Extinguishing an Arson Fraud
BARRY ZALMA
Gagik Levonian, a career criminal in then-Soviet Armenia, was offered the choice of prison or emigration to the United States. He came to the States as a “refugee” with 300 carats of diamonds, many antique icons, jewelry, Caucasian and Persian rugs and a large bank account in the Cayman Islands. He used what he brought with him to open a wholesale jewelry store and purchased three gas stations.
His obligations to the Soviet Union died with its demise. He became a citizen of the United States, purchased a 4,000-square-foot house in the hills over Los Angeles and became an officer of the Los Angeles Armenian Businessman's Association.
However, Levonian never lost his Armenian patriotism. He hated everything Turkish because of what he called the Armenian genocide carried out by the Turkish government at the beginning of the 20th century. At one point he was approached for a contribution by a representative of an Armenian political party whose purpose was to kill Turkish diplomats. He wanted to donate to the cause, but his wealth was locked in property. Right around this time, he decided to up the insurance on his house and its contents . . . just in case something were to happen.
His insurance agent, Hrant Aratian (a friend of Armenian descent who shared his attitude toward Turks), went to a representative of Goodfaith Insurance Company and acquired a policy for Levonian that insured the house for $2 million, its contents at $1 million and an itemized schedule of antiques and fine art he valued at $970,000. Goodfaith received an application signed by Levonian that represented the values of the property, that he had never had a claim before and that he had never had a policy canceled or nonrenewed. Goodfaith did not inspect the property but — in good faith — accepted Levonian's word.
Two weeks after the Goodfaith policy went into effect, Levonian's house on the hill exploded into flames. A fire department helicopter saw the explosion and quickly dropped water on the property and put out the flames. City arson investigators determined the cause of the fire was arson. The next evening the house caught on fire again and was totally destroyed. The firefighters called it a rekindle, but the arson investigators concluded the second fire was also intentional.
After the second fire, Levonian presented a claim to Goodfaith. The adjuster, Martha Andrews, asked for my assistance as a consultant, investigator and Certified Fraud Examiner (CFE) because she was facing a potential $3 million claim shortly after the policy was issued. I immediately contacted Levonian and made an appointment to meet with him at the fire scene.
Backyard Barbecue
I met with Gagik Levonian at the burned-out hulk of his house. I brought an Armenian-language interpreter (since Levonian's English was limited) and a certified shorthand reporter with me to take a statement from Gagik about the insurance and the loss. I was introduced by the interpreter to a large man who could speak Armenian and Russian fluently and knew some English. He commanded any room he entered. His round, rosy-cheeked face was marred by a large birthmark on his bald head that looked like a map of Texas and a bloated, red nose from overconsumption of Armenian brandy. We sat on rocks outside his swimming pool with a broken sculpture blown into the pool staring back at us. Gagik was drinking from an eight-ounce glass mixed 50/50 with brandy and orange juice at ten in the morning.
“Why are you here?” he asked.
“To help you prove your claim to Goodfaith Insurance Company,” I responded.
“You can see the house is destroyed. Where is my check?”
I explained the insurance he had purchased and the process of a claims investigation. I explained that because the fires were intentionally set, Goodfaith was required by law to conduct a thorough investigation and that a detailed statement from him was the beginning of that thorough investigation.
“I paid a lot for this insurance,” he said. “My house is burned to nothing. I want my money.”
His face began to flush red with anger and brandy. I calmed him down as best I could with the help of the interpreter and finally convinced him to sit back on the rock and answer my questions. I had the shorthand reporter take everything down but did not ask her to issue an oath since this was to be a preliminary statement; I was only getting Gagik's basic background and what he and other members of his family were doing at the time of the fire.
After I finished the statement, I explained to him that Goodfaith would pay to rent a similar $1 million house for his family while we investigated. Satisfied, he left the scene to me and a private fire cause-and-origin investigator whom I had asked Goodfaith to retain. I was concerned about some facts that Gagik gave me that he thought were inconsequential, including:
- One of the family's Dobermans was at the vet.
- The second Doberman was with his 18-year-old son and the son's date at a drive-in movie.
- The Goodfaith policy was the first time he had ever had a schedule of his fine art and antiques.
- His 14-year-old son was with him and Mrs. Levonian at an Armenian Businessman's Association dinner.
- The family cat and a coop of rabbits died in the fire.
- The fire happened after midnight.
- He had out-of-focus photographs of all the scheduled items, which he provided to me.
- He accused the fire department arson investigators of theft of diamonds stored in a floor safe in the master bath.
- His eldest son was at a nightclub the night of the fire and was now visiting his grandmother in Yerevan, Armenia.
- His prior insurer had canceled insurance because of a claim.
