Eldin v. Farmers Alliance Mut. Ins. Co.

• Decision Date: 29 December 1994
• Docket Number: No. 15638,15638
• Citation: 890 P.2d 823,1994 NMCA 172,119 N.M. 370
• Parties: Elsayad Zein ELDIN and Anna Patterson d/b/a Albuquerque Audio, Plaintiffs-Appellants, v. FARMERS ALLIANCE MUTUAL INSURANCE COMPANY, a Kansas Corporation, Defendant-Appellee.
• Court: Court of Appeals of New Mexico

Page 823

890 P.2d 823

119 N.M. 370

Elsayad Zein ELDIN and Anna Patterson d/b/a Albuquerque Audio, Plaintiffs-Appellants, v.FARMERS ALLIANCE MUTUAL INSURANCE COMPANY, a Kansas Corporation, Defendant-Appellee.

No. 15638.

Court of Appeals of New Mexico.

Dec. 29, 1994.

[119 N.M. 371] Alexander A. Wold, Jr., Alexander A. Wold, Jr., P.C., Albuquerque, for plaintiffs-appellants.

C. Kristine Osnes, Eric Scott Jeffries, Sager, Curran, Sturges & Tepper, P.C., Albuquerque, for defendant-appellee.

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, seeSanchez 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.(quotingOregon 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...