Fraudulent procurement defense looks more like a 3105 defense

Compas Med., P.C. v Praetorian Ins. Co., 2016 NY Slip Op 51000(U)(App. Term 2d Dept. 2016)

“Moreover, defendant failed to establish as a matter of law that the misrepresentation by plaintiff’s assignor as to his place of residence was material (see Interboro Ins. Co. v Fatmir, 89 AD3d 993 [2011]). For the foregoing reasons, the branches of defendant’s cross motion seeking summary judgment dismissing the first through third causes of action should have been denied.”

The citing of Fatmir now opens up a new door regarding the evidence necessary to substantiate “material misrepresentations” in establishing a fraudulent procurement defense.

“A misrepresentation is material if the insurer would not have issued the policy had it known the facts misrepresented (see Insurance Law § 3105 [b]; Novick v Middlesex Mut. Assur. Co., 84 AD3d at 1330; Varshavskaya v Metropolitan Life Ins. Co., 68 AD3d at 856). “To establish materiality as a matter of law, the insurer must present documentation concerning its underwriting practices, such as underwriting manuals, bulletins, or rules pertaining to similar risks, that show that it would not have issued the same policy if the correct information had been disclosed in the application

The case-law defined argument as I understood it was that the defense was predicated upon the “fraudulent procurement” of an insurance policy and not what could be classified as a “material misrepresentation” defense.  The difference, while subtle, was the difference between application of Fatmir and a standard presentation of proof where the coverage specialist gives testimony relative to the policy premium amounts relative to the policy as written and the policy as should have been written.

But this is the first time that the application of Ins. Law 3105 has been introduced into the fraudulent procurement paradigm.   I would categorize this case as a game changer, although not as significant as when the Second Department held that fraudulent procurement was a precludable defense.  (Westchester Med. Ctr. v GMAC Ins. Co. Online, Inc., [80 AD3d 603 [2d Dept. 2011])

The permissive use statute trumps the rental agreement

ELRAC LLC v Duque, 2016 NY Slip Op 26169 (App. Term 1st Dept. 2016)

This is not a no-fault issue but something that has always worried me in my own life.  Assume like many people you rent a car.  Furthermore, assume you let someone drive it who is not on the rental contract.  That someone else gets into a car accident.  Under New York law, the rental company is primary for the standard 25/50/10 and $50 PIP.

Assume the rental company pays our monies to settle the third-party liability and/or PD case.  Now, the rental company wants their money back from you, the renter.  The theory for recovery is that you breached the contract through allowing someone drive the vehicle.

It was thought in the subrogation circles that this was a viable basis of recovery.  The Appellate Term has now held otherwise and appears to be applying the anti-subrogation rule (an insurance carrier cannot generally recover from its own insured the amounts it pays out on the insurance contract covering the insured)

The theory is that the rental car is self-insured; the coverage is not contractual but forced upon the rental car company; and the vehicle was used outside of the scope of contractual use between the renter and rental company.  The Appellate Term disagreed and stated the following:

“Section 388 of the Vehicle and Traffic Law states that the owner of a motor vehicle may be held civilly liable for any damage caused by the owner or any permissive user of the vehicle. Vehicle and Traffic Law § 370 requires rental car companies to provide insurance for their [*2]vehicles, including minimum liability coverage of $25,000 for bodily injury, and further requires that such insurance “inure to the benefit” of any permissive user of the vehicle (Vehicle and Traffic Law § 370[1][b]). As a result of the interplay of §§ 370 and 388, a rental car company such as Enterprise is prohibited from seeking indemnification from its renter “for amounts up to the limited liability requirements” of the Vehicle and Traffic Law (Elrac, Inc. v Ward, 96 NY2d 58, 73 [2001], rearg. denied 96 NY2d 855 [2001]). Since the underlying claim is for a sum considerably less than the statutory minimum of $25,000, the action must be dismissed. To allow Enterprise to pass on the $9,000 cost to its insured would permit Enterprise to avoid the coverage it was statutorily bound to provide (id. at 77).”

I am curious if instead of bringing suit under a breach of contract, the rental company can bring suit under a “fraudulent procurement” theory.  This of course requires ELRAC to assert that the vehicle would not have been rented to the renter had it knew the ULD was operating the vehicle.  Assuming this is answered in the affirmative, then a Kaplun type recover is appropriate.

Material misrepresentation?

