to Cases prices flected the of merchandise that was ries to Innocent Third Parties indeed Consequently, stolen. Insureds ar- Farmers contends that it need not gued they had not intended to defraud show substantial In a result of Farmers. alleged sureds’ breaches of the insurance In regard, Farmers echoes the motion, hearing At the on the judge’s trial holding view of the in Founda Supreme relied on the Court’s decision in Essentially, argues Reserve. Farmers Foundation Reserve Esqui- Insurance Co. v. inapplicable that Foundation Reserve is bel, 94 N.M. 607 P.2d 1150 present Supreme case because the Reserve, Supreme Foundation Court ruling protect Court’s was meant to innocent considered whether an insurer could void a parties third from a breach of an insurance liability policy because of an insured’s breach control, over which have no not to policy’s cooperation provi- fraud and protect guilty the insured who is sions when the claim made on the was However, breach. we believe that the Su injured party innocent third preme Court’s most recent treatment of the Supreme apparently insured. The Court fo- issue, Roberts Oil Co. v. cooperation provision, cused Transamerica Ins. 113 N.M. Cos., Kemper Sanchez v. (1992), proves P.2d 222 Farmers to be mis (1981), and held that taken. an “insuror must demonstrate substantial Oil, as a result of a material breach of Supreme In Roberts Court consid- policy by the insurance the insured showing before it ered whether a obligations will relieved required of its under a liability policy before a could be Reserve, policy,” Foundation poli- N.M. at avoided for the insured’s breach of the provision. does not have effect “voluntary payment” condition cy’s party, injuring an innocent third of Roberts Oil were Roberts was facts policy provisions are at issue. which different filling gas leak at a station liable next consider whether substantial We subsequent large paid both and a regard four dice must shown money groundwater to abate the sums alleges In- specific types of breach Farmers thereby. insur- contamination caused Prior fraud, misrepresen- have sureds committed: indemnify Roberts or reim- ers declined tation, concealment, noncooperation. subsequent burse the insurer because their claim that Roberts breached a clause Prejudice Need Be B. Substantial Not voluntarily making any prohibiting it from By In- in Cases Fraud Shown payment, assuming any obligation, incur- or sured ring any expense the in connection with shown, holding in As we have the 746-47, 223- event. 113 N.M. at 833 P.2d at requiring showing a now, Roberts Oil substan 24. Much insurer as Farmers does the may a be avoided tial before attempted the distinguish in Roberts Oil appears quite to be broad. None for breach holding of broad Foundation Reserve theless, the rule we do not think that extends party ground that no innocent third was hurt material fraud to an insured’s at because of the insured’s breach. 113 N.M. provisions provision. Other kinds of Rejecting argu- 833 at 228. P.2d motive an may deal with an innocent ment, Supreme stated follow- the Court the breach, and strict en insured’s therefore ing: provisions might frustrate forcement those We think that the rationale behind expectation that a consumer’s reasonable Reserve cannot be limited so [Foundation ] arbitrarily. coverage be See will not denied narrowly. beginning opin- At the of that N.M. 833 P.2d at 229. Howev id. 113 at ion, the as “Is a we stated follows: er, strong public policy pre considerations substantial and material breach of the saying the for fraud. As us from same vent surance contract the insured sufficient Supply in explained American Diver’s policy, to void or must the also his Boltz, Manufacturing Corp. v. 482 795 F.2d demonstrate actual the insur- (10th Cir.1973): resulting from 94 at er the breach?” N.M. misgivings the out of some about [I]f law is 607 P.2d at 1150. There no indica- forfeitures, require that the insur- were to many in opinion, tion in the nor been misled to er demonstrate that has showing requiring actual cases fraud, prejudice by policy provi- its operates only when that rule virtually put and would sion be worthless party third is or has been innocent dealings the as- premium on dishonest Rather, implements injured. rule if, by investigation, its sured. For own all, nearly fundamental characteristic of or by suspicions of inspired perhaps the as- all, namely, es- insurance contracts — misrepresent, the insurer sured’s efforts promise sential nature of the contract had been at- itself that satisfied fraud indemnify and by the insurer to defend pay, such a rule tempted and declined to risks, exchange in against certain claim would mean that assured’s would payment premium. for the insured’s though dishonest acts stand as no then added). (emphasis on to The Court went Id. practiced. The men- whatsoever had Reserve could indicate that Foundation assured, surveying possibilities dacious and distinguished, be contemplating prospective tactics and avoided, simply be- dice rule could claim, handling his strategy would cooperation cause a other than immediately vis-a-vis himself sense clause at issue. Id. underwriter, no there would be ' worked, he it clear at all in his deceit. If it Consequently, Roberts Oil makes risk worst, and, money could prejudice requirement would have his cases, affirma- pres- compelled disgorge may such be extended to the fraud one, by the insurer if alleged breach tive suit an insured’s ent 374 legally practica- can be avoided on the basis of