I immediately called Martha and obtained her permission to retain competent coverage counsel and a fine-arts appraiser to review the little debris available as well as to report the claim to the fraud division of California's Department of Insurance.
Expanding the Team
The day after I met with Levonian in his backyard, Martha and I met with attorney Bill Abogador. Bill was an experienced lawyer with more than 20 years' experience dealing with insurance fraud and arson-for-profit cases for Goodfaith and dozens of other insurers.
After introductions Bill asked to see the policy and reviewed it carefully, cover to cover, before saying anything:
“How do you spell porcelain?” he asked me.
“P-o-r-c-e-l-a-i-n,” I responded, confused.
“Did you notice that the schedule of fine arts in this policy spelled it procelane?
“No. Do you think it was a typo?”
“I would have thought so until I saw Meisen spelled Mason and Lalique spelled Lalik. Do you have the underwriting file with the appraisal on which this schedule was agreed to by Goodfaith?”
Martha reached into her briefcase and pulled out a copy of the underwriting file, flipped through the pages and opened the copy to the original appraisal.
“Here it is,” she said. “Do you know Matthew Krooner, the appraiser?”
“Yes. I represented an insurer with regard to an armed robbery at Krooner's auction house three years ago. We refused the claim when he was arrested and convicted of insurance fraud.”
“Oh, my!” exclaimed Martha. “What do we do now?”
“First, Barry should immediately visit the offices of the retail insurance agent and the underwriter and obtain detailed recorded statements concerning the placement of this insurance. I will review the information in the claim file, the transcript of Gagik's statement, the underwriting file, the policy wording and the local law. If, after my review, I find grounds to suspect fraud, I will recommend to Goodfaith that Gagik Levonian be required to submit to an examination under oath. I also recommend that Goodfaith retain the services of an appraiser to review the conclusions of Krooner, who — although he had a problem with receiving and selling stolen property — knew how to spell porcelain and Meisen. After meeting with an expert, Barry should also interview Krooner.”
Martha and I left, and I began following Abogador's instructions including consulting with a fine-arts appraiser.
My first stop was at the office of the retail insurance agent, Hrant Aratian, who sold Levonian his policy. Aratian was cooperative and provided me with copies of photographs he had received from Levonian of each of the items described in the appraisal signed by Krooner. He advised me that Levonian had been his client for five years and that he had written insurance on Levonian's home and his car, his wife's car and the cars operated by two of his sons. They were immigrants from Soviet Armenia who appreciated the American dream and lived well operating gas stations and a jewelry store.
“In the five years you have worked with Levonian, has he ever made a claim to an insurer?
“Yes, he had a water leak in his roof last year, and Strong Hands Insurance paid to repair his house. Two years before, his downhill neighbor sued him because of a mudslide. Strong Hands defended him, but I don't know how the case resolved.”
“Why did he move from Strong Hands to Goodfaith?”
“After the second claim, Strong Hands sent out a notice of nonrenewal so I had to find another market to protect him.”
“Can I have copies of your files on both the Strong Hands and the Good-faith policies?”
“Of course, everything I do is open to the insurers with whom I do business.”
After the copies were made, I met with Dean Hale, an art appraiser, to review the appraisal and the photographs. Dean and I had worked together on several investigations involving fine art in the past. His office was above a garage in the Hancock Park area of Los Angeles. It was filled with auction catalogs and books on fine arts from the Dark Ages to the day before yesterday.
Dean greeted me with a mug of hot, black coffee and a gleaming white smile escaping from the cover of a thick ginger-colored beard. While I drank my coffee, Dean sat silently reviewing the photographs and the appraisal carefully before speaking.
“Who is this Krooner person?” he asked.
“He's an auctioneer in Sherman Oaks dealing in antiques, artwork and goods with an often-questionable provenance,” I replied.
“That makes sense,” Dean noted, “because if this man is an appraiser, he was imbibing in some illicit drugs at the time.”
“Why do you say that?”
“Because none of the descriptions makes sense, the artists are not well known and all the values seem to have had at least one extra zero added to them. I can't be certain because the photographs are all out of focus, although they appear to depict items similar to those described. Finally, the spelling is atrocious. Do you have any of the remains?”
“No. The fire was almost total, but you and I can visit the scene to see what we can find.”
“I'll get my coat and loupe.”
Dean and I drove to the scene of the fire. The destruction was almost total, but there were shards of pottery, pieces of glass, metal that had been attached to the icons and small unburned pieces of rugs.
After an hour at the scene, Dean exclaimed: “This is a fraud. The pottery shards are not Meisen as described but Mexican pottery bought at Olvera Street downtown for five dollars, and the Persian carpet remnants are nylon, not wool or silk, and were probably bought in a shop in Chinatown. You need to do a great deal more investigation.”
