Simms v. Mutual Benefit Insurance

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 03-2452
WAYNE L. SIMMS; TRACEY SIMMS,
Plaintiffs - Appellees,
versus
MUTUAL BENEFIT INSURANCE COMPANY,
Defendant - Appellant.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. Alexander Harvey, II, Senior District
Judge. (CA-02-1261-H)
Argued: February 3, 2005 Decided: June 30, 2005
Before WIDENER and KING, Circuit Judges, and Henry F. FLOYD, United
States District Judge for the District of South Carolina, sitting
by designation.
Affirmed by unpublished opinion. Judge Floyd wrote the opinion, in
which Judge Widener and Judge King joined.
ARGUED: G. Stewart Webb, Jr., VENABLE, L.L.P., Baltimore, Maryland,
for Appellant. Irwin Raphael Kramer, KRAMER & CONNOLLY, Owings
Mills, Maryland, for Appellees. ON BRIEF: Randolph Stuart Sergent,
VENABLE, L.L.P., Baltimore, Maryland, for Appellant. Lawrence S.
Greenberg, Baltimore, Maryland, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
FLOYD, District Judge:
Mutual Benefit Insurance Company (MBIC) brings this appeal,
asserting that the district court erred when it prevented MBIC from
introducing evidence of Wayne and Tracey Simms’ financial condition
and charged the jury that MBIC must prove its affirmative defense
by clear and convincing evidence.
We disagree and, for the reasons set forth below, affirm the
district court.
I. FACTUAL AND PROCEDURAL HISTORY
During 1998 and 1999, Wayne and Tracey Simms built a new home
on a tract of land located at 2624 Winters Run Road in Joppa,
Maryland. Tracey’s father, Robert Spamer, owner of Spamer General
Contracting, Inc., supervised the construction of the home.
Tracey’s sister, Bobbie Spamer, owned the parcel of land upon which
the house was built. Ownership of the land was transferred to the
Simms by deed dated June 27, 2000.
In March of 1999, MBIC issued a homeowners’ insurance policy,
which insured the Simms’ new home. The policy contained, inter
alia, limits of $434,000 for repair or replacement of the dwelling
and $303,800 for repair or replacement of personal property. An
endorsement to the policy increased the coverage for the Simms’
dwelling “to equal the current replacement cost of the dwelling,”
and increased the personal property coverage “by the same
2
percentage.” (J.A. 872.) The policy was renewed annually. MBIC
also issued a commercial insurance policy to the Simms with limits
of $100,000.1 Subject to the terms, conditions, and endorsements
of the policies, the Simms were covered for, among other things,
losses or damages sustained as a result of a fire.
On the afternoon of November 5, 2001, while Wayne and Tracey
Simms were shopping, they received a phone message that their home
had burned to the ground. They returned home to learn that their
house and all of its contents had been completely destroyed.
After the Simms notified MBIC of the fire, the insurance
company retained an arson investigator, Lee McAdams, to investigate
the cause and origin of the fire. McAdams concluded that the cause
of the fire was undetermined.
MBIC also retained Pat Bonnani, an independent claims
adjuster, to process the Simms’ claim. Bonanni met with the Simms
to inform them of what they needed to do to submit their claim
under the policies. Among other things, he explained to them the
effect of depreciation on the replacement value of their property
and the process for obtaining the actual cash value of their
property should they decide not to replace it.
Soon after Bonanni’s discussion with the Simms regarding the
procedures for filing a claim, Tracey submitted 1) a personal
1
Wayne Simms was self-employed and operated a trucking business
known as RBS Trucking from his home.
3
property inventory, listing 1,689 destroyed items with a total
replacement cost of $446,794.88; 2)invoices from Spamer General
Contracting for demolition and debris removal performed at the home
site, totaling $24,810; and 3) an estimate of the costs of
rebuilding the home destroyed in the fire in the amount of
$648,000. Tracey also informed Bonanni that the Simms planned to
stay in a vacant, furnished house owned by her sister. Bonanni
authorized the Simms to rent the dwelling for $1,700 per month.
MBIC later determined that the dwelling occupied by the Simms was
a loft apartment attached to a shed owned by Tracey’s father.
The 69-page personal property inventory contained more than
1500 categories of items. The inventory set forth the date of
purchase of each item lost in the fire, a description, the
quantity, and the replacement cost, as determined by the Simms.
The inventory revealed that the Simms claimed to have acquired
roughly $146,000 worth of personal property in 1999, $60,000 -
$65,000 worth of property in 2000, and $50,000 worth of property in
2001.
