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Getting to “Void”: An Insurer’s Guide for Defending Lawsuits Filed by Fraudsters

Sandra Karin Jones and Jessica Ellen Loesing


  • Insurers have to contend with a variety of fraudulent claims: Death is sometimes faked, the “disabled” are sometimes not so disabled, and insureds are sometimes represented by imposters.
  • There are many ways to counteract fraudulent behavior, including asserting counterclaims.
  • Using the proper strategy, employing diligence and perseverance, and exhibiting superior negotiation tactics will allow the truth to prevail.
Getting to “Void”: An Insurer’s Guide for Defending Lawsuits Filed by Fraudsters
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Life and disability insurers are all too familiar with the tagalong bad faith claim that accompanies most breach-of-contract-based lawsuits. Most states, if not all, have some form of claim for bad faith (or breach of the covenant of good faith and fair dealing) that can be asserted against an insurer. But what if the shoe is on the other foot, and the insured or his/her beneficiary is a bad actor? In many instances, the insurer may believe that it is stuck paying the proceeds of a policy because the facts are not black and white and the statutory prompt-pay clocks are ticking. However, insurers can often avoid this result by working with outside counsel to employ an offensive strategy from the outset of the litigation, including the option to “void” or otherwise avoid paying the policy proceeds.

Fraud Scenarios

Insurers have to contend with a variety of fraudulent claims.

Death is sometimes faked. Life insurance fraud related to fake death (pseudocide) is more common than you may think. In 2016, the Coalition Against Insurance Fraud conducted a survey [login required] in which insurance companies were asked if faked death was a slight, moderate, or severe issue facing the industry; faked death fell into the “moderate” category, meaning that there are several hundred such cases each year. But when investigators have been hired and the insured is still nowhere to be found, and the beneficiaries sue the insurer for failure to pay the death benefit, what next?

The “disabled” are sometimes not so disabled. The population most likely to go on disability, those aged 50 to 64, is growing. The potential disability population is also larger now than in the past because today’s older women (as opposed to earlier generations) were once in the workplace, leading to increased participation in the disability insurance market. With more disability claims comes a greater likelihood of fraud. When an insurer uncovers fraud, it typically terminates the disability benefits, and the identified fraudster walks away. But what happens when the insured brings suit against the insurer, alleging a wrongful denial of benefits and tacking on claims for bad faith and attorney fees? What if the suspected fraud is not so cut-and-dried?

Insureds are sometimes represented by imposters. People only know what you tell them. In “traveler” life insurance scams, individuals take out life insurance policies for old or infirm family members (or even family members who are no longer alive) and send healthy imposters to take the physical exams. How can an insurer know anything other than what it is told on the application? In some cases, the imposter even has the same name as the proposed insured whom he or she is impersonating. Proving this sort of scam can be difficult, especially when the pieces fall into place for the insured and the insured’s beneficiaries. How does the insurer avoid paying the death benefit when it believes that this sort of foul play is afoot? See Valant v. Metro. Life Ins. Co., 23 N.E.2d 922 (Ill. App. Ct. 1939) (overturning judgment notwithstanding verdict entered by trial court that found incontestability clause barred imposter defense and remanding for judgment consistent with holding); Strawbridge v. N.Y. Life Ins. Co., 504 F. Supp. 824 (D.N.J. 1980) (denying beneficiary’s motion for summary judgment on breach of contract claim where evidence created issue of fact as to the identity of individual that appeared at physical examination and denying beneficiary’s motion for summary judgment on fraud counterclaim asserted by insurer).

Counteracting Fraudulent Behavior

These are just a few of the many scenarios in which fraudulent behavior may arise. So, what should an insurer do to protect itself from being taken advantage of?

Assert counterclaims. An insurer is not required to tolerate fraud from the parties to its contracts any more than any other contracting party. Accordingly, do not be afraid to assert appropriate counterclaims against the perceived wrongdoer when evidence points to fraud—but do so wisely and cautiously.