Renelique v National Liab. & Fire Ins. Co., 2016 NY Slip Op 50254(U)(App. Term 2d Dept. 2016)

“With respect to defendant’s cross motion, “[t]he proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to eliminate any material issues of fact from the case” (Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853 [1985]). No-fault benefits may be denied to an insured where an insurer submits evidence in admissible form showing that the insured had fraudulently procured the insurance policy (see W.H.O. Acupuncture, P.C. v Infinity Prop. & Cas. Co., 36 Misc 3d 4 [App Term, 2d, 11th & 13th Jud Dists 2012]; New Millennium Psychological Servs., P.C. v Commerce Ins. Co., 34 Misc 3d 127[A], 2011 NY Slip Op 52286[U] [App Term, 2d, 11th & 13th Jud Dists 2011]). Upon the record before us, we find that defendant failed to establish as a matter of law that plaintiff’s assignor had made material misrepresentations in order to obtain insurance at reduced premiums

The question is what is necessary regarding the type of “material misrepresentations” that are necessary to demonstrate a fraudulent procurement defense.  I also do not see any notion that the underwriting handbook has to be presented here, making this different than a 3105 misrepresentation.

Why was misrepresentation material?

Gutierrez v Tri State Consumers Ins. Co., 2015 NY Slip Op 51703(U)(App. Term 2d Dept. 2015)

“Defendant demonstrated that the assignor, who was also the insured under the insurance policy in question, had misrepresented, among other things, his use of the subject vehicle when he had submitted his application for insurance to defendant. However, defendant failed to submit sufficient evidence to establish that this misrepresentation was material”

I sense the lack of materiality flowed from the failure to indicate that this misrepresentation would have caused the premium to be greater,

Ins Law 3105 in the realm of no-fault? No way

Want to cancel a policy that insures against proper damage?  Material misrepresentation will do it.   A policy that of insurance that insures against death or personal injury?  3105 will not apply and all cancellations will be prospective at best.

Against this reality came the lack of reality that is SS Med. Care, PC v USAA Gen. Indem. Co., 2015 NY Slip Op 51094(U)(Civ. Ct. Kings. Co. 2015)

In this case, the Civil Court found that the law that has developed under 3105 applied to a policy of insurance insuring against personal injury or death.  This was a mistake.  Second, the Court failed to apply a fraudulent procurement theory to the facts of this case; rather, the Court applied a faulty 3105 paradigm.

“It is well settled that to establish the right to rescind an insurance policy an insurer must show that the insured made a material misrepresentation when he or she secured the policy (Interboro Ins. Co. v Fatmir, 89 AD3d 993 [2d Dept 2011], citing see Novick v Middlesex Mut. Assur. Co., 84 AD3d 1330 [2011]; Varshavskaya v Metropolitan Life Ins. Co., 68 AD3d 855, 856 [2009]; Schirmer v Penkert, 41 AD3d 688, 690 [2007]; Zilkha v Mutual Life Ins. Co. of NY, 287 AD2d 713, 714 [2001]). A misrepresentation is considered to be material only if the insurer would not have issued the policy had it known the facts misrepresented (Interboro, 89 AD2d at 994, citing see Insurance Law § 3105 [b] [1]; Novick, 84 AD3d at 1330; Varshavskaya, 68 AD3d [*3]at 856). “To establish materiality as a matter of law, the insurer must present documentation concerning its underwriting practices, such as underwriting manuals, bulletins, or rules pertaining to similar risks, that show it would not have issued the same policy if the correct information had been disclosed in the application” (Interboro, 89 AD3d at 994, quoting Schirmer v Penkert, 41 AD3d at 690-691).”

This is all nonsense.

An interesting case in the realm of misrepresentations

Castlepoint Ins. Co. v Jaipersaud, 2015 NY Slip Op 02839 (1st Dept. 2015)

“Thus, we are constrained to find that plaintiff is under no duty to defend or indemnify defendant insureds, in the personal injury action brought against them by defendant Fernando, notwithstanding the inherent inequity of Castlepoint’s acceptance and retention of premiums paid by defendants Jaipersauds on the premises.

Although it is unnecessary to determine whether the misrepresentation on the insurance application vitiated the policy, we note that the underwriting guidelines and the underwriter affidavit that the policy would not have been written had plaintiff known the true status of the premises sufficed for this purpose (see id.).”

Policy can be rescined under PA law; proof insufficient as to particular Assignor

Delta Diagnostic Radiology, P.C. v Infinity Group, 2014 NY Slip Op 50602(U)(App. Term 2d Dept. 2014)

The EUO was sufficient to raise an issue of fact as to the fraudulent procurement issue.  Now, you need to subpoena the assignor for trial and have the Civil Court enforce a judicial subpoena.  I feel pains even thinking about how Defendant is going to win this at trial.  This is another example of how the assignment shields the EIP from being responsible for her sins.  Without the assignment, EIP has to appear and testify pursuant to subpoena; otherwise, the complaint may very well be stricken.  CPLR 2308.  The assignment blocks a 2308 penalty and, at best, can cause a matter to be stricken from the trial calendar during discovery when Assignor dodges a subpoena.  (Total Family v. Mercury)

There is no penalty for the less than innocent medical provider who knows (or should know) that all of Infinity’s insured’s/EIP’s are seemingly involved (somehow) with PA-NY rate evasion issues.  I know this just by reading every Infinity case from this Court;  it is the same issue over and over.  So I digressed.  Here is the holding:

