Eldin v. Farmers Alliance Mutual Insurance

890 P.2d 823, 119 N.M. 370

• Court: New Mexico Court of Appeals
• Decided: December 29, 1994
• Docket: 15638
• Status: Published

Opinions

OPINION

PICKARD, Judge.

Insureds, Eldin and Patterson, appeal from the trial court’s order granting summary judgment in favor of Farmers Alliance Mutual Insurance Company (Farmers). Farmers contended that it was not required to pay on its business insurance policy with Insureds because of Insureds’ fraud, concealment, and misrepresentation in their proof of loss for items stolen from their business and because of Insureds’ failure to cooperate in the investigation of that claim. We reverse.

BACKGROUND

Insureds owned an audio store, Albuquerque Audio. Farmers issued a business owner’s common insurance policy to Insureds, which covered them against theft. The policy contained the following provision:

This policy is void in any case of fraud by you at any time as it relates to this policy. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact concerning: 1. This policy; 2. The Covered Property; 3. Your interest in the Covered Property; or 4. A claim under this policy.

The policy also contained a provision stating that, in the event of a claim of loss, Insureds had a duty to cooperate with Farmers’ investigation of the claim, among other ways, by specifically answering questions under oath related to the claim.

Insureds subsequently filed a claim on the policy, alleging that their store had been burglarized. Insureds’ sworn proof of loss statement claimed that the value of the items lost in the burglary was $45,797.19. Insureds documented a portion of their valuation of the claim by submitting eight invoices of merchandise costing $10,938. According to the invoices, this merchandise (the “questioned merchandise”) was purportedly purchased by Insureds on four different occasions from a store called Super Sound. The sworn statement included the language “no articles are mentioned herein or in annexed schedules but such as were destroyed or damaged at the time of said loss.” Farmers questioned Insured Eldin under oath about the claim. At the start of the examination, Insureds’ initial attorney in this case stated that the claims for the questioned merchandise were being withdrawn and advised Eldin not to answer questions regarding that merchandise. No concerns were ever raised concerning the balance of the claim. Concluding that the eight invoices were fictitious, Farmers denied Insureds’ entire claim.

Insureds then instituted this action against Farmers for recovery of their claimed loss. Farmers moved for summary judgment, arguing that it did not need to pay on the policy because Insureds breached both the provisions regarding fraud, misrepresentation, and concealment as well as the provision requiring the cooperation by the insured. In response, Insureds conceded that the questioned merchandise had not in fact come from Super Sound, but insisted that this merchandise was nonetheless stolen in the burglary. Insureds also asserted through affidavit that Eldin speaks English poorly and as a result was under the mistaken impression that Farmers would accept the Super Sound invoices as proof of his loss. According to his affidavit, Eldin had informed Farmers that invoices for some of the stolen merchandise were also stolen in the burglary and when Farmers told him that he had to produce invoices, he understood that Farmers would accept invoices prepared for the purpose of the claim. Eldin maintained that the questioned invoices accurately reflected the prices of merchandise that was indeed stolen. Consequently, Insureds argued that they had not intended to defraud Farmers.

At the hearing on the motion, Insureds relied on the Supreme Court’s decision in Foundation Reserve Insurance Co. v. Esquibel, 94 N.M. 132, 607 P.2d 1150 (1980). In Foundation Reserve, the Supreme Court considered whether an insurer could void a liability policy because of an insured’s breach of the policy’s fraud and cooperation provisions when the claim made on the policy was by an innocent third party injured by the insured. The Supreme Court apparently focused only on the cooperation provision, see Sanchez v. Kemper Ins. Cos., 96 N.M. 466, 467, 632 P.2d 343, 344 (1981), and held that an “insuror must demonstrate substantial prejudice as a result of a material breach of the insurance policy by the insured before it will be relieved of its obligations under a policy,” Foundation Reserve, 94 N.M. at 134, 607 P.2d at 1152. The Foundation Reserve court also included the following language in its decision: “The risk-spreading theory of liability ‘should operate to afford to affected members of the public — frequently innocent third persons — the maximum protection possible consonant with fairness to the insurer.’ ” Id. (quoting Oregon Auto. Ins. Co. v. Salzberg, 85 Wash.2d 372, 535 P.2d 816, 819 (1975)). Seeing the policy considerations in Foundation Reserve as different from those in the present action, the trial judge in this case believed that Foundation Reserve addressed “the need for prejudice in a liability policy only,” and therefore found that case to be inapplicable. The trial judge also indicated that Insureds’ affidavits were conclusory and tardy in their explanation of the false invoices. Accordingly, the trial judge granted Farmers’ motion for summary judgment.

