A comparative analysis of post-loss false swearing and its implications for insurance claims settlement practices

Amoroso, Henry J

I. INTRODUCTION

It is a foregone principle that case law, across all jurisdictions, has advanced an interpretation of contracts of insurance in such a manner as would weigh all reasonable inferences in favor of the insured. The relative policy concerns justifying such an approach are many, ranging from the apportionment of business risk to the concern for relative bargaining positions. Indeed, over the years, courts such as those in New Jersey have viewed insurance contracts suspiciously as contracts of adhesion, and have utilized the "Doctrine of Reasonable Expectation" as well as other interpretive devices to read insurance contracts in a manner providing the insured bargaining strength after the fact which was presumably lacking at the inception of the insurance relationship.1

A contrary trend, however, has emerged in the wake of a series of recent decisions that have departed from the foregoing legalistic prepossession. These recent decisions characteristically engender a more indulgent approach to the construction of "concealment or fraud" clauses in insurance policies as they are applied to the post-loss activities of insureds. This necessarily begs the question of the extent to which courts have abrogated their anti-industry posture and the implications that such a retreat portends for consumers.

The Supreme Court of New Jersey seems to have set forth the representative decision in Longobardi v. Chubb Insurance Co.2 The case signifies a substantial departure from that court's traditional rule of construing insurance contracts against the insurer so as to provide balance to the perceptibly disadvantaged consumer. Longobardi not only serves to reassess many of these well-entrenched doctrines, but it also introduces a novel and vague concept ("prospective reasonable relevancy") to determine the materiality of post-loss statements made by insured parties. As will be seen, a majority of jurisdictions have expressly or impliedly adopted the reasoning espoused in Longobardi and, it is suggested, have in many instances accelerated the dissipation of the relative protection and immunity enjoyed by consumers in their relationship with palpably advantaged insurers. Such is a principle which, as will be seen, bodes ominously for consumers who carry property and casualty insurance policies.

The purpose of this article is to analyze the reasoning that underlies the Longobardi decision, the manner in which it represents a marked reversal in the existing jurisprudence governing the relationship between insurer and insured, and the overall repercussions the decision may yet pose for the entire insurance-buying public. Secondly, the paper will trace the legacy of the Longobardi decision, in terms of the expression it has found in the many jurisdictions that have either expressly or impliedly adopted or expanded upon its reasoning. Lastly, conclusions will be drawn as to the ultimate ramifications of these decisions, or how they will otherwise augur for the relationships among insurers and insureds, as well as the respective apportionment of risks between them.

II. LONGOBARDI - THE FACTUAL BACKGROUND3

George B. Longobardi, Jr., was a teacher and a life-long collector of fine art objects, antiques, and collectibles. He secured coverage for his collection under a renter's insurance policy with Chubb. While Longobardi was out of town, his rented home was burglarized. He claimed that collectibles and personal items in the amount of $232,592.50 were stolen. He then sought to recover the value of these items from Chubb.

As part of its investigation, Chubb requested that Longobardi submit to an examination under oath. During the course of that examination, Longobardi denied knowing Stephen Kitsakos or Frank Isgro, persons known to have had prior involvement in insurance fraud schemes. Chubb knew from independent sources, however, that Longobardi's denial was false. On the strength of that knowledge and Longobardi's denial, Chubb thereafter took the position that Longobardi had "participated" in the loss and that he had given false information on a subject material to the investigation. Relying upon the "Concealment or Fraud" clause contained in its contract with Longobardi, Chubb denied coverage for the loss and sought to void the policy entirely. The clause stated: "We do not provide coverage for any insured who has intentionally concealed or misrepresented any material fact or circumstance relating to this insurance."4

At trial, Chubb failed to prove that Longobardi participated in or conspired to bring about the loss. However, Longobardi did admit during the trial that he knew Isgro, who taught at the same school, and Kitsakos, who had appraised his Hummel collection. Longobardi explained that he previously denied knowing them because he believed that the examination under oath had a "hidden agenda" and was extremely accusatory. Moreover, he claimed that prior to the examination under oath he learned that Kitsakos and Isgro were of dubious character. He decided not to acknowledge association with them any longer. Apparently, both men had been involved in insurance fraud in 1980 for which they were later convicted.

In challenging Longobardi's previous denial, Chubb presented a witness at trial who testified to his own participation in an insurance fraud scheme with Kitsakos and Isgro. The witness testified that he had seen Longobardi in the company of both men. However, the witness never implicated Longobardi in any conspiracy and admitted that the first time he heard of the burglary was when the carrier advised him about it. The paramount issue at trial, then, clearly became the substantive impact of Longobardi's misstatement under oath.

At the conclusion of the trial, the court presented to the jury a series of special interrogatories as an aid in guiding them through the legal issues which defined the case. One of these addressed the issue of false swearing, read as follows: "Did plaintiff George Longobardi, Jr. make a material false statement during the examination under oath conducted by defendant, or the written statement made by plaintiff after April 10, 1984, in an effort to or for the purpose of hindering, deflecting or misleading defendant in the course of its investigative process?"

The jury answered the pertinent interrogatory in the affirmative, thereby permitting Chubb to prevail on the issue of false swearing after the loss, although it had never been proved that Longobardi actively participated in the loss itself.

On appeal, Longobardi contended that the interrogatory erroneously permitted the jury to conclude that his obligation after the loss was controlled by the insurance company's subjective interpretation of "fraud" and "false swearing." He also argued that the interrogatory did not properly advise the jury on the materiality element of fraud which he contended must relate to Chubb's assumption of the risk or the claim of loss. The question before the appellate court, then, was whether Longobardi's post-loss misstatements regarding his familiarity with Kitsakos and Isgro were facts intentionally concealed or misrepresented and sufficiently material as to permit Chubb to disclaim all coverage. To answer this question, the appellate court sought to determine if any of the concealed or misrepresented information prejudiced the insurer, and, if this query were resolved in the negative, whether the absence of prejudice necessitated recovery by the insured.