discovered time to be or if, bly If it didn’t before fraud. effective. Insureds’ work — consummation, was detected —he Prejudice Must Be Shown C. Substantial disadvantage would suffer no whatsoever. Misrepresentation, Conceal- Cases everything-to-win, nothing- It be an ment, Noncooperation the In- proposition. to-lose sured (quoting Id. at 797 Chaachou v. American (5th Co., fraud, Cent. Ins. F.2d 892-93 In contrast to the issue of Cir.1957)). appears dispute as to there to be no factual policy provi whether Insureds breached the support holding find further for this We misrepresentation; sion the Insureds jurisdictions from the fact that those consid came admit that the items which stated ering appear the issue to have come from Sound did not fact come from See, e.g., Longobardi same conclusion. Similarly, appears that store. there to be no Jersey, Chubb Ins. Co. New 121 N.J. dispute concerning factual breach of the con (1990); 582 A.2d Henricksen noncooperation provisions cealment and be Home Ins. Or. cause Insureds admit that examination (1964); Mercury St. Paul Ins. Co. v. Salo they questions pertaining refused to answer vich, 652, 812, Wash.App. 41 705 P.2d 815-16 to the items listed on the in Sound (1985). generally Ey, See Robert M. Anno However, fraud, voices. unlike the issue of tation, Against Cause Action Insurer may policy we believe that Farmers avoid the Loss, Recover Fire 15 C.O.A. Benefits for only if it can show that it has substan been (1988 213, § Cum.Supp.1993); 19 & Annota tially prejudiced by these breaches of the tion, Prop Overvaluation in Loss Proof of policy. erty Avoiding Insured as Fraud Insur Fire (1967 774, § Policy, 16 ance A.L.R.3d 10 & Initially, policy considerations that Supp.1993). prompt require prejudice not to for fraud us necessarily regard do not exist with to the However, though even Farmers does Fraud, misrepresentation in this case. preju not have to demonstrate substantial necessity, deception by involves Insureds to dice as a result of a material proceeds they they obtain to which knew provision, genuine we that a believe However, allege were not entitled. Insureds concerning material fact exists misrepresentations their were based on whether the fraud in this case was good they conforming faith belief that were through breached. Insured Eldin asserted requests. to Farmers’ Insureds insist that provided that at time affidavit he they inventory, did lose the and therefore Super Sound invoices to he Farmers believed they proceeds. are entitled to the In other complying requests he was with Farmers’ words, word, taking the Insureds at their (of sort) documentation for his real loss misrepresentation, there was a but without testimony es. to believe Eldin’s or Whether fraud. tardy attempt find that it was fabricated in a up question allege, to cover a fraud is a for the fact If the facts are as avoid- Leyba Whitley, showing finder to v. decide. See 118 ance without of sub- 437, 26, 435, (Ct.App.1994), N.M. 882 37 con- P.2d stantial Farmers would be 430, granted, trary cert. 118 N.M. 882 P.2d 21 to “the essential nature of contract (1994); Quintana, Maxey promise by indemnify 84 N.M. as a the insurer to (intent risks, (Ct.App.) 360 element of defend the insured certain question jury exchange payment fraud is a for the where its for the insured’s of the Oil, depends credibility premium.” determination on 113 N.M. at 833 witnesses), denied, 228; Springfield cert. N.M. 499 P.2d at Fire 84 & Marine Winn, Consequently, jury because the Ins. Co. v. 27 Neb. 43 N.W. (1889) (insured’s misrepresentation, should decide whether Insureds intended to 402-03 defraud, Farmers, summary judgment was not meant to did not defraud was which void policy; ruling improper respect with to Farmers’ claim that fire court based its on its which, avoid a before its breach will a rule while will shown “desire to establish Reserve, just protect companies in their Foundation See majority from the 1152. The that a rights, also shield the insured P.2d at fact will including those property upon jurisdictions, fanciful or on confiscation not Dempsey grounds”); rely, an insurer insufficient see also we conclude that need totally 717 F.2d pay Auto Owners on a when the not (11th Cir.1983) (insurance may only any questions under oath does fails to answer if misrepresentations for insured’s opinion. avoided facts of alter our Under deceive, they intended to if related case, may have under- in which Insureds risk, materially affecting to matters ques- some standably refused detriment); if relied them to its tions, Supreme we believe that our Court Lowenthal, 36 Ins. Co. New York v. Home requirement apply the Roberts Oil (Miss.1904) (fire So. could given reasons for the avoided due to insured’s overvaluation Fire Springfield case of the Nebraska of claim insurer could not have because Insureds of Ins. Co. and thus relieve Marine prejudiced thereby; both inflated value and a forfeiture. of lost exceeded actual value items far Having decided that substantial limits).