On appeal, we consider whether Farmers was required to show substantial prejudice as a result of Insureds’ alleged breaches of the provisions at issue, and whether the grant of summary judgment in favor of Farmers was appropriate as to each provision.

DISCUSSION

A. The Substantial Prejudice Requirement is Not Limited to Cases Involving Injuries to Innocent Third Parties

Farmers contends that it need not show substantial prejudice as a result of Insureds’ alleged breaches of the insurance policy. In this regard, Farmers echoes the trial judge’s view of the holding in Foundation Reserve. Essentially, Farmers argues that Foundation Reserve is inapplicable to the present case because the Supreme Court’s ruling was meant to protect innocent third parties from a breach of an insurance policy over which they have no control, not to protect the insured who is guilty of the breach. However, we believe that the Supreme Court’s most recent treatment of the substantial prejudice issue, Roberts Oil Co. v. Transamerica Ins. Co., 113 N.M. 745, 833 P.2d 222 (1992), proves Farmers to be mistaken.

In Roberts Oil, the Supreme Court considered whether a showing of prejudice was required before a liability policy could be avoided for the insured’s breach of the policy’s “voluntary payment” provision. The facts of Roberts Oil were that Roberts was liable for a gas leak at a filling station and both it and a subsequent insurer paid large sums of money to abate the groundwater contamination caused thereby. Prior insurers declined to indemnify Roberts or reimburse the subsequent insurer because of their claim that Roberts breached a clause prohibiting it from voluntarily making any payment, assuming any obligation, or incurring any expense in connection with the event. 113 N.M. at 746-47, 833 P.2d at 223-24. Much as Farmers does now, the insurer in Roberts Oil attempted to distinguish the broad holding of Foundation Reserve on the ground that no innocent third party was hurt because of the insured’s breach. 113 N.M. at 751, 833 P.2d at 228. Rejecting this argument, the Supreme Court stated the following:

We think that the rationale behind [Foundation Reserve ] cannot be limited so narrowly. At the beginning of that opinion, we stated the issue as follows: “Is a substantial and material breach of the insurance contract by the insured sufficient to void his policy, or must the insurer also demonstrate actual prejudice to the insurer resulting from the breach?” 94 N.M. at 132, 607 P.2d at 1150. There is no indication in the opinion, nor any in the many other cases requiring a showing of actual prejudice, that the rule operates only when an innocent third party is or has been injured. Rather, the rule implements a fundamental characteristic of all, or nearly all, insurance contracts — namely, the essential nature of the contract as a promise by the insurer to indemnify and defend the insured against certain risks, in exchange for the insured’s payment of the premium.

Id. (emphasis added). The Court went on to indicate that Foundation Reserve could not be distinguished, and the substantial prejudice rule could not be avoided, simply because a provision other than a cooperation clause is at issue. Id.

Consequently, Roberts Oil makes it clear ' that the substantial prejudice requirement may be extended to cases, such as the present one, in which an insured’s alleged breach of a policy condition does not have the effect of injuring an innocent third party, and in which different policy provisions are at issue. We next consider whether substantial prejudice must be shown with regard to the four specific types of breach Farmers alleges Insureds have committed: fraud, misrepresentation, concealment, and noncooperation.

