Let's face it ­- insurance litigation gets tougher every day. The law says insurers have the burden of proving claim fraud, yet many jurors presume that greed motivates the insured consumer.

Jurors fret about their escalating premiums, while defense lawyers play the role of the consumer's best friend. Insureds must try to win coverage in a hostile environment. How can counsel combat the fraud defense?

The trial lawyer's counterattack begins by establishing clear rules for the battle. Counsel must screen out fraudulent claims by learning how to recognize the red flags that attract insurer attention: the unwitnessed slip and fall, for example, or the business that burned a week before foreclosure. These claims are perfectly consistent with innocence but may also indicate fraud.

Counsel must also beware of claims referred by third parties, even those who don't directly ask for anything. Clients who do not speak English are often accompanied by translators or advisers who present the case to counsel. These people can market fraudulent claims, charging counsel for translation services and taking a cut from the claimant at settlement. Also suspicious are advisers who want to be named on settlement checks "to help cash the check."

Paralegals or associates involved in client intake must be educated about fraud. Red flags should trigger close questioning of potential clients. If the client was previously represented by another lawyer, what happened to the relationship? How did the client get here?

If the claim seems suspicious at the initial interview, what will it look like after a year or two in discovery?

Of course, even valid claims may send out red flags. After any questions about a claim's validity have been resolved, counsel must be prepared to handle requests for documents, statements, medical exams, or examinations under oath. Counsel should be diligent considering these requests. An unsuccessful attempt to stonewall on policy requirements can be fatal to the claim. 

Prevent unnecessary policy defenses

If the insurer suspects fraud, it will demand full compliance with the policy. Insureds have significant duties in first party claims. These duties are found in the "Conditions­Duties After Loss" section of the policy and go well beyond a general requirement to cooperate.

The policy probably requires the insured to furnish books and records, to exhibit damaged property, to supply proofs of loss within a particular time, to supply medical and wage information, to submit to an examination under oath, and to refrain from filing a lawsuit before fulfilling the policy requirements. Property policies often feature a one-year limit for filing suit.

Ignoring or resisting these requirements can create defenses for the insurer. In a recent case, the insured refused to submit to an examination under oath, claiming the request was unreasonable because he had already submitted to two recorded statements. Defendant insurer argued that the policy required submission as a matter of law and the insured's refusal justified dismissal. The court agreed and upheld dismissal.1

Sometimes the issue isn't so clear. For example, the policy usually requires the insured to supply records and documents for inspection. Absent an express condition, must the insured sign a blanket authorization for financial records? Does the general cooperation clause (often found outside the "Duties After Loss" section) compel the insured to do whatever the carrier wants?

In the personal injury protection (PIP), no-fault medical, or underinsured motorist context, the requirement to provide medical access and information can create issues. Can the required medical authorization be limited to the subject of the injury?

If the PIP form allows the carrier to require a medical examination, can the carrier obtain a psychiatric one?

In every instance, the policyholder can reject unreasonable demands, yet if the court later supports the insurer's request, the insured can lose coverage. Even if the policy does not clearly support the carrier's request, case law interpreting the policy may mandate compliance. Refusal to comply, no matter how unreasonable the request may seem, can endanger the claim.

To resolve these disputes, counsel should look beyond the issue of the moment. When suit is filed, the insurer may get what it wants in discovery anyway. If so, furnishing the requested information early may help resolve the case. Unless the insurer's request is totally unreasonable, voluntary compliance will likely help the cause at trial.

Another approach is to put the burden of decision on the company. If the company wants a financial records authorization, for example, counsel should ask the adjuster to explain the basis for the request in the policy or in law. Counsel should express willingness to compromise, to help the insurer obtain relevant information by other means, and to keep an open mind and consider the company's position. This should be done in writing, with a letter that will make an effective exhibit at trial.

Policy requirements do not lend themselves to a "just say no" approach. If the insurer adds a policy-violation defense to a fraud defense, the consumer has problems. Juries often suspect outright fraud but believe the carrier failed to prove it. A policy violation gives the jury an excuse to find for the carrier. 

Discover key facts

Insurers can use an ongoing investigation to justify delay. Most states' unfair claims practices acts require the insurer to complete its investigation within 30 days of notice. Typically, the insurer can then notify the insured that more time is needed and investigate further.

If the claim isn't paid within four or five months, the situation changes dramatically. The insurer refuses to accept or deny the claim. Delay begins to grind on the insureds, draining personal and financial resources, exhausting their emotions, and compromising the evidence. Personal relationships suffer, as insureds blame each other for the insurance company's intransigence. Filing suit for coverage and bad faith is often the only way to ensure that the claim will be resolved.

Interrogatories can require the carrier to identify the basis for its denial and to state each fact on which the denial is based. Counsel should ask for the source of each fact relied on, every supporting document, and the identity of every witness.