III. THE APPELLATE DIVISION RULING

The appellate court first had to determine if the "concealment or fraud" clause provided a clear warning so as to mandate and support the insurer's ability to void the policy. The court concluded that use of the word "has," in the phrase "any insured who has intentionally concealed or misrepresented,"5 implied past action, that is, action prior to issuance of the policy, or at least prior to or contemporaneous with the loss. The clause in the court's view, therefore, did not provide the insured with a sufficiently clear warning regarding the consequences of post-loss misstatements, and the insurer was therefore prohibited from voiding the policy.

A. The Doctrine of Ambiguity

The court reached its conclusion using a number of the guiding principles laid out by the New Jersey Supreme Court. In Mazzilli v. Accident & Casualty Insurance Co.,6 the court set forth a bright line standard governing the construction of all insurance contracts:

Solution of a problem of construction of an insurance policy must be approached with a well settled doctrine in mind. If the controlling language will support two meanings, one favorable to the insurer, and the other favorable to the insured, the interpretation sustaining coverage must be applied. Courts are bound to protect the insured to the full extent that any fair interpretation will allow. Doubts as to the existence of coverage must be resolved in favor of the insured. If the clause in question is one of exclusion or exception, designed to limit the protection, a strict interpretation is applied.7

Therefore, in the first tier of its analysis, the Appellate Division ruled that the bar to coverage triggered by Chubb's "concealment or fraud" clause applied exclusively to misrepresentations that occurred prior to contract. The court then continued its examination to see whether further circumstances surrounding the false statement would otherwise warrant the preclusion of coverage.

Characterizing insurance policies as contracts of adhesion, based on standard forms couched in technical language and prepared by the insurer's experts, the appellate division reiterated the New Jersey Supreme Court's admonition to construe these contracts in accordance with the reasonable expectations of the average insured.8 Consistent with that analysis, the court determined that a reasonable insured would believe that an insurer would be precluded from rescinding a policy for false statements that did not affect the nature of the risk, or the origin of the loss. Therefore, because Longobardi was not found to have participated in or conspired to bring about the loss for which he now sought recovery, nor were his misstatements found to have skewed the proportionate risks between the parties or unduly interfered with the investigation of the loss, the appellate division directed that coverage should issue. The court did not need to engage strained or obscure legal reasoning to achieve that result. However, on review of that decision, it is the supreme court's interpretation which stretches for validity.

IV. THE DECISION OF THE SUPREME COURT

A. The Doctrine of Ambiguity

The supreme court, in contrary fashion, applied the doctrine of ambiguity narrowly and failed to find any ambivalence in the "concealment or fraud clause" with respect to when the timing of a misstatement by the insured would trigger rescission. In a prior decision, Weedo v. Stone-EBrick, Inc.,9 the court stated:

We conceive a genuine ambiguity to arise where the phrasing of the policy is so confusing that the average policyholder cannot make out the boundaries of coverage. In that instance, application of the test of the objectively reasonable expectation of the insured often will result in benefits of coverage never intended from the insurer's point of view. The benefits granted, however, will pertain to the same landscape of risk as contemplated by the policy in issue, that is, the "doctrine of ambiguity" works to effectuate the consumer's expectation that the policy purchased extended greater coverage in a particular underwriting area.10

The Weedo case, however, has been limited in its application when language that is "doubtful, uncertain, or ambiguous or reasonably susceptible of two interpretations" has necessitated an interpretation that is more liberal than that which has been written.11 The "fraud or concealment" clause in Longobardi, for instance, was susceptible to two interpretations as two diverse opinions by competent judicial panels evidence. Whether the clause applied to a post-loss misstatement was at the very least brought into question; one interpretation favored Chubb and the other favored Longobardi. The appellate division found that the concealment clause referred only to past inconsistencies or fraud in the application process which the jury did not find.12 The supreme court found that use of the word "has" meant that false statements made at any time in the insurance relationship would allow the insurer to void coverage.13 That the supreme court has handed down such a contrary interpretation with potentially harsh consequences warrants further analysis.

B. Alternative Language

Aside from the doctrine of ambiguity, the supreme court seemingly ignored another of its rules of construction in deciding Longobardi. In evaluating the claim of an insured, consideration is typically given to whether alternative or more precise language, if used, would have put the matter beyond reasonable question.14 The appellate court, in a common method of construction, placed the burden of dispelling this query squarely on Chubb, as the party that had drafted the clause. Indeed, if Chubb had meant to exclude coverage for misstatements made at any time, it could have drafted the document more clearly. By adding the phrase "before or after the loss," to the end of the statement, there would have been no doubt as to the applicability of the clause. The addition of this short phrase would not have violated the Plain Language Statute enacted by the legislature; nor would it have made the clause complex and confusing, a concern well cautioned against by the supreme court.15 Inexplicably, the supreme court did not employ that reasoning in crafting its decision in Longobardi.

In fact, the policy provision in Public National Bank v. Patriotic Insurance Co. of America,16 a case upon which the supreme court significantly relied in its decision, applied to "fraud or false swearing by the insured touching any matter relating to this insurance or the subject thereof, whether before or after the loss."17 Despite the factual distinction between the subject policy provisions in Public National Bank and Longobardi, respectively, the supreme court nonetheless determined that application of "concealment or fraud" clauses to misrepresentations made during the post-loss investigation was a matter of first impression in New Jersey. The court, therefore, looked to a number of cases from other jurisdictions that found similar clauses18 to be unambiguous and hence applicable when an insured misrepresents facts to the insurer during the post-loss investigation, rather than during the application process.19 There is a split of authority as to whether fraud or concealment clauses may void a policy for post-loss misstatements. Most opinions appear to turn upon the presence or absence of the essential phrase "whether before or after the loss."20 Despite the absence of a bright-line standard, however, the New Jersey Supreme Court ruled to the benefit of the insurer, which perhaps suggests the early manifestation of an emerging undercurrent of industry favoritism.21

V. THE SUPREME COURT'S ANALYSIS OF MATERIALITY

Admittedly, the rules of construction are sufficiently broad to permit or deny a finding of ambiguity in all but the extreme cases. However, the courts of the State of New Jersey have traditionally balanced the competing interests with one finger on the consumer's side of the scales of justice.