Start with a counterclaim for breach of contract, and add a declaratory claim seeking to declare the policy void due to the actions of the insured and/or the beneficiary. Depending on the behavior of the insured or the beneficiary, a policy may also be void for (1) constructive lapse due to failure to pay premiums while the insured was alive, (2) bad faith, or (3) violations of specific language in the policy relating to fraud. Most jurisdictions will also permit insurers to assert claims for fraud, conversion, civil theft, or other similar claims that carry punitive damages high enough to level the playing field. This sends an immediate message to the insured that the insurer is aware of the fraudulent behavior and does not intend to concede to it.

Remember to work closely with your Special Investigation Unit to ensure that you are complying with all mandatory fraud reporting requirements for your jurisdiction. At last count, 48 of the 50 states had adopted either the Insurance Fraud Prevention Model Act published by the National Association of Insurance Commissioners or similar mandatory reporting legislation. Additionally, every state and the District of Columbia have laws making insurance fraud a crime. These reporting requirements exist independently of any litigation strategy related to suspected fraud, but also serve as an incentive for insureds and/or beneficiaries engaged in fraud to go away quickly and quietly when an insurer begins to uncover their fraudulent acts.

Alternatively, there may not be enough factual evidence at the outset to support the claims that will win the day. It may be prudent to allow the plaintiffs to think that they are making great headway and then threaten counterclaims once enough facts have been gathered to make a move.

Develop an early strategy. If the end goal is to declare the policy void due to fraud, what is the road map in getting there? As described above, scenarios involving fraud often require extra investigation and surveillance to gather enough facts to indisputably demonstrate the fraud. Early planning will allow an insurer to avoid seemingly harmless mistakes that may prevent declaring the policies void later on.

When you lack sufficient evidence to file a counterclaim at the outset of the suit, it is often better to hold off on raising the alleged fraud, keeping the evidence that you have collected in your proverbial back pocket until the right time to bring it into the light. Once you have engaged in sufficient written discovery and investigation to demonstrate the fraud, you can request the insured’s and/or beneficiary’s deposition. When confronted face-to-face with the facts of their fraud—and with the threat of impeachment at a jury trial looming—many insureds will regret bringing suit altogether. This will place you in a strong negotiating position for settlement talks, regardless of what value-increasing bad faith or punitive damages claims the plaintiff may have filed.

Negotiate with conviction. Show your hand when the timing is right, and then use what you have learned to take the policy down. You need just enough to call their bluff—whether that be one reliable witness who can contradict the plaintiff’s position, one day of surveillance footage, or enough contradictory facts to weaken the plaintiff’s story. Moreover, the plaintiff now faces potential individual liability for the damages that you asserted in your counterclaims. In some cases, the plaintiff may be “upside down” on the case, so to speak, facing greater liability than the value of the original claims that the plaintiff asserted. The plaintiff’s attorney may also be deep in the hole on a contingency fee and may not want to risk a total loss on the case.

Get the policy off the books. Many insureds and beneficiaries, when threatened with the thought of all that accompanies an unsuccessful attempt at fraud, will settle. Once they realize that their plan has failed, a mere fraction of the death benefit or an agreement that the insured may keep the fraudulently obtained disability benefits will often be enough to get them to agree to void the policy.

Plead the equities. If the insured and/or beneficiary refuses to settle and you find yourself in court, you can rely heavily upon the evidence you collected throughout the discovery and litigation process to demonstrate to the judge or jury that the plaintiff’s claims of breach of contract and/or bad faith are false, as well as to support any counterclaims you asserted throughout the suit. Further, to the extent that you are in a jurisdiction that allows a judgment based on equity, an insurer that has been the victim of fraud is well positioned to argue that, as the innocent party, the balance of equities demands judgment in its favor.


Cases of fraud can be difficult to prove, and it is even more difficult to declare a policy void after the contestability period has run. However, more often than not, using the proper strategy, employing diligence and perseverance, and exhibiting superior negotiation tactics will allow the truth to prevail.