policy’s misrepre- regard to the must be shown Moreover, requirement of the additional concealment, sentation, cooperation pro- misrepresentation is case, in this we must next determine visions complete meaning to the necessary to afford summary appropri- judgment whether separate If terms of avoidance clause. in Roberts ately granted. The Oil Court alone, misrepresentation fraudulent that, without although the insurer must established intent, in sufficient to avoid presumption establish allege entirety, its the insurer never need upon proof breach of a arises dice fraud; prove separate and fraud term as a here. 113 provision such as those at issue meaning- rendered and Farmers, would be redundant 755, 833 P.2d at 232. N.M. less, surely contrary to the would be however, rely presumption in does on the parties. expectation” of Rather, “reasonable prejudice it that this case. contends Oil, 752, 229. 113 N.M. at 833 P.2d at shown, proposition we have need not be rejected. Alternatively, that ac- it contends the same is for Insureds’ We believe true prejudice has established tual provision. The of the concealment expense it has incurred to investi- time and were ad breach occurred because Insureds alleged fraud. gate and defend this attorney first not to answer vised invoices. about the Sound Regarding claim of actual Farmers’ however, allege, that after obtain Insureds previously have held that in prejudice, we reexam ing to be new counsel offered prejudice cases the of substantial most invoices, Farmers and that ined about provi of a breach of an insurance as a result recognize Although offer. we refused this jury. See question for the State sion is of his or a client is bound the errors that Price, Casualty 101 N.M. Fire & Co. v. Farm Griego, 113 attorney, Padilla v. her Estate of 524, 438, 445, (Ct.App.), cert. 531 684 665, 1348, (Ct.App. 830 P.2d 1353 N.M. (1984), denied, P.2d 44 101 N.M. 683 1992), how that it is shown we believe unless Ellingwood grounds, disapproved on other by In substantially prejudiced Farmers was Co., 111 N.M. Investors v. N.N. Life breach, con of the strict enforcement sureds’ The facts 805 P.2d 76 in frustrate provision this case will cealment alleged involved breaches case show expectation that cover reasonable Insureds’ claim, portion that portion of the only a arbitrarily, age denied see Roberts will not be rec although the quickly dropped Oil, N.M. at 833 P.2d at has been revived. is unclear whether it ord expense clause, appears that much Farmers’ we It Finally, cooperation for the alleged establishing already that Supreme has was devoted note that Court part cooperate as to failure to must be fraud and ruled that Accordingly, reverse the case. we the whole in this claim sufficient void was Thus, for assuming remand the case that Insureds’ court’s order and even trial Farmers, we believe If wishes to proceedings. Farmers breaches did further reasonably infer that this jury could rely that on a breach of the not substantial. Con- prove claimed was policy and thus not have void the of actual sequently, as to Farmer’s claim issue of whether prejudice, a trial on the summary judgment prejudice, we hold If required. fraud is Insureds committed granted. improperly See Sarracino was rely on a breach Farmers wishes Martinez, 193, 194, 117 N.M. 870 P.2d is and provisions to void (when suscepti- (Ct.App.1994) evidence is proving willing to shoulder the burden inferences, conflicting sum- ble to reasonable judg- summary prejudice, may move for mary judgment improper); also Jour- bur- relying presumption. The ment on the Publishing Co. v. American Home As- nal produce Insureds to will then shift to den F.Supp. surance prej- showing Farmers was not evidence (S.D.N.Y.1990) (under law, Mexico sub- New udiced. prejudice as a result of breach stantial IT ORDERED. IS SO jury question is a properly resolved on a and therefore BOSSON, J., concurs. summary judgment). motion rely finally note that we will not We HARTZ, J., part in dissents in concurs In presumption part. to rebut it to affirm this ease sureds’ failure HARTZ, (concurring part in Judge right-for-the-wrong-reason rationale. on a dissenting part). recently pointed we out State As Franks, 209, 211 Judge Pickard’s I concur ground (Ct.App.1994), not affirm on a we will I also through B of the Discussion. Section court if it would be not relied on the trial reversing judgment and re- concur principle of appellant unfair to to do so. This proceedings. I cannot manding for further applies to this case. When the unfairness however, analysis in join, Section C summary judgment presented motion for majority opin- opinion. I believe that the below, on Re Insureds relied Foundation reads too much into Roberts Oil Co. ion by questions raised serve and the factual 745, Transamerica Insurance regarding issue. affidavits the fraud particular, In I believe 833 P.2d trial court relied on Both Farmers and the recovery by the insured bars law Foundation Reserve as their distinction of (1) if a theft insurance the under rights being in the of third a case coverage the insured violates the voids when on the lack of parties involved and questions obligation respond under oath to