Having determined the "fraud or concealment" clause was unambiguous, the supreme court applied its substantive interpretation of the clause to the facts so as to effectuate a result. This aspect of the analysis, however, proves most troubling. The supreme court appears to contort the traditional concepts of materiality and fraud so as to permit the finding that Longobardi's post-loss statements were sufficiently iniquitous to justify a denial of coverage. This warrants further examination.

In a universal, legal sense, the term "material" frequently connotes substance, importance, or a reliance or inducement that is created within one to whom a material statement is communicated.22 Materiality has further been defined under New Jersey Statutes as any information which affected either the acceptance of the risk or the hazard assumed by the insurer.23 That the element of materiality is to be measured by detrimental or prejudicial effect upon the insurer is well established in the law of the state. In Kerpchak v. John Hancock Mutual Life Insurance Co.,24 the court noted:

Every fact which is untruly stated or wrongfully suppressed must be regarded as material, if the knowledge or ignorance of it would naturally and reasonably influence the judgment of the underwriter in making the contract at all, or in estimating the degree or character of the risk, or in fixing the rate of premium.25

Materiality, as explained in terms of reliance, has typically found expression in the pre-loss circumstance, when the carrier predicates its assumption of insurance risks, and indeed its very decision to contract at all, upon the statements and information provided by the insured or applicant for insurance. "Materiality" under these circumstances, therefore, is more easily found because the insurer's concomitant change in position is more readily observable. The interpretation of materiality, however, becomes more problematic when the purported misstatement occurs subsequent to and independent of the loss. Under a post-loss false swearing scenario, the courts of New Jersey have traditionally precluded coverage when the policyholder is guilty of committing reliance-inducing fraud during the course of a post-loss investigation. This is a position easily defensible by the courts even in the face of consumer-oriented policy constraints. As can be seen, however, the supreme court in Longobardi ruled against the plaintiff by abandoning the requirement of reliance-based fraud in favor of a more passive "prospective relevancy" standard, more closely associated with principles of equity. It is suggested that this is the legacy of Longobardi, a clarion decision which has become emblematic of the emerging trend of jurisprudence with regard to post-loss behavior of insureds and which favors insurance carriers.

A. The Supreme Court's Analysis of the Fraud Issue

As explained above, under traditional analysis the court in Longobardi would have had to find that the plaintiff's post-loss behavior constituted actual fraud, or its equivalent, in order to negate coverage. Actual fraud usually consists of the declaration of a presently existing or past fact, made with knowledge of its falsity and with the intention that the other rely thereon, resulting in reliance by that party to its detriment. Actual fraud embraces the concepts of intent to deceive and prejudice to the reliant party.26 Concealment is analogous to actual fraud, in that it has been often used to establish fraudulent activity and to rescind coverage when the insured party has demonstrated an active intentional endeavor to prevent the reliant party from discovering the truth. In insurance law, concealment has traditionally included "non-disclosure" as well. In the context of an insurance contract, concealment, with or without intent to deceive, suffices to avoid a policy.

In Longobardi, actual fraud was not proved, primarily because the element of detrimental reliance was not established. Indeed, a false representation made to a person who knows it to be false is not, in legal estimation, a fraud.27 Chubb already knew of the association with Kitsakos and Isgro before it questioned Longobardi. Therefore Chubb knew his answers were false when they were made. This fact undermined any attempt by Chubb to establish actual fraud, for it could not demonstrate detrimental reliance.

B. The Concept of Equitable Fraud

Having failed to find the existence of actual post-loss fraud, the supreme court interposed the doctrine of equitable fraud, a concept which shifts the emphasis away from the detrimental reliance occasioned by the statement and to the actual "materiality" of the statement itself. As will be seen, the doctrine of equitable fraud is the vehicle which permits the New Jersey Supreme Court to alter the import and legal significance of the term "materiality," thereby giving effect to a result the court so patently sought to achieve.

In proving equitable fraud, one need not establish scienter, that is knowledge of falsity compiled with an intent to deceive. Nor is it necessary to show actual, pecuniary damages. Equitable fraud simply seeks to recover from one who engages in post-loss misrepresentation any unfair gain or advantage which is directly attributed to that misrepresentation.28 Hence, equitable fraud may exist in the misrepresentation of a material fact however innocently made.29

The term "equitable fraud" is, of course, a misnomer. Fraud, at all levels, connotes an intent to do wrong.30 When one misrepresents innocently, there appears to be an absence of such intent, unless of course, one has gained an obvious advantage through a misstatement and later refuses to undo the transaction or relinquish the benefit.31 The dilemma was summed up long ago:

Equitable fraud is obscured by its label. Fraud connotes an intent to do wrong. When one misrepresents innocently, there is no such intent. Still it may be wrong to insist upon an advantage thus obtained, and when that is so, a refusal to undo the transaction could be characterized as "fraudulent."32

The supreme court in Longobardi appears to borrow from such reasoning, as is evidenced by the court's attempt to remove intent as an issue with which to contend. The court noted: "the insured's motive for lying, however, is irrelevant. Forfeiture does not depend on proof that an insured harbored an intent to recover proceeds to which he or she was not entitled."33

Here, the court seems to have applied an equitable fraud theory without any demonstration of reliance or prejudice to the insurer that can be attributed to the information misstated or misrepresented. Indeed:

For an insurer to void a policy because of a post-loss misrepresentation, the misrepresentation must be knowing and material.

. . . An insured's misstatement is material if when made a reasonable insurer would have considered the misrepresented fact relevant to its concerns and important in determining its course of action.