“Pennsylvania law gives an insurer a common law right to rescind a policy of automobile insurance (see Klopp v Keystone Ins. Cos., 528 Pa 1, 595 A2d 1 [1991]). The Pennsylvania Supreme Court has held, however, that while an automobile insurance policy may be retroactively rescinded as to an insured who has made a misrepresentation material to the acceptance of risk by the insurer, the policy may not be retroactively rescinded with respect to third parties “who are innocent of trickery, and injured through no fault of their own” (see Erie [*2]Ins. Exch. v Lake, 543 Pa 363, 375, 671 A2d 681, 687 [1996]). Although defendant, in its motion papers, set forth facts tending to demonstrate that the insured was the actual perpetrator of a fraud, and that, based on that fact, it rescinded the policy in accordance with Pennsylvania law, defendant’s submissions did not conclusively establish that plaintiff’s assignor was not an innocent third party. Consequently, defendant’s cross motion failed to make a prima facie showing of defendant’s entitlement to judgment as a matter of law.”

Material misrepresentation – via Florida law

Universal Health Chiropractic, P.C. v Infinity Prop. & Cas. Co., 2014 NY Slip Op 50350(U)(App. Term 2d Dept. 2014)

No preclusion here.

“The vehicle involved in the accident at issue was, at the time of the accident, insured by defendant under a Florida automobile insurance policy issued to plaintiff’s assignor. After an investigation into the accident revealed that the assignor had not resided at the Florida address listed on her insurance application and that her vehicle had not been garaged at that Florida address, defendant cancelled the policy ab initio, pursuant to Florida Statutes Annotated, title 37, § 627.409, which permits retroactive cancellation of an insurance contract if there has been a material misrepresentation in an application for insurance”

“Under Florida law, in order to show that it voided a motor vehicle policy ab initio, pursuant to Florida Statutes Annotated, title 37, § 627.409, an insurer must demonstrate that it gave notice of the rescission to the insured and that it returned or tendered all premiums paid within a reasonable time after the discovery of the grounds for avoiding the policy”

What would have happened had it not been the assignor who committed the material misrepresentation in the procurement?  The general deemer statute would have probably been effective and carrier would have had to pay benefits.

Fraudulent procurement and preclusuion

Doctrinally, a fraudulent procurement defense should not be bound by the 30-day pay or deny rule.  This is so since the Appellate Division in Kaplun specifically held that an insurance carrier can seek recompense from an EIP for monies paid out due to this fraud and, therefore, the defense can be raised at an time.   Contrariwise, the Court instructed us in Cornell Medical that an unjust enrichment cannot lie if the defense is precludable.   GMAC was an aberrant act and the “preclusion” appeared to be more dicta than anything else.

Great Health Care Chiropractic, P.C. v Hanover Ins. Co., 2014 NY Slip Op 50359(U)

“With respect to defendant’s motion for summary judgment, although defendant contends that, in connection with the issuance of the insurance policy at issue, plaintiff’s assignor had misrepresented the state where the insured vehicle was garaged, defendant is precluded from asserting that defense in support of its motion and in opposition to plaintiff’s motion as it failed to establish that it had timely denied plaintiff’s claim on that ground (see Westchester Med. Ctr. v GMAC Ins. Co. Online, Inc., 80 AD3d 603 [2011]”

The declaratory judgment failed to name everybody

Ideal Med. Supply v Mercury Cas. Ins. Co., 2013 NY Slip Op 23068 (App. Term 1st Dept. 2013)

“Although plaintiff’s assignor was a named party in the prior action, plaintiff cannot be deemed to be in privity with its assignor, since the declaratory judgment action was commenced after the assignment”

Perhaps the concurrence is more interesting than the per curiam opinion.

(Schoenfeld, J.)

“I write separately to acknowledge that the outcome reached today does not serve to promote the purposes of this State’s no-fault law to provide a less costly, more efficient automobile accident reparation system and to ease court congestion.”

“As (now retired) Justice Golia properly recognized in closely analogous circumstances, no-fault actions do not fit squarely within the Gramatan rule, given “the unique nature and reality of the assignment of claims for first-party benefits under the Insurance Law and the no-fault regulations of this State” (Magic Recovery Med. & Surgical Supply Inc. v State Farm Auto. Ins. Co., 27 Misc 3d 67, 69 [dissenting opn][2010]). That being so, and in view of the prior Supreme Court judgment declaring that plaintiff’s assignor and the assignee-providers named as defendants in that action “are not entitled to first-party benefits” stemming from the subject motor vehicle accident due to the assignor’s “material misrepresentations in the procurement of the insurance policy,” it is not unreasonable to say that the denial of summary judgment dismissing this assignee-provider’s claim tends to exalt form over substance, delaying the seemingly inevitable dismissal of the claim until after trial. Nonetheless, on balance, I feel compelled to adhere to the rule set forth in Gramatan without a signal to the contrary from a higher appellate authority”