credibility No one of Insureds’ affidavits. (2) insurer, intentionally the insured the prejudice, and presumption mentioned obligation respect ques- violates notice that Insureds were not on therefore investigation insurer’s relevant to an tions might presumption. the have to rebut (3) insured, violation is fraud the the circumstances, not we should Under these Although and third material. the second right-for-the-wrong-reason ratio apply the here, satisfied remand is nec- conditions are Porras-Fuerte, 119 N.M. nale. State v. Cf. essary to whether the first condi- determine 215, 219 (Ct.App.1994) 889 P.2d complete tion is satisfied because (Court Appeals will not affirm denial appeal. in record on is not included defendant suppression motion failure of perspective, in I standing put when State never raised To the discussion to show below). standing reviewing pertinent The begin by facts. The occurred on November 1991. loss CONCLUSION on De- of loss submitted testify reasons, 1991. Eldin refused to hold that cember foregoing we For the at his examina- granted about the fraudulent invoices summary judgment improperly was 3,1992. obligation poli- under the February Farm- sured tion under oath on breached not, however, precisely In- cy. claim on March 2. The ers denied the Roberts Oil does attorney who sent a sureds retained a new delineate is re- when majority to Farmers dated March 1992. quired letter is not. The and when it “gave you that Eldin The letter admitted recognizes one opinion in this case narrow $10,- stolen items that included about list of exception substantial-prejudice to the re- in invoices from that were Sound quirement, permitting escape insurer to to a untrue” but offered have Eldin submit (such first-party policy under polygraph if examination Farmers would losses) covering when the one fire and theft agree paid legiti- that Eldin would be for all agree claim. I insured submits a fraudulent April rejected mate losses. On 15 Farmers majority proposition. with that But noting request, that because Eldin had jumps quickly that Rob- too to the conclusion portion admitted that a of his claim was requires erts Oil an insurer to establish sub- information, based false his entire claim deny stantial before it can a claim August should be denied. On 1992 the failure to answer because of the insured’s attorney Insureds’ third withdrew the refusal questions My analysis of Rob- under oath. questions. accept not Farmers did erts Oil leads to a different conclusion with deposition. the offer to submit to a Suit was respect to an intentional refusal to answer July filed on November 1992. On questions investiga- an insurer’s relevant to contending Eldin executed an affidavit tion of fraud the insured under theft committing he fraud when he policy. submitted the false invoices. determining require the in- whether to pointed As Farmers out its brief prove surer to Roberts court, there was no reason for it to district adopts focusing on “approach Oil accept proposal in the March purpose at is- contractual accept suggestion letter or to for a new sue.” 113 N.M. at (which deposition. right It had affirmed important appear considerations to be the Court) deny of this public expectations insured’s reasonable claim in full if Eldin had submitted false argue denying cov- Both favor intent, invoices with fraudulent erage to an insured who commits a material attorney March 30 letter the Insureds’ had intentionally policy by refus- violation of the admitted, offering any extenuating without ing oath relevant to answer under circumstances, that the invoices were false. investigation possible to an knew, polygraph For all Farmers exam or insured. deposition complete new would be waste money. attorney time and The Insureds’ indicated that it would Oil already that relieved had made an admission provisions “frustrate ‘the allow contract to liability. receipt Farmers of Not until of expectation that cov- reasonable consumer’s August in 1993 did Farmers Eldin’s affidavit arbitrary pro- erage on will not be defeated ” any doubt that Eldin had in have reason to 752, 833 grounds.’ 113 N.M. at cedural Thus, a fact committed fraud. there was concern was that P.2d at 229. The Court’s (1) eighteen delay of almost months between adhesion, policies, as insurance contracts questions concern- Eldin’s refusal to answer truly that would not be will contain terms (2) appearance of ing the invoices and the bargained by consumers. See for informed any question for Farmers to him or incentive however, say, that id. Roberts Oil did not investigation concerning conduct every provision in an courts should throw out fraud. whether he committed contrary, before insurance contract. On the rejecting provision be a contract there should I I turn from the facts to the law. now so, simply good reason to do other than majority that Oil agree with the Roberts the rejecting the will benefit may to that clear that an insurer need makes making particular particular the prejudice in to order establish in- claim. escape liability ground that the on Nonetheless, there is provisions may background). be financial as much Some (when coverage to nothing arbitrary denying as about