After reviewing the personal property inventory, and in light
of his knowledge of the Simms’ limited income, Bonanni became
concerned with its magnitude and the amount of recent purchases.
As a result of his concerns, Bonnani referred the case back to MBIC
for further investigation.
4
William C. Parler, Jr., Esq., MBIC’s attorney, scheduled
Examinations Under Oath of both Tracey and Wayne for January 17,
2002. On the date of the examination, the Simms produced a revised
personal property inventory and their 1999 and 2000 tax returns.
Parler questioned Wayne and Tracey at length regarding
discrepancies between the replacement costs listed by the Simms and
the costs obtained by MBIC as a result of its own investigation.
The examination continued on January 21, 2002, at which time Tracey
submitted a second revised personal property inventory. This
inventory provided a total replacement cost of $390,290.73.
Tracey was also questioned about the original and the
replacement costs for the construction of the Simms’ house.
Tracey’s father, Robert Spamer, supervised much of the construction
of the original house, which cost $286,000. The cost estimate for
the replacement of the house was $648,000, which was based upon a
5,500 square foot home at $120 per square foot. Tracey later
informed her father, who had prepared the estimate, that the
original house was only 4,900 square feet. Accordingly, Mr. Spamer
reduced the replacement cost to $588,900.
An investigation of the Simms’ financial data revealed that
Wayne and Tracey were deeply in debt. Wayne’s trucking business
owed in excess of $150,000 in short and long-term debt, and the
Simms owed $265,000 on their home mortgage. The Simms also owed
$35,000 in credit card debt, $20,000 to the Internal Revenue
5
Service for past unpaid taxes, and the balance of a $60,000 lien to
Bobbi Spamer for the land upon which the Simms’ built their house.
To service their total debt of $588,394, the Simms were required to
make monthly payments of at least $8,250. The Simms had an
approximate monthly, pre-tax income, both from Tracey’s salary as
a claims representative at State Farm and from the trucking
business, of between $9,000 and $10,000.2
The insurance contract between the Simms and MBIC contains a
provision that states that MBIC is not obligated to provide any
coverage for property losses
if, whether before or after a loss, one or more
‘insureds’ have:
(1) Intentionally concealed or misrepresented any
material fact or circumstance;
(2) Engaged in fraudulent conduct; or
(3) Made false statements;
relating to this insurance.
(J.A. 867.)
On March 12, 2002, MBIC informed the Simms that their claim
under their homeowner’s policy had been denied. Counsel for MBIC
informed the Simms that their policy would be considered void
because of their misrepresentations and false statements made in
support of their claim.
2
The information regarding the Simms’ financial condition is
based primarily on the report of licensed certified public
accountant Brad Ryden, whom MBIC sought to present as an expert on
this issue. Ryden’s report was not admitted into evidence and he
was not allowed to testify at trial.
6
Thereafter, the Simms filed suit for breach of contract in
state court against MBIC, seeking recovery of $1,500,000, plus
interests and costs. MBIC later removed the case to the United
States District Court for the District of Maryland.
In their complaint, the Simms alleged that MBIC’s refusal to
pay the demand set forth in their claim was a breach of the
homeowners’ and the commercial policy, and that the denial of the
claim was not in good faith.
MBIC denied that it breached the contract between the parties
and asserted that no coverage was available under the terms,
conditions, and exclusions of the policies because the Simms
intentionally concealed or misrepresented material facts or
circumstances and/or engaged in fraudulent conduct relating to the
insurance.
At trial, MBIC attempted to present to the jury evidence of
the Simms’ financial circumstances to argue that the Simms must
have falsified their claim because they could not have purchased
all of the property that they claimed, in the amounts that they
claimed, within the few years that they claimed. MBIC also sought
to introduce this evidence to demonstrate the Simms’ motive for
filing an inflated insurance claim.
Relying on Federal Rule of Evidence 403, the district court
found that it would be prejudicial to the Simms if MBIC were to
introduce evidence of the Simms’ financial condition and refused to
allow the financial information into evidence.
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At the close of the trial, over MBIC’s objection, the district
court instructed the jury that Maryland law requires that an
affirmative defense of fraud be established by clear and convincing
evidence. The jury returned with a verdict of $1,023,147 in favor
of the Simms. MBIC timely filed its appeal.
II. DISCUSSION
A. Exclusion of Evidence
Evidentiary rulings are generally reviewed for abuse of
discretion. United States v. D'Anjou, 16 F.3d 604, 610 (4th Cir.