. . . Prejudice from a post-loss misrepresentation, therefore, is unnecessary to relieve the insurer of its liability.34

However, intent is not entirely obviated by the supreme court's reasoning. Although the motive for lying is irrelevant, a mere oversight or honest mistake will not cost an insured the coverage. Hence, only a willful misrepresentation during the post-loss investigation will result in rescission.35 Intent still looms as an issue because it would seem that the supreme court would not void the policy when the misrepresentation was made innocently or in good faith, regardless of its impact upon the insurer. The opinion does not indicate just how innocence is to be determined; although the supreme court was clear that "any" misstatement "means any," it is presumed that exceptions will be made when the court believes it is subjectively appropriate. The manner in which such a rule will be enforced remains to be seen.

The more fascinating aspect of the Longobardi decision, and that which has already prompted surprising results in other jurisdictions, is the manner in which the New Jersey Supreme Court has endeavored to associate "materiality" with mere "relevancy." The effect is to precipitously diminish the standard of proof previously required of the insurer seeking to void coverage. The rule as stated by the court is: "[ain insured's misstatement is material if when made a reasonable insurer would have considered the misrepresented fact relevant to its concerns and important in determining its course of action."36

The supreme court refers to this standard as the rule of "prospective reasonable relevancy."37 This term and the rule that it represents is vague and without standards, and gives the insurer an unfair advantage over the insured in the litigation of a claim. Indeed, a review of the elements of fraud which have been employed in the insurance arena in New Jersey reveals that "prospective reasonable relevancy" is an anomaly.

In the case's infancy, the appellate division was very troubled by the fact that the trial judge had defined the word "material" as "simply" meaning "pertinent" or "germane." The appellate court found that inclusion of the phrase "for the purpose of hindering, deflecting or misleading" in the special interrogatory was not a substitute for a complete jury instruction on the post-loss aspect. Defining "material" as "simply" germane or "pertinent" was not, in the court's view, a sufficient statement of the law. The appellate court stated that the insurer had the burden of proving not only that Longobardi's false statements after the loss were material, in the sense of being important or significant to the origin or nature of the loss, but also that the false statement resulted in prejudice to Chubb. Because material statements, information without which an average insurer would be harmed, will always encompass relevant information, the appellate court believed that having a carrier show prejudice would ensure fair and uniform results and would prevent the insurer from gaining a windfall.38

Contrary to the findings and concerns expressed by the appellate division, the New Jersey Supreme Court adopted the rule set forth in Fine v. Bellefonte Underwriter's Insurance Co.39 in its entirety, without providing, in the opinion of the writer, sufficient guidelines and rules of enforcement to protect against the potential abuses to which the decision exposes insureds.

The Fine court stated:

[F]alse sworn answers are material if they might have affected the attitude and action of the insurer. They are equally material if they may be said to have been calculated either to discourage, mislead or deflect the company's investigation in any area that might seem to the company, at that time, a relevant or productive area to investigate.40

In the case of post-loss statements, although the rule is prospective, it can only be shown by post hoc statements of insurance company personnel that the withheld or misstated information would have affected the course of their investigation. These statements are easily made and obviously susceptible to bias.41 As the appellate court realized, at such a juncture in the litigation the insurer and the insured are in an adversarial relationship.42 The insured may be reacting to the fear of having a claim denied; the insurer may be inordinately aggressive in the manner in which it conducts its investigation. The removal of subjective considerations as they relate to discovery and the investigative process necessarily renders insureds vulnerable to the unscrupulous tactics of a carrier, or to a purely objective examination that ignores the motivations or other exigencies demonstrated by the respective parties during the post-loss period. As will be seen in decisions from other jurisdictions, this legacy of Longobardi favors the insurance industry and potentially exposes consumers to significant hardship.

VI. APPLICATION OF THE LONGOBARDI PRINCIPLES IN OTHER JURISDICTIONS

A. The Second Circuit

The Second Circuit, having been responsible for decisions such as Fine,43 seems to have developed the principle of materiality more or less in tandem with the New Jersey Supreme Court. Ultimately, in the seminal decision of Pacific Indemnity Co. v. Golden,44 the Second Circuit makes clear its inclinations in the context of post-loss misstatements by the insured.

In Golden, the claimant's house was severely damaged by fire. Having been promptly alerted of the blaze, Golden returned to his home in time to advise firefighters of the storage of significant quantities of gasoline in a room opposite the end of the house at which the fire started. The firefighters removed the gasoline without incident. Upon questioning at the scene, Golden disclosed that the gasoline had been stored for use with snowmobiles that he and a neighbor owned. An initial investigation conducted by the fire marshal revealed that the stored gasoline did not cause or contribute to the fire.

Approximately ten days after the fire, the carrier took an informal recorded statement from Golden in which he reiterated his reasons for storing the gasoline on his premises. Approximately one month later, however, the insurer conducted an examination of Mr. Golden under oath, at which time he acknowledged he initially made certain misstatements. At this subsequent deposition, Golden claimed that the reason for storing gasoline on his premises was to facilitate the systematic poisoning of his neighbor's lawn, growing out of an ongoing dispute between them. He asserted that he did not earlier disclose this fact out of fear and embarrassment and of being prosecuted criminally for vandalism.

The insurance company denied Golden's claim under the authority of a provision excluding coverage where the insured "intentionally concealed or misrepresented any material fact relating to this policy before or after a loss."45 Relying upon Fine v. Bellefonte Underwriters Insurance Co.,46 the district court concluded that an intentional misstatement of a material fact had been made, and granted summary judgment to the insurer.47

On appeal, the Second Circuit Court of Appeals concurred with the court below that Golden's intent in offering the misstatement was irrelevant, and relied specifically on Longobardi as authority for such a principle.48 Satisfied that Golden's misstatement was intentional, the court then turned to the issue of the substantive import of the misstatement.49

In construing "materiality," the court relied upon its earlier decision in Fine as articulating the standard definition: "the materiality requirement is satisfied if the false statement concerns a subject relevant and germane to the insurer's investigation as it was then proceeding."50 Although hinting at the nexus of relevancy that presumably existed between Golden's false statements and the nature and scope of the carrier's post-loss investigation, the court was nonetheless constrained to vacate the district court order of summary judgment for what it perceived to be the carrier's failure to dispel the factual dispute surrounding the issue of materiality. The insurer's investigation with respect to Golden's storage of gasoline merely disclosed that the fuel had not been stored on the premises approximately ten months prior to the accident. Because the carrier had made only a cursory inquiry into the timing and nature of the gasoline storage, it could not be established, at least to the degree that would sustain a summary judgment application, that Golden's misstatements had perceptibly altered or affected the conduct of its investigation. Consequently, the Second Circuit reserved the issue of materiality for the jury.