interests the insureds considered class) intentionally ques- as insurer. Be- the interest refuses to answer one who defending investigating, cause insurer’s obviously to claim when tions related against, paying can fraudulent claims investigating has a fide basis for insurer bona insureds, insurance all raise cost of fraud. group financially pow- expect one would determining a factor in policy Public is also negotiating are terms of erful businesses who to require whether freely to an insurance contract to accede in This consideration fundamental dice. policy provisions that enable the insur- strict Esqui- Foundation Reserve Insurance Co. company investigate potential fraud ance to bel, The 94 N.M. 607 P.2d 1150 expeditiously efficiently, so more at least in insurer question case was whether the that long impose unrea- terms do not deny liability under a- could claim all, After sonable burdens insured. poli- because of the insured’s breach of passengers appreciate air the convenience cooperation If cy’s provisions. fraud and flights, meals reserved seats and hot on their voided, recovery could not fund a willing forego millions to those amen- but are party injured by an innocent third in return for lower would ities fares. One “The risk- insured. The Court wrote: expect seeking in- likewise most businesses operate spreading theory of should agree theft coverage surance losses to public— afford to members affected cooperation conditions of in fraud strict persons maxi- frequently third innocent —the vestigations likely be low- premiums if would protection possible mum consonant with fair- owners, prob- Many as a er result. business to the 94 N.M. at ness insuror.” most, ably cooperation view such (internal omitted); quotation at 1152 say appropriate in event. not to This is In- Appleman Appleman, A. & Jean 8 John every first-party into that courts should read § Law at 231 surance and Practice poli- policy provision voiding insurance (1981) policies part in (liability insurance are cy the if insured refuses to submit to exami- contracts, third-party beneficiary it is in nation under when the wishes to oath injured persons are public interest that who Rather, investigate point fraud. recover); E. free from fault- should Robert pre- policy provision such a cannot Widiss, I. Law Keeton Alan Insurance expectations. sumed violate consumer (student 1988) 7.3(b), (analysis § at ed. sure, expectations To be the reasonable concerning cooperation courts whether cir might consumers in certain violated liability policies violated clauses have been predicated fail cumstances forfeiture on by public appears to be influenced interest ure under oath. victims). compensating innocent accident provision may, for ex violation substantial-preju- Roberts Oil held that (This ample, appears be unintentional. requirement of Reserve is dice Foundation Oil. have the circumstance coverage liability policies not limited to notify The insured did (when injured party often an innocent third years companies it until more than four sued one suffer the insured is the who would leading the event to the after loss. coverage), from forfeiture of but it did may 833 P.2d at One infer reject importance public policy the of consid- expenditures made violation of contrary, para- On the the first erations. policy terms occurred well before the insured states, case, graph of Roberts Oil “This coverage even knew that it had under argued by parties, presents least as Thus, expect insured policies.) an insurance principles conflict between basic of to an coverage to forfeit because of refusal necessity prompt and the for remedial law questions. swer irrelevant Crowell Cf. an instance of environmen- Casualty Farm 259 Ill. action correct State Fire & tal contamination.” N.M. at App.3d Ill.Dec. 631 N.E.2d (1994) (uncounselled Likewise, penultimate not P.2d at 222. sen- insured did states, questions into his of the the court understand relevance of tence “And weigh points questions should the evidence on these would facilitate the insurer’s for, fraud, light necessity