The U.S. Tenth Circuit Court of Appeals upheld the preponderance of evidence burden applied by a trial court in an insurer’s declaratory judgment action to determine rights and obligations under a policy. The insurer alleged that the insured had committed fraud in submission of several claims and sought repayment and payment for investigation costs on the basis that the policy was void under a “fraud and false swearing” provision. Century Surety Company v. Shayona Investment, LLC, 2016 WL 6440369 (10th Cir. Nov. 1, 2016).
An insurer issued a commercial lines policy and filed a declaratory judgment action after paying several claims and becoming suspicious and finding that the insured committed fraud in at least some of its submissions. The policy included a provision that expressly voided coverage “in any case of fraud” by the insured, including intentional concealment or misrepresentation of any material fact relating to the covered property or claim for coverage. The insurer prevailed at trial, receiving an award for repayment and for the cost of investigating the insured’s claims. The insured appealed, arguing that a clear and convincing evidence standard applied to the fraud claims.
The Tenth Circuit broke down three possible reasons that a clear and convincing standard could apply: (1) when an insurer seeks restitution of money paid; (2) where a party seeks costs not directly covered by the contract, i.e., investigation expenses; and (3) the combination of (1) and (2) transforms the entire claim into one governed by the higher evidentiary standard. The Tenth Circuit held that (1) setting aside the issue of extra-contractual damages, the higher standard is applied only in civil cases involving allegations of fraud or some other quasi-criminal wrongdoing because the interests at stake involve more than the mere loss of money and the insured stood only to lose money; (2) the insured waived the argument that the insurer could not recover extra-contractual expenses caused by the insured’s fraud by not objecting to the jury instruction on damages; and (3) the insured’s argument that the inclusion of investigatory expenses supports viewing an entire claim as one for fraud is unavailing because the declaratory action was brought to determine the insurer’s rights under the contract because of the insured’s fraudulent conduct, and inclusion of additional damages did not convert the action.