1994). However, MBIC asserts that this Court should review the
district court’s ruling in this case de novo because the ruling was
based upon an error of law. See, e.g., H & W Indus., Inc. v.
Occidental Chemical Corp., 911 F.2d 1118, 1121 (5th Cir. 1990)
(“[W]here the admissibility determination necessarily involves a
substantive legal decision, the court should review de novo the
validity of the underlying legal analysis.”).
We disagree. "Rule 403 judgments are preeminently the
province of the trial courts." United States v. Love, 134 F.3d
595, 603 (4th Cir. 1998). Thus, we review such decisions with
great deference, and will leave them undisturbed unless the court’s
"discretion has been plainly abused." Id. (citing United States v.
Simpson, 910 F.2d 154, 157 (4th Cir. 1990)). “Such an abuse occurs
only when it can be said that the trial court acted ‘arbitrarily’
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or ‘irrationally’ in admitting evidence.” Simpson, 910 F.2d at 157
(citing United States v. Masters, 622 F.2d 83, 88 (4th Cir. 1980);
Garraghty v. Jordan, 830 F.2d 1295, 1298 (4th Cir. 1987)).
The district court issued an oral order in which it granted
the Simms’ motion to exclude evidence of their financial condition.
The court found that the probative value of the evidence MBIC
sought to introduce was substantially outweighed by several
factors. He first noted the danger for unfair prejudice. Included
in the materials MBIC sought to introduce were the Simms tax
returns. The district court ruled that admission of the tax
returns could result in extreme prejudice if the jury concluded
that the Simms failed to report all of their income. The court
also stated that the Simms’ financial condition was immaterial to
whether they had a motive to inflate their claim.
Additionally, the trial court observed that introduction of
the financial evidence could create serious confusion among the
jurors about the relevant issues.
Finally, the court explained its concern that the introduction
of such a voluminous amount of evidence would result in undue delay
of the trial.
MBIC claims that the district court improperly excluded
evidence of the Simms’ financial condition, which, in turn,
unfairly limited its defense. According to MBIC, because there was
no direct evidence that the Simms made false statements, MBIC
9
intended to prove its affirmative defense with circumstantial
evidence. The insurance company sought to use the financial
statements at trial to elicit from the jury an inference that the
Simms were financially incapable of acquiring all of the property
they claimed to have lost in the fire and, thus, inflated their
inventory either by including items they did not own, increasing
the quantity of items beyond the number they actually owned, or
declaring the items to be of a higher quality than they actually
were.
In its brief, MBIC cites to various state law cases for the
proposition that evidence of an insured’s income level is relevant
in determining whether the insured made a false claim. Phillips v.
Allstate Indemnity Co., 156 Md. App 729, 745, 848 A.2d 681, 690
(2004); Pilgrim v. State Farm Fire & Cas. Ins. Co., 950 P.2d 479,
484 (Wash. App. 1997); Rymsha v. Trust Ins. Co., 746 N.E.2d 561,
564 (Mass. App. Ct. 2001); DiFrancisco v. Chubb Ins. Co., 662 A.2d
1027, 1033 (N.J. App. Div. 1995). These cases, however, are
distinguishable from the case at hand. Each of the cases cited by
MBIC deals with the insured’s refusal to produce his or her
financial records to the insurer as a part of the investigation of
a claim, and whether such refusal was a breach of the contract for
insurance, not whether such evidence was admissible for use at
trial. Phillips, 156 Md. App. at 745, 848 A.2d at 690; Pilgrim,
950 P.2d at 484; Rymsha, 746 N.E.2d at 564; DiFrancisco, 662 A.2d
10at 1033. Nevertheless, even if the records were relevant to the
case at hand,3 Rule 403 provides for the exclusion of otherwise
relevant evidence on the grounds of prejudice, confusion, or waste
of time. Fed. R. Evid. 403. The district court’s exclusion of the
Simms’ financial records was well within the bounds of Rule 403,
and, thus, we find no error.
B. Burden of Proof
We review de novo MBIC’s claim that the district court failed
to provide the correct burden of proof in his instructions to the
jury. See Al-Abood v. El-Shamari, 217 F.3d 225, 235 (4th Cir.