Of course, in this case the Second Circuit reaffirmed the equivalent of the "prospective reasonable relevancy" test that had been set forth in the Longobardi decision. However, the court was simply not prepared to make the leap in logic that would be necessary to give material effect to Golden's misrepresentations upon an investigation which never fully realized. Rather, the court deferred to a disposition by the finder of fact, where the standards, inferences and, presumably, the outcome, would be different.

B. Northern District of Georgia

A recent case emanating from the Northern District of Georgia, Meyers v. State Farm Fire & Casualty Co.,51 has offered a noteworthy rejoinder to the preceding decision. It takes a more liberal approach to those circumstances under which "materiality" may be decided as a matter of law, through increased emphasis upon the language used by the insurer itself in the drafting of its policy. In fact, it can be seen that if that court's reasoning is taken to its logical extreme, it will become possible for an insurer to itself prescribe within the four corners of its policy precisely that which constitutes materiality. This disturbing postulation warrants a closer look.

In Meyers, the insurer issued a homeowner's insurance policy to the plaintiff which contained a "concealment or fraud" clause providing: "[t]his policy is void as to you and any other insured if you or any other insured under this policy has intentionally concealed or misrepresented any material fact or circumstances relating to this insurance, whether before or after a loss."52

The policy further provided that following a loss, the insured is required to submit to an examination under oath and to supply the insurer certain information, records, and documents regarding their financial condition. The plaintiffs' house and certain contents were destroyed by fire. The insurer conducted an investigation as to the incident and the claim that had been submitted.

As permitted under the terms of the policy, the insurer conducted an examination under oath of the plaintiffs. During the examination significant efforts were made to remind the plaintiffs of their obligations to be truthful and of the insurers remedies under the policy in the event of a misstatement. Transcripts of the deposition were forwarded to the plaintiffs so as to permit them the opportunity to correct any inaccuracies. The plaintiffs made no changes.

Upon conducting its own investigation of the plaintiffs' financial affairs, the insurer determined that both had intentionally misrepresented material financial facts during their examinations under oath.53 On the authority of its "concealment or fraud" clause, the insurer denied the entirety of the claim.

Subsequent to the filing of the plaintiffs' complaint, the insurer brought a motion for summary judgment on the basis of the misrepresentations. At the outset of its analysis, the court recognized that "whether a misrepresentation is material because it would influence a prudent insurer's decision to insure is [traditionally] a jury question."54 Notwithstanding, the court reasoned, "materiality is a mixed question of law and fact that can be decided as a matter of law if reasonable minds could not differ on the question."55

Upon turning to the issue of materiality, the court enumerated a standard of definition which closely resembles the "prospective reasonable relevancy" standard set forth in Longobardi.56 The court then superimposed upon this relevancy standard the common sense notion that when an insurer alleges arson as a defense to a claim for fire loss, the financial status and potential financial gain to the insured (as the suspected arsonist) are circumstances material to that defense.57

The most novel aspect of the court's reasoning in granting summary judgment to the insurer, however, is its finding that "materiality" may be self-evident as a matter of law. This would depend upon the language contained in the policy itself "where the parties expressly contracted for a postloss financial examination under oath, as well as the voiding of the policy due to any post-loss financial misrepresentation, surely they must be deemed to be aware of the presumed material nature of such information."58

The court decided that because the examination under oath had been arranged specifically pursuant to the express terms of the agreement between insurer and insured, for the explicit purpose of determining the existence of any financial or other motive for arson, the insureds' misrepresentations were material as a matter of law and common sense. In support of its reasoning, the court cited the old decision of Claflin v. Commonwealth Insurance Co.,59 in which the United States Supreme Court held:

The object of the provisions in the policies of insurance, requiring the assured to submit himself to an examination under oath, to be reduced to writing, was to enable the company to possess itself of all knowledge, in regard to the facts, material to their rights . . . and every interrogatory that was relevant and pertinent in such an examination was material, in the sense that a true answer to it was of substance of the obligation of the assured.60

The import of this decision is clear: through the careful crafting of policies of insurance, so as to place the insured on notice as to his precise post-loss obligations in providing discovery and information, the insurer may eventually reduce the issue of "materiality" to a matter of contractual consideration. This would obviate the need for its adjudication with the assistance of a court or finder of fact. Although the court may have achieved a just result under the foregoing facts, the prospects for industry abuse made possible under its reasoning are most disturbing.61

C. The District of Kansas

In an interesting decision, the United States District Court for the District of Kansas clearly endorses an expansion of the rigid principle espoused in Longobardi to the perceptibly more passive conduct suggested by the insured's failure to comply with a request for document production. In King v. Federal Insurance Co.,62 the insured filed a declaratory judgment action seeking recovery for property loss and damages. Although in conjunction with the post-loss investigation of the matter he submitted himself for oral deposition and apparently testified forthrightly, the court made a determination that he failed without excuse to produce two documents that had been requested of him at the examination.63

On the strength of testimony at trial of the adjuster who handled the claim, the court subsequently made a determination that the documents requested contained "material," albeit admittedly cumulative, information.64 In light of the repetitive and superfluous nature of the information contained in the subject documents, the court found that the insurer had not been prejudiced by their untimely production. Notwithstanding the absence of prejudice, the carrier relied upon the decision in Longobardi in arguing that as long as the withheld documents were "material" (i.e., relevant), it was not obligated to demonstrate a resultant disadvantage.65