public defrauding and the insured’s self-interest policy favoring, prompt and effective re- would counsel refusal to unless answer refus- sponse Second, to an instance of environmental con- al in itself if worked forfeit. tamination.” Id. at 833 P.2d at prove prejudice insurer must from the refus- al, require likely One of the reasons to investiga- the insurer to it is to incur substantial legal expenses establish substantial in that case tive the effort. Such deterring expenses was to avoid from insured tak- are a real cost fraud. caused (and ing prompt protect Why action to the environ- potentially should the insurer its holders) policy ment. incur such costs when there is legitimate no excuse for the to refuse insured In contrast to Foundation Reserve and Third, questions? to answer relevant be- Oil, public policy in this case no fraud, difficulty proving cause of the supports substantial-prejudice require- may insurer well be unable to establish ment. The one to benefit from the prevented prov- the insured’s refusal it from requirement in a case like this would be the ing obtaining fraud or relevant evidence even making the claim. Nor is there actually when the refusal had that effect. useful conduct an insured that would be by failing recognize deterred Consequently, permissible a substantial- it should prejudice requirement. policy provide right The reverse would a that the insured’s strongly be true. recovery Public favors en- under the if is forfeited couraging cooperate respond insured to an insured refuses to under oath to investigation leg- questions of fraud. The New Mexico relevant to the insurer’s bona fide expressed inquiry islature has its in- concern about into fraud the insured. The sole surance proposition fraud on at least two occasions. limitation on this should be that Legislation in felony pre- duty 1984 created the the insured’s violation of this under the senting all, fraudulent claim. must be a “material” one. After 1978, § (Repl.Pamp.1992). purpose obligation NMSA 59A-16-23 of the insured’s legislature passed questions 1991 the the Insurance under oath is to facilitate Act, Reporting Immunity investigation. Fraud NMSA the insurer’s If the breach of is, §§ through (Repl. obligation 59A-16A-1 -4 is not material —that Pamp.1992), which immunizes from breach does not create a substantial likeli- persons good reports investigation who make faith hood that the insurer’s will be surance fraud. hindered —the insurer has no cause for com- hand, plaint. On the other if the breach is Admittedly, importance cooperating substantially likely to hinder the insured’s investigation possible with an fraud is not investigation, expectations then consumer great importance committing as the of not public policy support forfeiture to reduce because, majority agrees, fraud. Just as the investigation costs and to deter inde- appro- forfeiture of the an benefits is protect fensible conduct that can crooks. claim, priate for a sanction fraudulent it does necessarily materiality requirement might appear follow that forfeiture appropriate just way expressing a sanction for intentional refusal to to be another re- cooperate investigation quirement prejudice. in an But ma- fraud. Nonetheless, teriality depends only potential to deter its fraud and reduce impact, permit- prejudice; financial forfeiture to cause it does not should be the breach (which penalty require proof may impossible ted for refusal to answer often by) prejudice actually occurred. under oath relevant to a bona fide to come inquiry Imposi- prejudice the insurer about fraud the insured. To show substantial ordinarily requirement prove insurer must would need to that it would likely prevailed prove would have three have on the merits or that First, acquired helpful consequences: actually harmful it offer would have informa- would complied non-cooperation an incentive for one who tion if the insured had answering duty questions to oath. This is commits fraud. When relevant answer under 380 arising to the insured’s refusal demanding than dice from

