N.J. Supreme Court Lowers Standard for Proving Insured Committed Fraud

March 14, 2006

The New Jersey Supreme Court has set an easier standard of proof for an insurance company suing an insured for fraud than a lower court had required.

Instead of proving fraud by “clear and convincing evidence,” an insurer suing under the state’s Insurance Fraud Protection Act need only prove its case by a “preponderance of the evidence,” a lower standard, the high court ruled 5-2 in a decision handed down this week.

The case involved Liberty Mutual Insurance Co.’s denial of an inflated claim for property damage to a small vacation cabin in Highland Lakes owned by Rose Land.

Liberty Mutual won in the first round when a court found it had presented clear and convincing evidence that the claim was fraudulent. However, when the plaintiffs appealed, Liberty also counter-appealed, arguing that the standard it had been held to, “clear and convincing evidence,” was not the appropriate standard under the IFPA.

That question of the appropriate standard reached the state Supreme Court and Liberty Mutual won its argument for a lower standard.

According to the facts set forth in the ruling, on Dec. 12, 2000, a tree located on the property of Joseph Rizzo, the Lands’ next-door neighbor, fell onto the roof of the Lands’ cabin. Land telephoned his nephew, Steven Budge, a licensed public adjuster in the State of New Jersey, to assess the damage and secure the structure.

After Rizzo’s wife reported that there were men on Land’s roof doing “additional damage,” Rizzo videotaped Budge and his associates working on the cabin’s roof. The videotape depicts the three men taking a portion of the fallen tree and slamming it against the roof, creating further damage and shattering a skylight. The videotape also shows Frank Land on the ground gesturing to Budge and his associates and climbing a ladder to provide a jacket to one of the workers.

Budge assisted the Lands in preparing and filing an insurance claim on their behalf with Liberty Mutual for $69,338. Joseph Balinski, a builder employed by Liberty Mutual, inspected the cabin 10 days after the incident.

Balinski prepared a damage estimate concluding it would cost only $9,921 to make the necessary repairs. At trial, Balinski also testified that he had previously inspected the property in connection with a prior damage claim by the Lands, and found that some of the prior damage was included in the estimate submitted in support of the December 2000 claim. Balinski also stated that many of the repairs in Budge’s estimate were unnecessary.

Liberty Mutual denied coverage and filed suit against the Lands and Budge, alleging IFPA violations. The Lands and Budge counterclaimed against Liberty Mutual alleging, among other claims, bad faith in denying the claim.

After a six-day trial, the jury returned a verdict in favor of Liberty Mutual, finding that it had proven by clear and convincing evidence that all three defendants “knowingly misrepresented, concealed, or failed to disclose any material fact concerning the property loss.”

The jury further concluded that Budge “intentionally cause[d] or contribute[d] to the loss.” The trial court awarded Liberty Mutual treble damages, counsel fees, and investigative costs totaling $82,413 and denied Budge’s motion for reconsideration.

The Lands and Budge appealed, asserting that the trial court committed prejudicial errors during the trial. Liberty Mutual cross-appealed, claiming that the trial court erred in charging the jury that an IFPA violation must be proven by clear and convincing evidence.

In an unpublished opinion, the Appellate Division reversed and remanded for a new trial for various reasons, including prejudicial statements made by Liberty Mutual’s counsel during summation. The panel also concluded, without analysis, that the proper burden of proof under IFPA is clear and convincing evidence.”

The Supreme Court granted certification limited solely to determining the appropriate standard of proof and on March 14 released its opinion the standard of proof required under the New Jersey IFPA is a preponderance of the evidence.

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