Complete claim files should be requested immediately. Many companies have multiple files at different levels of supervision for the same claim. There may even be separate investigation files. Requests for production must be directed at all such files. Carriers often resist discovery of claim files, so counsel must be ready to ask the court for relief.2 The mental impressions, conclusions, and opinions of an insurer's representatives are discoverable. The Arizona Supreme Court reasoned:

The claim file contains a "blow-by-blow" diary of the insurer's investigation and decision-making process. . . . No matter how the test is defined, bad faith is a question of reasonableness under the circumstances. . . . The portions of the claims file which explained how the company processed and considered [the plaintiff's] claim and why it rejected the claim are certainly relevant to these issues. Further, bad-faith actions against an insurer, like actions by client against attorney, patient against doctor, can only be proved by showing exactly how the company processed the claim, how thoroughly it was considered and why the company took the action it did.3

Counsel should beware of incomplete production. The carrier may produce what purports to be the claim file but no list of withheld documents. A privilege log listing each document withheld and the basis for nonproduction should be requested, along with a demand that electronic communications be printed and produced.

The claim file should be checked to ensure it is internally consistent-that there are answers included with all communications and that a record of informal activity (the adjuster diary or activity log) is complete. Where there is cause for suspicion, counsel should note a Rule 30(b)6 deposition of someone familiar with the file.

After the results of initial discovery are in hand, counsel can start to choose appropriate weapons. Remember, the carrier, not the insured, bears the burden of proving the fraud defense. 

Use summary judgment

The initial discovery is like a bill of particulars. Once it becomes clear what the carrier is alleging and how it intends to prove it, counsel should go through the allegations and focus on removing the weakest. This is crucial, because each unfounded allegation of fraud needs to be handled before trial or it will drain attention from the real issues. Counsel should consider bringing a summary judgment motion to deal with fraud allegations.

Burden of proof is the touchstone for developing strategy. Most cases hold the insured need prove only that the policy was in effect on the date of loss and that the peril was within the policy's coverage. Fraud is an affirmative defense the insurer must plead and prove.4

If, for example, the insurer claims the policyholder intentionally inflated the claim, the insurer must prove intent. The insured may have made an error in evaluation, or the dispute may be simply a clash of opinions. In either case, a quick motion for summary judgment should get rid of the defense. Striking even frivolous fraud defenses can help settle the claim-especially when the adjuster initially thought the defense had merit.

Summary judgment motions are particularly useful where the insurer claims fraud by arson. In recent years, companies have been pleading this defense at every opportunity. Often, the carrier uses the defense when it doesn't know precisely where or how the fire started. Absent clear evidence of accidental origin, the carrier simply assumes the insured burned the property. These assumptions will seldom survive summary judgment, particularly where motive is unclear.

In one case, the insured homeowners sued on their claim after a house fire, and the insurer counterclaimed for fraud, alleging owner arson.5 The insureds moved for summary judgment, supported by the husband's affidavit that stated, "I did not have anything to do with causing the fire, nor did I pay anyone or request anyone to set the fire."6 The trial court granted judgment for the insured, and the insurer appealed.

Affirming, the appellate court said the affidavit shifted the burden of proof to the insurance company to present substantial evidence on the arson issue. To establish a prima facie case of arson, the insurer must prove (1) the fire was intentionally set; (2) the insured had a motive to burn the home; and (3) the insured either set the fire or had it set, which may be proved by circumstantial evidence implicating the insured. Here, the insurer failed to meet its burden, and summary judgment for the insured was proper.7

Trial lawyers accustomed to representing plaintiffs often neglect summary judgment, the defense bar's best friend. If a fraud defense is based on mere suspicion, or the circumstantial evidence is less than compelling, counsel should move for summary judgment to try to resolve the issue.

Divide and conquer

Sometimes the carrier is half right. An insured burned the house, crashed the car on purpose, or otherwise violated the policy. Another insured, such as a spouse or business partner, may be completely innocent. Innocent co-insureds may bear the loss if coverage is unavailable.

The divorcing spouse who burns the family home can impoverish the innocent spouse if fraud by any insured forfeits coverage for all. Recent developments in the law help those who have been victimized twice-first by the insured wrongdoer and then by the insurer who refuses to cover the innocent co-insured.

A growing body of case law now recognizes that co-insureds have rights independent of each other and that a policy violation by one insured may not void the policy as to the other. As one court summarized:

The minority view . . . previously the majority view, denies an innocent spouse recovery either because the underlying property ownership is an indivisible tenancy by the entirety, or because the wrongdoing of one spouse is imputed to the other under a theory of oneness of the married couple. The present majority view . . . allows an innocent or divorced spouse to recover even though the co-insured spouse is at fault. The majority view courts reason that policy language excluding coverage must be explicit or that what is in question is the spouse's interest in the insurance policy, not the interest in the real property, or that the fault of the wrongdoing spouse cannot be imputed to the innocent spouse.8

Many modern cases favor innocent co-insureds. Courts have protected them by saying that their rights and obligations under the policy are severable. This argument is based on the language of the New York Standard Fire Policy, which provides:

Concealment, fraud. This entire policy shall be void if, whether before or after a loss, the insured has wilfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein, or in case of any fraud or false swearing by the insured relating thereto.