B. Substantial Prejudice Need Not Be Shown in Cases of Fraud By the Insured

As we have shown, the holding in Roberts Oil requiring a showing of substantial prejudice before a policy may be avoided for breach appears to be quite broad. Nonetheless, we do not think that the rule extends to an insured’s material breach of a fraud provision. Other kinds of policy provisions may deal with an innocent motive for an insured’s breach, and therefore strict enforcement of those provisions might frustrate a consumer’s reasonable expectation that coverage will not be denied arbitrarily. See id. 113 N.M. at 752, 833 P.2d at 229. However, strong public policy considerations prevent us from saying the same for fraud. As explained in American Diver’s Supply & Manufacturing Corp. v. Boltz, 482 F.2d 795 (10th Cir.1973):

[I]f the law out of some misgivings about forfeitures, were to require that the insurer demonstrate that it has been misled to its prejudice by the fraud, the policy provision would be virtually worthless and put a premium on dishonest dealings by the assured. For if, by its own investigation, inspired perhaps by suspicions of the assured’s efforts to misrepresent, the insurer satisfied itself that a fraud had been attempted and declined to pay, such a rule would mean that the assured’s claim would then stand as though no dishonest acts whatsoever had been practiced. The mendacious assured, surveying the possibilities and contemplating prospective tactics and strategy in the handling of his claim, would sense immediately that vis-a-vis himself and the underwriter, there would be no risk at all in his deceit. If it worked, he would have his money and, at worst, could be compelled to disgorge only by affirmative suit by the insurer if the fraud were discovered in time to be legally or practicably effective. If it didn’t work — if, before consummation, fraud was detected — he would suffer no disadvantage whatsoever. It would be an everything-to-win, nothing-to-lose proposition.

Id. at 797 (quoting Chaachou v. American Cent. Ins. Co., 241 F.2d 889, 892-93 (5th Cir.1957)).

We find further support for this holding from the fact that those jurisdictions considering the issue appear to have come to the same conclusion. See, e.g., Longobardi v. Chubb Ins. Co. of New Jersey, 121 N. J. 530, 582 A.2d 1257, 1263 (1990); Henricksen v. Home Ins. Co., 237 Or. 539, 392 P.2d 324, 326 (1964); St. Paul Mercury Ins. Co. v. Salovich, 41 Wash.App. 652, 705 P.2d 812, 815-16 (1985). See generally Robert M. Ey, Annotation, Cause of Action Against Insurer to Recover Benefits for Fire Loss, 15 C.O.A. 213, § 19 (1988 & Cum.Supp.1993); Annotation, Overvaluation in Proof of Loss of Property Insured as Fraud Avoiding Fire Insurance Policy, 16 A.L.R.3d 774, § 10 (1967 & Supp.1993).

However, even though Farmers does not have to demonstrate substantial prejudice as a result of a material breach of the fraud provision, we believe that a genuine issue of material fact exists concerning whether the fraud provision in this case was breached. Insured Eldin asserted through affidavit that at the time he provided the Super Sound invoices to Farmers he believed he was complying with Farmers’ requests for documentation (of any sort) for his real losses. Whether to believe Eldin’s testimony or find that it was fabricated in a tardy attempt to cover up a fraud is a question for the fact finder to decide. See Leyba v. Whitley, 118 N.M. 435, 437, 882 P.2d 26, 37 (Ct.App.1994), cert. granted, 118 N.M. 430, 882 P.2d 21 (1994); Maxey v. Quintana, 84 N.M. 38, 42, 499 P.2d 356, 360 (Ct.App.) (intent element of fraud is a question for the jury where its determination depends on credibility of the witnesses), cert. denied, 84 N.M. 37, 499 P.2d 355 (1972). Consequently, because the jury should decide whether Insureds intended to defraud Farmers, summary judgment was improper with respect to Farmers’ claim that the policy can be avoided on the basis of Insureds’ fraud.