a more standard materiali oath, ty, requires only questions a substantial likeli under see C-Suzanne answer Co., hamper duty would hood that breach 574 F.2d Beauty Salon v. General Ins. Hence, investigation. prefer (2d I Cir.1978), the insurer’s 106, 110-11 now it is clear material, although, as the term discussed answer relieves an insured’s willful refusal to below, appear use the term some courts to obligation pay, to the insurer of prejudicial convey to the same standard. Property & v. Prudential Casual Cf. Rosenthal Inc., Northway, Industries v. 426 U.S. TSC Cir.1991). (2d Co., 493, ty 494-95 928 F.2d 2126, 2132, 48 L.Ed.2d 757 96 S.Ct. jurisdictions a substan A few have stated (1976) (under omitted “[a]n securities law it is unclear tial-prejudice requirement, but is likeli fact is material if there a substantial requirement, by the applied how this hood that reasonable shareholder would courts, practical effect from the differs deciding to important how consider materiality above. requirement described vote”). example, in Illinois if the insurer “can For apply I to The law that would this case question the existence demonstrate jurisdictions. support in other The finds prejudiced, to it was whether fact majority strong view is that when insured compliance of substantial issue becomes one first-party policy, makes a claim on a cover Co., jury.” for the Piro v. Pekin Ins. and is age appropriately denied is when 220, 223-24, 225, Ill.App.3d 162 113 Ill.Dec. to relevant under refuses (1987) 1231, (emphasis 514 1234-35 N.E.2d Fidelity & oath. See United States Guar. Crowell, 418, added); Ill.Dec. at accord 197 Cir.1992) (5th Wigginton, F.2d Co. v. 964 487 at 631 N.E.2d referred law; Mississippi not (applying need “the apparently to insurer’s is v. prejudice); Pervis State Farm Fire show Piro, 113 investigation of the facts.” Ill.Dec. (11th Co., 944, Casualty F.2d 901 946-47 requirement 514 N.E.2d at 1234. The Cir.) (arson privi suspected; insured invoked question of fact as to whether that there denied, self-incrimination), lege against cert. prejudiced investigation the insurer’s 255, 112 213 498 111 S.Ct. L.Ed.2d U.S. re quite application seems similar (1990); Court, Superior 142 Warrilow v. (by quirement “material” (Ct.App.1984) Ariz. 195-98 creating in likelihood that the substantial material; (questions privilege must be hindered). If investigation surer’s would be protect not self-incrimination does materiality the insurer satisfies either the insured); Stringer v. Fireman’s Fund test, question-of-fact test or the Illinois Co., (Fla.Dist.Ct.App.) (per 622 So.2d 145 only showing insured can recover (Fla. denied, curiam), review 1101 630 So.2d compliance. Co., 1993); Halcome v. Cincinnati Ins. 254 (1985) (fraud Ga. 334 155 sus S.E.2d Co., v. Insurance 21 F.3d Wood Allstate pected; provide material failure to informa (7th Cir.1994), following law 741 Indiana case tion); Boyd, Mut. Ins. v. 452 Standard Co. policies, re- regarding (insured (Ind.Ct.App.1983) 1074 N.E.2d quired prejudice arising vio- from refusal); no resulted from claimed provision in a cooperation home- lation 468 Corp., Watson v. National Sur. N.W.2d preju- owner’s But the (Iowa 1991) (substantial compliance re 448 related to the dice discussed quired; belated offer submit examina timely sign manner a insured’s failure to Fineberg compliance); did constitute transcript of oath. her examination under Co., Casualty 113 State Farm Fire & apparent Id. at 747. Because it how denied, N.C.App. review S.E.2d material, the such a failure could be case did But see N.C. S.E.2d say anything not call on the court Windt, Dis Allan D. Insurance Claims and distinguish concept its 3.04, (yet putes Supp. § at 46 foot at 86 & concept materiality. from the authority). weight contrary Al noting the King Insurance though thought at time that New Federal it was one (D.Kan.1992), aff'd, required F.Supp. 506 996 F.2d 311 York the insurer to show law (10th Cir.1998), in- that the investi- the court ruled that the stantial likelihood insurer’s prove must that the insured’s breach gation prejudice surer This was hindered. view substantial either “caused to essentially concept is the same as ability investigate [insurer’s] [the materiality in context. this claim or to defend itself this ac- sured’s] understanding A similar adjuster, An tion.” Id. who had implicit in Daniel v. Pawtucket Mutual In- the documents that had not reviewed Co., (R.I.1986). surance 506 A.2d 1032 De- insured, produced timely in a fashion spite argument the insured’s that the insurer testified documents would not have prejudice, had failed to establish id. at deny affected the decision to the claim. Fail- recovery the insured was barred from be- produce ure to the documents was held to be provide adequate cause of her failure prejudicial. Again, it is unclear whether give sworn of loss and her refusal to concept signif- the court’s differs icantly meaning materiality oath. from the ex- sworn statement under pressed in opinion. authority suggests The above that Farm-