Courts have reasoned that policies speak of fraud or misrepresentation by "the insured." Thus, the antifraud provision must mean "the insured who violated the policy has no coverage."9 If the rights and obligations under the policy are severable rather than joint, a co-insured who does not participate in the policy violation is protected.

Insurance companies have countered with new policy language that voids coverage on fraud by "any insured." Many courts held carriers could thus eliminate claims of innocent co-insureds.10

Those opinions, however, overlooked that most states require carriers to use the New York Standard Fire Policy language or other, equally liberal, language.11 Thus, even if the policy says that fraud by "any insured" voids coverage, the court will look to the language of the Standard Policy and hold coverage is voided only as to "the insured" who committed the fraud. Most modern courts presented with the Standard Policy argument have protected the innocent co-insured.12

Trial lawyers can win tough cases by paying close attention to the law, understanding the policy, and narrowing issues before trial. These techniques can combat the fraud defense and force insurers to pay valid claims. Solid investigation and sound research can keep fraudulent claims out of the office and ensure compensation for deserving consumers.

1. Downie v. State Farm Fire & Cas. Co., 929 P.2d 484, 485 (Wash. Ct. App.), review denied, 939 P.2d 215 (Wash. 1997); see also United States Fidelity & Guar. Co. v. Wigginton, 964 F.2d 487, 490 (5th Cir. 1992) (requiring exam under oath even where insured was involved in related criminal proceeding); Archie v. State Farm Fire & Cas. Co., 813 F. Supp. 1208, 1213 (S.D. Miss. 1992) (offering to submit to examination nine months late was insufficient).

2. Leading cases include Brown v. Superior Court, 670 P.2d 725 (Ariz. 1983); In re Bergeson, 112 F.R.D. 692 (D. Mont. 1986).

3. Brown, 670 P.2d 725, 734.

4. See, e.g., Travelers Indem. Co. v. Lee, 204 So. 2d 759 (Fla. Dist. Ct. App. 1967); Pacific Ins. Co. v. Frank, 452 P.2d 794 (Okla. 1969); Hendrix v. Insurance Co. of N. Am., 675 S.W.2d 476 (Tenn. Ct. App. 1984); Dairy Queen, Inc. v. Travelers Indem. Co., 748 P.2d 1169 (Alaska 1988); S & W Properties v. American Motorists Ins. Co., 668 So. 2d 529 (Ala. 1995).

5. Pennsylvania Nat'l Mut. Cas. Ins. Co. v. Lane, 656 So. 2d 371 (Ala. 1995).

6. Id. at 373.

7. Id. at 376.

8. Commercial Union Ins. Co. v. State Farm Fire & Cas. Co., 546 F. Supp. 543, 546 (D. Colo. 1982).

9. Richards v. Hanover Ins. Co., 299 S.E.2d 561 (Ga. 1983) (holding that the obligation of insureds was several, not joint. Thus, innocent co-insured spouse was entitled to coverage if she did not participate in wrongful conduct); St. Paul Fire & Marine Ins. Co. v. Molloy, 433 A.2d 1135 (Md. 1981) (finding that unless policy language clearly makes obligations of co-insureds joint, co-insureds may be treated as several, and innocent co-insured may recover); Samhammer v. Home Mut. Ins. Co., 507 N.Y.S.2d 499, 503 (App. Div. 1986).

10. See, e.g., U.S.F.& G. Ins. v. Brannan, 589 P.2d 817 (Wash. Ct. App. 1979); see also Reitzner v. State Farm Fire & Cas. Co., 510 N.W.2d 20 (Minn. Ct. App. 1993).

11. The 1943 Standard New York Fire Policy contains 165 numbered lines of text. Underwriters attached it to property policies, then added coverages and conditions by endorsement. When "plain language" policies began to appear, most state legislatures approved the new policies but required them to be at least as favorable to the insured as the Standard Policy. For an excellent description of the history of the issue, see Borman v. State Farm Fire & Cas. Co., 521 N.W.2d 266, 269 (Mich. 1994).

12. Watson v. United Servs. Auto. Ass'n, 566 N.W.2d 683 (Minn. 1997); Fireman's Fund Ins. Co. v. Dean, 441 S.E.2d 436 (Ga. Ct. App. 1994); Osbon v. National Union Fire Ins. Co., 632 So. 2d 1158 (La. Ct. App. 1994). This is true even when the policy filed has been approved by the insurance commissioner. Ponder v. Allstate Ins. Co., 729 F. Supp 60, 62 (E.D. Mich. 1990).