C. Substantial Prejudice Must Be Shown in Cases of Misrepresentation, Concealment, and Noncooperation by the Insured

In contrast to the issue of fraud, there appears to be no factual dispute as to whether Insureds breached the policy provision against misrepresentation; the Insureds admit that the items which they stated came from Super Sound did not in fact come from that store. Similarly, there appears to be no factual dispute concerning breach of the concealment and noncooperation provisions because Insureds admit that upon examination they refused to answer questions pertaining to the items listed on the Super Sound invoices. However, unlike the issue of fraud, we believe that Farmers may avoid the policy only if it can show that it has been substantially prejudiced by these breaches of the policy.

Initially, the policy considerations that prompt us not to require prejudice for fraud do not necessarily exist with regard to the misrepresentation in this case. Fraud, by necessity, involves deception by Insureds to obtain proceeds to which they knew they were not entitled. However, Insureds allege that their misrepresentations were based on a good faith belief that they were conforming to Farmers’ requests. Insureds insist that they did lose the inventory, and therefore they are entitled to the proceeds. In other words, taking the Insureds at their word, there was a misrepresentation, but without fraud.

If the facts are as Insureds allege, avoidance of the policy without a showing of substantial prejudice to Farmers would be contrary to “the essential nature of the contract as a promise by the insurer to indemnify and defend the insured against certain risks, in exchange for the insured’s payment of the premium.” Roberts Oil, 113 N.M. at 751, 833 P.2d at 228; see Springfield Fire & Marine Ins. Co. v. Winn, 27 Neb. 649, 43 N.W. 401, 402-03 (1889) (insured’s misrepresentation, which was not meant to defraud, did not void fire policy; court based its ruling on its “desire to establish a rule which, while it will protect insurance companies in their just rights, will also shield the insured from the confiscation of their property upon fanciful or insufficient grounds”); see also Dempsey v. Auto Owners Ins. Co., 717 F.2d 556, 560 (11th Cir.1983) (insurance policy may only be avoided for insured’s misrepresentations if they were intended to deceive, if they related to matters materially affecting the risk, and if insurer relied upon them to its detriment); Home Ins. Co. of New York v. Lowenthal, 36 So. 1042, 1043 (Miss.1904) (fire policy could not be avoided due to insured’s overvaluation of claim because insurer could not have been prejudiced thereby; both inflated value and actual value of lost items far exceeded the policy’s limits).

Moreover, the additional requirement of substantial prejudice for misrepresentation is necessary to afford complete meaning to the separate terms of the avoidance clause. If misrepresentation alone, without fraudulent intent, were sufficient to avoid the policy in its entirety, the insurer need never allege and prove fraud; fraud as a separate term would be rendered redundant and meaningless, which surely would be contrary to the “reasonable expectation” of the parties. Roberts Oil, 113 N.M. at 752, 833 P.2d at 229.

We believe the same is true for Insureds’ breach of the concealment provision. The breach occurred because Insureds were advised by their first attorney not to answer questions about the Super Sound invoices. Insureds allege, however, that after obtaining new counsel they offered to be reexamined about the invoices, and that Farmers refused this offer. Although we recognize that a client is bound by the errors of his or her attorney, Padilla v. Estate of Griego, 113 N.M. 660, 665, 830 P.2d 1348, 1353 (Ct.App.1992), we believe that unless it is shown how Farmers was substantially prejudiced by Insureds’ breach, strict enforcement of the concealment provision in this case will frustrate Insureds’ reasonable expectation that coverage will not be denied arbitrarily, see Roberts Oil, 113 N.M. at 752, 833 P.2d at 229.

Finally, as for the cooperation clause, we note that the Supreme Court has already ruled that substantial prejudice must be shown before its breach will avoid a policy. See Foundation Reserve, 94 N.M. at 134, 607 P.2d at 1152. The fact that a majority of other jurisdictions, not including those on which we rely, conclude that an insurer need not pay on a policy when the insured totally fails to answer any questions under oath does not alter our opinion. Under the facts of this case, in which Insureds may have understandably refused to answer only some questions, we believe that our Supreme Court would apply the Roberts Oil requirement of substantial prejudice for the reasons given in the Nebraska case of Springfield Fire & Marine Ins. Co. and thus relieve Insureds of a forfeiture.