Marquis Family v. Farm Mutual Insur- might summary judg- ers entitled to well be Co., (Me.1993), 628 A.2d ance said every jurisdiction ment in this coun- prejudice, that the insurer must demonstrate try, assuming the terms of the type but the did not discuss the of provide for forfeiture when an insured re- prejudice required, appeared and it to turn questions fuses to answer under oath. The primarily on the reasonableness of the in- eighteen-month delay caused Eldin’s ini- request delay sured’s his examination until tial refusal to answer establishes 649; proceedings, of criminal the close id. at that Eldin’s refusal a material violation Thompson Virginia Prop- Essential West or, terminology jurisdictions, of some Ass’n, erty Insurance 186 W.Va. 411 prejudiced investigation. Both Farmers’ (1991), delay S.E.2d involved a of at most authority case and sound re- would couple submitting of weeks in to an exami- quire summary judgment in favor of Farm- applied nation under oath. court a sub- ers New Mexico as well. standard, stantial-prejudice analysis but the analysis was consistent with what the Perhaps little the above discussion is of materiality be under standard. practical suspect I effect. remand Farmers, advantage presump- with the jurisdictions requiring Two decisions prejudice, will be able to particularly are instruc- summary judgment. To obtain rebut Farm Auto- tive. Gabor State Mutual presumption, a most the Insureds would have App.3d mobile Insurance 66 Ohio presenting evidence that the difficult task of (1990), compa- 583 N.E.2d 1041 the insurance eighteen-month delay prevent failed to ny suspected requested arson and the in- obtaining valuable informa- Farmers from sured’s state and federal income tax returns recovery tion. Because the Insureds is year purchased for the he the burned before possible only phony represent- if the invoices court, vehicle. The without further dis- (oth- ed actual merchandise stolen from them stated, cussion “We hold that fraud), they erwise are barred produce the insured’s refusal to his income identify truly sold the would need to who year purchased tax for the he returns before merchandise to them and show that at the Oldsmobile was a substantial and materi- disclaiming time Eldin submitted his affidavit duty cooperate al of his contractual (1) copies of the true invoices were still clearly prejudiced the insurer’s inves- (2) possession any persons in the seller’s tigation possible into motives for arson.” presence who would have known added). Id., (emphasis 583 N.E.2d at 1044 prior merchandise in the Insured’s store summary the court’s treatment of the Given undi- the theft were still available and had issue, one can infer that it found substantial prejudice simply there was a sub- minished memories. because Nevertheless, just materiality materiality standard is standard is a cation of it. another reason favor generally

sound one. And if it leads to the substantial-prejudice stan- same result as coupled presumption

dard substan- greater appli-

tial then the ease of

Case Details

Case Name: Eldin v. Farmers Alliance Mutual Insurance

Court Name: New Mexico Court of Appeals

Date Published: Dec 29, 1994

Citation: 890 P.2d 823

Docket Number: 15638

Court Abbreviation: N.M. Ct. App.