2000). At trial, the district court instructed the jury that MBIC
had to prove its affirmative defense by clear and convincing
evidence. MBIC asserts that its affirmative defense was based upon
the provisions of the insurance contract and not upon common law
fraud, and, thus, preponderance of the evidence is the appropriate
burden. It further asserts that, by charging the clear and
convincing burden of proof, the court ignored the two circumstances
other than fraud under which the policy can be voided–the insured’s
1) intentional concealment or misrepresentation of any material
fact or circumstance, or 2) assertion of false statements. We
address each contention in turn.
3
Judge Harvey describes the documents as “slightly relevant.”
(J.A. 637.)
11
1. Fraud
Maryland courts require that litigants establish a claim or
defense of fraud by clear and convincing evidence. Loyola Fed.
Sav. & Loan Ass’n v. Trenchcraft, Inc., 17 Md. App. 646, 648, 303
A.2d 432, 434 (1973). However, MBIC argues, its defense of fraud
is not properly equated with common law fraud because the insurance
policy does not require MBIC to establish an intent to deceive or
that it relied on the Simms’ false statements to its detriment.
See Martens Chevrolet, Inc. v. Seney, 292 Md. 328, 333, 439 A.2d
534, 537 (1982)(listing as three of the elements of common law
fraud that 1) the misrepresentation was made for the purpose of
defrauding some other person, 2) the plaintiff relied on the
misrepresentation and had the right to rely on it, and 3) the
plaintiff suffered compensable injury resulting from the
misrepresentation).
MBIC is correct in its assertion that the insurance policy
does not include the elements of common law fraud. Indeed, the
policy is silent as to the steps MBIC must take to establish that
the insurer has engaged in fraudulent conduct. Thus, we turn to
common law to determine those steps. In Maryland, a party
establishes fraud if it can show
(1) that the representation made is false; (2) that its
falsity was either known to the speaker, or the
misrepresentation was made with such a reckless
indifference to truth as to be equivalent to actual
knowledge; (3) that it was made for the purpose of
defrauding the person claiming to be injured thereby; (4)
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that such person not only relied upon the
misrepresentation, but had a right to rely upon it in the
full belief of its truth, and that he would not have done
the thing from which the injury resulted had not such
misrepresentation been made; and (5) that he actually
suffered damage directly resulting from such fraudulent
misrepresentation.
Martens Chevrolet, 292 Md. at 333, 439 A.2d at 537. However, when
establishing fraud in the context of an insurance contract,
application of the last two elements would lead to an absurd
result. The United States District Court for the District of
Maryland, quoting the Fifth Circuit, provided an explanation of
this absurdity:
“[i]f, 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.”
Tru-Fit Clothes, Inc. v. Underwriters at Lloyd’s London, 151 F.
Supp. 136, 140 (D. Md. 1957)(quoting Cachou v. American Central
Ins. Co., 241 F.2d 889, 892-893 (5th Cir. 1957)). To prevent such
a result, the requirement to prove detrimental reliance is dropped
13
for insurers who seek to establish that an insured has submitted a
fraudulent claim. Id.Although proof of the insured’s detrimental reliance is
unnecessary, proof of the insurer’s intent to deceive remains a
vital element in all claims of fraud. First Union Nat. Bank v.
Steele Software Systems, Corp., 154 Md. App. 97, 147, 838 A.2d
404, 433 (Md. 2003).
MBIC has not provided, nor have we found, any support for its
assertion that the absence of the detrimental reliance element in
insurance fraud cases, without more, is an indication that the
burden of proof should be lessened from clear and convincing
evidence to preponderance of the evidence. Precisely because the
insurance policy lacks a definition of “fraudulent conduct,” the
trial court properly looked to Maryland common law fraud to provide
instructions to the jury on MBIC’s affirmative defense of fraud.
We conclude that clear and convincing evidence is the
appropriate burden of proof for an affirmative defense of fraud,
whether it is asserted as a common law defense or a contractual
defense.
2. Other Circumstances
We next turn to MBIC’s contention that the trial court ignored
the other two circumstances listed in the policy when it instructed
the jury only on the clear and convincing burden of proof.
14
MBIC makes much of the fact that the insurance contract lists
separately from “fraud” “intentional concealment or
misrepresentation” and “false statements.” Again, the policy does
not define these terms, and a close look at Maryland case law
reveals that the differences, if any, are inconsequential.