Having decided that substantial prejudice must be shown with regard to the misrepresentation, concealment, and cooperation provisions in this case, we must next determine whether summary judgment was appropriately granted. The Court in Roberts Oil established that, although the insurer must establish prejudice, a presumption of prejudice arises upon proof of a breach of a policy provision such as those at issue here. 113 N.M. at 755, 833 P.2d at 232. Farmers, however, does not rely on the presumption in this case. Rather, it contends that prejudice need not be shown, a proposition we have rejected. Alternatively, it contends that actual prejudice has been established by the time and expense it has incurred to investigate and defend against this alleged fraud.

Regarding Farmers’ claim of actual prejudice, we have previously held that in most cases the issue of substantial prejudice as a result of a breach of an insurance provision is a question for the jury. See State Farm Fire & Casualty Co. v. Price, 101 N.M. 438, 445, 684 P.2d 524, 531 (Ct.App.), cert. denied, 101 N.M. 362, 683 P.2d 44 (1984), disapproved of on other grounds, Ellingwood v. N.N. Investors Life Ins. Co., 111 N.M. 301, 307, 805 P.2d 70, 76 (1991). The facts of this case show that the alleged breaches involved only a portion of the claim, a portion that the Insureds quickly dropped although the record is unclear whether it has been revived. It appears that much of Farmers’ expense was devoted to establishing that the alleged fraud and failure to cooperate as to part of the claim was sufficient to void the whole policy. Thus, even assuming that Insureds’ breaches did prejudice Farmers, we believe that a jury could reasonably infer that this claimed prejudice was not substantial. Consequently, as to Farmer’s claim of actual prejudice, we hold that summary judgment was improperly granted. See Sarracino v. Martinez, 117 N.M. 193, 194, 870 P.2d 155, 156 (Ct.App.1994) (when evidence is susceptible to reasonable conflicting inferences, summary judgment is improper); see also Journal Publishing Co. v. American Home Assurance Co., 740 F.Supp. 1015, 1021 (S.D.N.Y.1990) (under New Mexico law, substantial prejudice as a result of a breach of an insurance policy is a question for the jury and therefore not properly resolved on a motion for summary judgment).

We finally note that we will not rely on the presumption of prejudice and Insureds’ failure to rebut it to affirm this ease on a right-for-the-wrong-reason rationale. As we recently pointed out in State v. Franks, 119 N.M. 174, 176, 889 P.2d 209, 211 (Ct.App.1994), we will not affirm on a ground not relied on by the trial court if it would be unfair to appellant to do so. This principle of unfairness applies to this case. When the motion for summary judgment was presented below, Insureds relied on Foundation Reserve and the factual questions raised by their affidavits regarding the fraud issue. Both Farmers and the trial court relied on their distinction of Foundation Reserve as being a case in which the rights of third parties were involved and on the lack of credibility of Insureds’ affidavits. No one mentioned any presumption of prejudice, and therefore Insureds were not on notice that they might have to rebut the presumption. Under these circumstances, we should not apply the right-for-the-wrong-reason rationale. Cf. State v. Porras-Fuerte, 119 N.M. 180, 184, 889 P.2d 215, 219 (Ct.App.1994) (Court of Appeals will not affirm denial of suppression motion for failure of defendant to show standing when State never raised the issue of standing below).

CONCLUSION

For the foregoing reasons, we hold that summary judgment was improperly granted in this case. Accordingly, we reverse the trial court’s order and remand the case for further proceedings. If Farmers wishes to rely on a breach of the fraud provision to void the policy and thus not have to prove prejudice, a trial on the issue of whether Insureds committed fraud is required. If Farmers wishes to rely on a breach of the other provisions to void the policy and is willing to shoulder the burden of proving prejudice, it may move for summary judgment relying on the presumption. The burden will then shift to Insureds to produce evidence showing that Farmers was not prejudiced.

IT IS SO ORDERED.

BOSSON, J., concurs. HARTZ, J., concurs in part and dissents in part.