In a somewhat unorthodox ruling, the district court acknowledged the distinction between the facts sub judice and those in the Longobardi case, but made clear its preference that the outcome for the former reflect the reasoning in the latter:

It is open to dispute whether an insured's misstatements of material fact should be viewed in the same light as the withholding of documents containing material, but cumulative, information. Practical reality of insurance industry practice would favor treating them the same and the court acknowledges that Longobardi makes a lot of common sense in that regard.66

The court clearly suggests that under Longobardi, King's failure to produce documents would trigger an absolute bar to coverage, and that such is a proper and intellectually sound result. Ultimately, however, the district court found in the plaintiff's favor, for reason that the court was obligated to follow Kansas state law which required a showing of prejudice as prerequisite to voiding coverage. In the absence of such binding authority, however, the manner in which the district court would have ruled is clear. It was certainly persuaded that an insured's unexcused failure to produce documents relevant to the claim, however superfluous or redundant, must necessarily pose a bar to recovery. Although ultimately decided within the parameters of Kansas law, the extraordinarily broad expansion of Longobardi proposed in this decision certainly communicates to the legislature and companion jurisdictions this court's predisposition on the issue. The decision furthermore represents a shocking example of the extreme interpretation Longobardi has enjoyed in other jurisdictions, much to the disadvantage of insureds. It is suggested that cases such as King are indicative of a trend that has been sparked by the Longobardi decision. Various jurisdictions appear to be exploring the limitations of the principles espoused therein, all with indications that will likely prove onerous to insurance consumers.

D. The Supreme Court of Wisconsin

Longobardi created controversy and differences of opinion over its scope and effect. In, Tempelis v. Aetna Casualty & Surety Co.,67 for example, the Wisconsin Supreme Court wrestled with the issue of whether an insured should be penalized only to the extent of coverage directly related to the post-loss misstatement. Although resolving that query in favor of the insured, the presence of the Longobardi decision created rigorous debate, and may otherwise signify an unsettling of the legal principle that had heretofore governed relations between insured and insurer.

In Tempelis, the plaintiffs purchased a home for $20,000 which was then insured with Aetna for $100,000. Approximately six months later, the home was destroyed by fire, along with much personal property contained therein. Subsequently, the plaintiffs filed a proof of loss claim which sought coverage for the loss of the residence and its contents. Also claimed was $6,345.55 as reimbursement for certain living expenses.

The case went to trial, and the jury unanimously concluded that the plaintiffs "intentionally misrepresented material facts . . . regarding their insurance" by creating and introducing fraudulent receipts to substantiate their claim for reimbursement of living expenses.68 Notwithstanding its determination of post-loss misrepresentation, the jury found the insured's damages to be as follows: a) $100,000.00 for the building; b) $26,364.90 for the contents of the building; and c) $1,951.65 for living expenses.69 Aetna subsequently filed a motion for judgment notwithstanding the verdict, seeking to void all coverage because of the misrepresentations the plaintiffs had made regarding their living expenses. Aetna founded its argument on the strength of a "fraud or concealment" clause which barred coverage for the intentional misstatement of any material facts.70

In addressing the motion, the Wisconsin Supreme Court, with a tinge of contradiction,71 ruled that the policy exclusion as drafted was ambiguous "as to what extent a material misrepresentation voids coverage."72 Because it had not been adequately explained within the policy that any misrepresentation would necessarily void all coverage, the court ruled in the plaintiff's favor, thereby voiding coverage only with respect to the claim for living expenses. Interestingly, in dicta accompanying the decision, the court acknowledged that, although it was basing its ruling on the relative ambiguity inherent in the policy, it understood why other courts have refused to permit a misrepresentation regarding one element of a claim to bar coverage entirely:

Such an interpretation of an insurance contract could produce extremely harsh results. For example, if an insured had a two million dollar insurance policy, and he or she submitted one fraudulent receipt for a $50 meal, the policy would void coverage of his or her entire insurance claim, including the two million dollar coverage of the home.73 Inexplicably, the court failed to take exception with the Longobardi decision on this ancillary substantive basis. This may prove to be a weakness in the Tempelis decision, for the reliance on ambiguity may simply encourage carriers to redraft their "fraud or concealment" clauses so as to issue a more prominent warning of the bar to coverage. It does not seem that the concerns and policies identified by the Wisconsin Supreme Court in its dicta in Tempelis have been meaningfully advanced by its ultimate ruling.

In fact, the dissent in Tempelis demonstrates that a substantial counterbalancing faction of jurists have wholly endorsed the Longobardi decision, regardless of the inequity it would have exacted upon the plaintiffs in this particular case. Indeed, remarking that, in his view the intermediate appellate court correctly applied the Longobardi decision in denying every aspect of the Tempelises' claim,74 the dissenter was quick to cite authority suggesting that other jurisdictions had long held that "fraud or misrepresentation as to any portion of property under an insurance policy voids the entire policy."75

Clearly, then, Longobardi has created a significant rift between competent jurists over the prohibition against post-loss misstatements. When such a rigorous dialectic is compared with the relative circuitous route through which the majority in this case ruled in favor of the insured, it is clear that Longobardi, and the ominous foreboding it holds for policyholders, is far from an aberrational decision.

VII. CONCLUSION

Decisional law has traditionally favored a construction and enforcement of contracts of insurance that has indulged and offered protections to insureds, so as to equalize the apportionment of risks and respective bargaining advantage between consumer and insurer. Recently, a series of cases has emerged that indicate a reversal in this custom, and a tendency to favor the interests of the industry when confronted with prospective fraudulent activity on the part of the insured in a post-loss scenario.