In Maryland, the terms “fraud” (otherwise known as “deceit”)
and “intentional misrepresentation”4 are often used
interchangeably, and the elements necessary to establish
intentional misrepresentation are identical to those required for
fraud. See B.N.A. v. K.K., 312 Md. 135, 149, 538 A.2d 1175, 1182
(1988) (stating “the elements of the cause of action in what is
variously known as fraud, deceit, or intentional misrepresentation
are” and listing the required elements); see also McGraw v. Loyola
Ford, Inc., 124 Md. App. 560, 584-85, 723 A.2d 502, 514-15 (1999)
(using “intentional misrepresentation” and “fraud” interchangeably
and listing the required elements); DeLeon Enterprises, Inc. v.
Zaino, 92 Md. App. 399, 416-17, 608 A.2d 828, 837-38 (1992) (using
“intentional misrepresentation” and “deceit” interchangeably and
listing the required elements).
The requirements for intentional concealment are essentially
the same as well:
4
Because “concealment” and “misrepresentation” are listed
together in the policy provision, we can assume that “intentional”
modifies both.
15
(1) the defendant owed a duty to the plaintiff to
disclose a material fact; (2) the defendant failed to
disclose that fact; (3) the defendant intended to defraud
or deceive the plaintiff; (4) the plaintiff took action
in justifiable reliance on the concealment; and (5) the
plaintiff suffered damages as a result of the defendant’s
concealment.
Green v. H & R Block, Inc., 355 Md. 488, 525, 735 A.2d 1039, 1059
(1999). The Maryland Court of Special Appeals has characterized
intentional concealment as “actionable fraud.” Finch v. Hughes
Aircraft Co., 57 Md. App. 190, 231, 469 A.2d 867, 888 (1984)
(citing Fegeas v. Sherrill, 218 Md. 472, 147 A.2d 223 (1958)).
The phrase “false statements” does not inherently indicate an
intention to deceive. See Medical Mut. Liability Ins. Soc. of
Maryland v. B. Dixon Evander & Associates, Inc., 92 Md. App. 551,
570, 609 A.2d 353, 362 (1992) (“A false statement ‘is one that is
not substantially correct.’”) (quoting Batson v. Shiflett, 325 Md.
684, 726, 602 A.2d 1191, 1212 (1992)). However, to void an
insurance policy based upon an insured’s “false swearing”5 the
statement must have been knowingly and intentionally stated with
knowledge of its untruthfulness or with reckless disregard for its
truthfulness and with the purpose to defraud. United States Fire
Ins. Co. v. Merrick, 171 Md. 476, , 190 A. 335, 342 (1937).
Because the law does not favor forfeitures, Hartford Fire Ins. Co.
5
“False swearing” is somewhat different from “false statement”
in that it implies a false statement made under oath. Regardless,
whether the statement was made under oath is inapposite; both
phrases specify an untrue utterance.
16
v. Himelfarb, 355 Md. 671, 681, 736 A.2d 295, 301 (1999), such a
definition is necessary so that an insurer cannot avoid a claim
simply because an insured unintentionally provided incorrect
information. Moreover, it mimics the definition of fraud and
intentional misrepresentation.
The important similarity among these various terms--“fraud,”
“intentional concealment,” “intentional misrepresentation,” and
“false statements,”--is the scienter requirement, and scienter must
be proven by clear and convincing evidence. First Union, 154 Md.
App. at 147, 838 A.2d at 433 (Md. 2003) (citing VF Corp. v. Wrexham
Aviation Corp., 850, Md. 693, 704, 715 A.2d 188, 193 (1998)).
MBIC cites to case law in numerous states that require only a
preponderance of the evidence burden for an insurer’s contractual
claim of misrepresentation, false statement, or concealment. See,
e.g., Rego v. Connecticut Ins. Placement Facility, 593 A.2d 491,
494 (Conn. 1991) (applying preponderance of the evidence standard);
Horrell V. Utah Farm Bureau Ins. Co., 909 P.2d 1279, 1281 & n.4
(Utah App. 1996) (same); Williams v. United Fire and Casualty Co.,
594 So.2d 455, 458 (La. App. 1991) (same).
Nonetheless, as long as Maryland remains in the minority of
states that require clear and convincing evidence in a common law
fraud claim, or until the courts of Maryland decide otherwise, we
decline to adopt a preponderance of the evidence standard for an
insurer’s contractual defenses of fraud, intentional concealment or
17
misrepresentation, or false statements. Accordingly, we hold that
the district court did not err in charging the jury to apply the
clear and convincing burden to MBIC’s affirmative defense.
III. CONCLUSION
Pursuant to the foregoing discussion and analysis, we affirm
the district court’s exclusion of evidence and charge to the jury.
AFFIRMED
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