Longobardi, the leading case, appears to have abdicated the elevated standards of proof typically associated with what may nominally be characterized as "fraud" or "concealment" on the part of the insured, in favor of a novel concept, the "prospective reasonable relevancy" of materiality. The decision signifies a tremendous shift in the indulgence with which courts have treated policyholders. Its legacy has proven it to be a decision rife with the potential for abuse, and one that permits the imposition of harsh and, at times, inequitable results.

Although it remains to be seen whether this emerging judicial inclination will be met with a counterbalancing intellectual current that favors the consumer, the greatest effects of the Longobardi decision are perhaps yet to be observed in the manner in which the insurance industry modifies its policies and practice so as to avail itself of the full potential benefits of this decision.

1Perrine v. Prudential Ins. Co., 265 A.2d 521 (N.J. 1970); Kievit v. Loyal Protective Life Ins. Co., 170 A.2d 22 (N.J. 1961). 2582 A.2d 1257 (N.J. 1990).

3Longobardi v. Chubb Ins. Co., 560 A.2d 68 (N.J. Super. Ct. App. Div. 1989).

4Longobardi, 582 A.2d at 1259.

5Longobardi, 560 A.2d at 76 (emphasis added). 6170 A.2d 800 (N.J. 1961).

9Id. at 803-04 (citations omitted).

8Kievit v. Loval Protective Life Ins. Co., 170 A.2d 22, 26 (N.J. 1961); Perrine v. Prudential Ins. Co., 265 A.2d 521, 523 (N.J. 1970). 9405 A.2d 788 (N.J. 1979).

10ld. at 795.

11Hunt v. Hospital Serv. Plan of New Jersey,162 A.2d 561, 563 (N.J. 1960). 12Longobardi, 560 A.2d at 82-83. 13Longobardi, 582 A.2d 1257,1260 (N.J.1990). 14Mazzilli, 170 A.2d 800, 803 (N.J.1961).

15Longobardi, 582 A.2d 1257, 1263 (N.J. 1990). 16144 A. 566 (N.J. 1929). 171d. at 568 (emphasis added).

18But ones which did not contain the statement "before or after the loss." 19Longobardi, 582 A.2d at 1263.

20Cf., Cummings v. Farmers Ins. Exchange, 249 Cal. Rptr. 568 (Ct. App. 1988); Ameri

can Employer's Ins. Co. v. Taylor, 476 So. 2d 281 (Fla. Dist. Ct. App. 1985). Interestingly, a number of recent decisions have specifically adopted Longobardi with respect to ambiguities in "fraud or concealment" clauses that do not possess the "before or after" language. Cf Smith v. State Farm Fire & Casualty Co., 426 S.E.2d 457 (N.C. Ct. App. 1993).

21This postulation is further supported by the alternatives to forfeiture or preclusion of coverage that are available to the court. That is, unlike life policies where the insurance carrier must choose to pay or to rescind when the insured dies within the statutory contestability period, alternative remedies are available for property and casualty losses, including criminal penalties and civil fines and damages. See, N.J. STAT. ANN. 17:33A-5 and 17:33A-7 (West 1997). Moreover, an insurer can only be obligated to pay the reasonable value of objects stolen or destroyed. In Longobardi, Chubb failed to prove that the plaintiff was involved in the loss or that the value of the items stolen was somehow inflated or misleading. See, Kozlowski v. Pavonia Fire Ins. Co., 183 A. 154, 156 (N.J. 1936). Longobardi, it would seem, was penalized for the suspicion of fraud and judged by the company that he kept.

22BLACK'S LAW DICTIONARY, 88 (Sth ed. 1979). 23N.J. STAT. ANN. 17B:24-3(d) (West 1997). 24117 A. 836 (N.J. 1922). 25ld. at 837.

26Jewish Center of Sussex Cty. v. Whale, 432 A.2d 521, 524 (N.J. 1981). 27Hayes v. Packer, 7 A. 511 (N.J. 1886).

28Jewish Center of Sussex Cty., 432 A.2d at 525.

29Formosa v. Equitable Life Assur. Soc. of the U.S., 398 A.2d 1301, 1304 (N.J. Sup. Ct. App. Div. 1979).

30Johnson v. Metro. Life Ins. Co., 251 A.2d 257, 264 (N.J. 1969). 31DuBois v. Nugent, 60 A. 339 (N.J. Super. Ct. Ch. Div. 1905). 32Johnson, 251 A.2d at 264 (citing DuBois, 60 A. at 343). 33Longobardi, 582 A.2d at 1262.

34Id. at 1261-63 (citations omitted), 35Id. at 1261. 36Id. at 123. 37Id.

38Longobardi, 560 A.2d 68, 79 (N.J. Super. Ct. App. Div. 1989). 39725 F.2d 179 (1984).

40ld. at 184; Longobardi, 582 A.2d at 1262. 41Longobardi, 560 A.2d at 77. 42Id. at 80.

43Fine, 725 F.2d at 184. 44985 F.2d 51 (2d Cir. 1993). 45Golden, 985 F.2d at 55. 46725 F.2d 179, 183 (2d Cir. 1984).

47Pacific Indem. Co. v. Golden, 791 F. Supp. 935, 939 (D. Conn. 1991). 48Golden, 985 E2d at 56.

49It is interesting to note that some jurisdictions have supplanted the requirement of an "intentional" misstatement with that of an "intentional or reckless" misstatement. See Callaway v. Sublimity Ins. Co., 858 P.2d 888, 889 (Or. Ct. App. 1993); Kentner v. Gulf Ins. Co., 686 P.2d 339, 343, modified on other grounds, 689 P.2d 955 (Or. 1984). This represents yet a further retreat from the active fraud requirement traditionally prerequisite to the preclusion of coverage.

50Golden, 985 E2d at 56 (citing Fine v. Bellefonte Underwriters Ins. Co., 725 E2d 179, 183 (2d Cir. 1984)).

51801 F. Supp. 709 (N.D. Ga. 1992). 52 Jd. at 711.

53Specifically, the plaintiffs concealed the following: a) that they had amassed substantial credit card debt prior to the fire; b) that they had become substantially past due in their utility bills prior to the fire; c) that they had endeavored to procure loans from four separate lending institutions within two weeks prior to the fire, all of which applications had been rejected; d) that they were liable for miscellaneous outstanding loans, all of which had become due prior to the fire. Id. at 713.

54Id. at 715 (citing Woods v. Indep. Fire Ins. Co., 749 F.2d 1493, 1497 (llth Cir. 1985)) (clarification supplied).

55Id. (citing Long v. Ins. Co. of N. Am., 670 F.2d 930, 934 (lOth Cir. 1982)). 56Id. (citing Woods v. Indep. Fire Ins. Co., 749 F.2d 1493, 1497 (llth Cir. 1985); Sentry Indem. Co. v. Brady, 264 S.E.2d 702, 704 (Ga. Ct. App. 1980); Lee v. Metropolitan Life Ins. Co., 123 S.E. 737, 738 (Ga. Ct. App. 1924)).

57Id. at 716. Cf Halcome v. Cincinnati Ins. Co., 334 S.E.2d 155, 157 (Ga.) aff'd 778 F.2d 606 (llth Cir. 1985). 58Meyers, 801 F. Supp. at 715. 59110 U.S. 81 (1883).

60 Meyers, 801 F. Supp. at 716 (citing Claflin, 110 U.S. at 94-95). 61Certain other jurisdictions seem to have endorsed this approach by distinguishing preloss from post-loss activity on the basis of fraud, versus breach of contract theory, respectively. The Sixth Circuit, for example, has ruled that although both types of "fraudulent" behavior are sufficient to pose an absolute bar to recovery, it is clear that the traditional elements of fraud (i.e., intent and reliance) are not an element of a policy defense based upon a fraudulent proof of loss, as opposed to a fraudulent procurement situation. See, O-So Detroit, Inc. v. Home Ins. Co., 973 F.2d 498 (6th Cir. 1992). In fact, the Sixth Circuit has suggested that post-loss concealment or false swearing brings into issue not fraud but, rather, whether

the plaintiff substantially performed his contractual obligation to cooperate with the investigation. J.S. Wyckoff & Assocs., Inc. v. Standard Fire Ins. Co., 936 F.2d 1474 (6th Cir.1991). Contract analysis in this context involves an ostensible, non-subjective examination of postloss compliance that is perhaps more prone to diminish or neglect certain exigencies which are particular to the plaintiff. It is suggested that such an approach, if unfettered, becomes ripe for abuse to the disadvantage of the consumer. 62788 F. Supp. 506 (D. Kan. 1992).

63The two documents at issue were: 1) long distance telephone records; and 2) a handwritten summary of the plaintiff's involvement in certain property (i.e., cattle transaction). Id. at 506.

64The adjuster specifically testified that, although the information sought was relevant to the investigation, even if produced in a timely fashion the information would not have impacted upon the carrier's decision to deny the claim. Id.

650f note is the decision by the Iowa Supreme Court in Webb v. American Family Mut. Ins. Co., 493 N.W.2d 808 (Iowa 1992), which adopts much of the same reasoning as the court in King. Here, the plaintiff had knowingly overstated the value of the property damage occasioned by a fire to his residence and its contents. American voided coverage on the authority of its "fraud or concealment" clause. The plaintiff argued that because the actual value of the loss (as determined by a jury) still exceeded the policy limits, the relative position of the insurer had never changed despite the misstatement, rendering the misstatement less than of a material quality. The supreme court dismissed the argument and set forth reasoning akin to that in Longobardi. Id. at 811-12 (citing Mutual of Enumclaw Ins. Co. v. Cox, 757 P.2d 499 (Wash. 1988)). 66King, 788 F. Supp. at 507.

67485 N.W.2d 217 (Wis. 1992). 68Id. at 218.

69The claim for living expenses in the amount of $6,354.55 had been adjusted downward by the jury in light of the finding of fraud.

70The actual policy language read as follows: "2. Concealment or Fraud. We do not provide coverage for any insured who has: a. Intentionally concealed or misrepresented any material fact or circumstance; b. Made false statements or engaged in fraudulent conduct; relating to this insurance. Id. at 218-19.

71The court, earlier in its decision, was confronted with the alleged ambiguity created by the term "has" contained in the relevant exclusion. The plaintiff here, as did Longobardi, claimed that the use of the past tense gave rise to two possible interpretations, one of which suggested applicability of the exclusion only to pre-loss misstatements. Ironically, the Wisconsin Supreme Court summarily found the exclusion to be unambiguous in this regard, and relied upon Longobardi as establishing the principle. Id. at 221. With some measure of inconsistency, the court found the existence of a dual interpretation of the effect of a misstatement to create a sufficient ambiguity to warrant judgment in plaintiffs' favor. Id. 72ld.

73Id. at 222. In support of its reflections, the court also cited Kerr v. State Farm Fire & Cas. Co., 552 F. Supp. 992 (D.S.C. 1982) aff'd in part, rev'd in part on other grounds, 731 F.2d 227 (4th Cir. 1984); Johnson v. South State Ins. Co., 341 S.E.2d 793, 794 (S.C. 1986).

74"See generally Tempelis v. Aetna Cas. & Sur. Co., 473 N.W.2d 549 (Wis. Ct. App. 1991). 75Tempelis, 485 N.W.2d at 222-23 (Steinmetz, J. dissenting) (citing 44 AM. JUR.2D Insurance 1371-76 (1982); SA JOHN ALAN APPELMAN & JEAN APPELMAN, INSURANCE LAW AND PRACTICE 3595 (1970); 45 C.J.S. Insurance 1021 (1946)).

Henry J. Amoroso is an Associate Professor of Legal Studies in the W Paul Stillman School of Business at Seton Hall University in New Jersey. Since 1992, he has served as Director of Ethics Development and Curriculum at the School of Business. Professor Amoroso received his B.A. in Accounting from Villanova University, his Juris Doctor from Delaware Law School and is a founding member of Nowell Amoroso, PA.

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