Good Faith Is Easily Exploited
After lunch at a nearby sandwich shop, Dean and I separated, and I headed to the office of the underwriter, Millie Snodgrass.
After a few hours in her office reviewing every document in her file, pointing out to her the spelling errors, I took a recorded statement about her underwriting philosophy since, in California, insurance is a contract of personal indemnity based on the decision of the individual underwriter. Millie had been underwriting personal articles for more than 20 years, was highly experienced and had acted as an underwriter for major insurers and the Lloyd's market in London.
“Millie, how important are the answers to questions on an application to your underwriting decision?”
“They are the most important since we rely on the truthfulness of the prospective insured.”
“Don't you check out the insured and the appraisal before you agree to the insurance?”
“Never. It would be too expensive since we only sell 20 percent of the applications on which we make an offer. We have to rely on the good faith of the prospective insured.”
“This application states that Levonian had never had a claim before — what effect would it have had on your decision to insure him if you knew he had a roof leak claim paid a month before he signed the application?”
“I probably would have assessed a 10 percent surcharge on the premium.”
“What would happen if he told you he had the roof leak and a burglary last year?”
“I would have assessed a 15 percent surcharge on the premium.”
“What would happen if he told you he had the roof leak, two burglaries and a liability claim?”
“I would have told him to go elsewhere. I would not touch that risk with a high-value policy like this one.”
“And if Levonian told you his last policy was canceled for loss history, what would you have done?”
“I would have been very disappointed, but there is no way I could write a policy with that kind of information. Are any of those things true?”
“Levonian and his insurance agent told me all of those statements are true.”
“Heck, if I knew all those things, I would have trashed the application immediately. I only agreed to the policy because the loss and cancelation history was clean, he lived in a low-crime neighborhood, had a detailed appraisal and appeared to be a successful businessman.”
“Did you review the appraisal?”
“Yes.”
“Do you know Krooner?”
“No.”
“Did you notice that the appraisal misspelled the words porcelain and Meisen?”
“Oh, no! I missed that, didn't I? If I had seen it, I would have asked for a new appraisal before agreeing to the policy.”
I had the statement transcribed and asked Millie to sign her responses under penalty of perjury.
I then went to Krooner's office in Sherman Oaks, and he voluntarily agreed to a recorded statement about his work for Levonian.
Lazy Appraisal Work
After pleasantries establishing rapport and making Krooner certain I had nothing to do with a police agency, I showed him a copy of the original appraisal and asked: “Matthew, is that you signature at the bottom of each page of the appraisal?”
“Yes,” he responded with a slight tremor in his voice while rubbing his palms on his pants leg.
“When did you last see this document?”
“I've never seen it.”
“Perhaps I misheard you — how could you sign it without seeing it?”
“I signed blank appraisal forms. Levonian was in a hurry, said his son was an A student in typing and he would type it if I reduced my fee. I charged him $300 and gave him my notes.”
“Read the appraisal; did the son accurately type up your notes?”
“No. It looks like he added a zero on many of the items and called this print an oil painting. This is very disturbing, Barry; he could get me in trouble, and I'm still on probation.”
Outcome of the Investigation
I reported the findings of the investigation to Martha and the lawyer Abogador. The claim was eventually denied, Levonian sued and Goodfaith cross-complained to recover the money it advanced for living expenses, along with investigative costs and legal fees.
It took years of trial and appeal for the California Court of Appeals to conclude:
A contract is extinguished by its rescission. The consequence of rescission is not only the termination of further liability, but also the restoration of the parties to their former positions by requiring each to return whatever consideration has been received. Here, this would require the refund by Goodfaith of any premiums and the repayment by Levonian of any proceeds advanced which they may have received. The policy is “extinguished” from its inception, as though it had never existed.
Levonian, in law, never was insured under a policy of insurance. That status cannot exist in a vacuum, but must necessarily depend upon the existence of a valid policy of insurance. No compelling reason has been suggested to us, nor can we conceive of any, as to why defendants, having obtained the policy upon the basis of material concealment about prior losses and an earlier cancellation should have no rights against Goodfaith.
We therefore hold that upon a rescission of a policy of insurance, based upon a material concealment or misrepresentation, all rights of the insured thereunder (except the right to recover any consideration paid in the purchase of the policy) are extinguished, including the right or standing to prosecute a claim against the insurer for breach of contract and breach of the covenant of good faith and fair dealing.
In the end, Levonian failed to get money to support his terrorist friends, failed to profit from his claims of bad faith and was required to pay $500,000 to Goodfaith to repay funds expended for temporary living expenses and for the investigative and legal fees incurred to defeat his suit.
Lessons Learned
Goodfaith lived up to its name. It did a thorough investigation with the assistance of a claims adjuster, an experienced and knowledgeable CFE and an experienced and knowledgeable lawyer who was also a CFE. Because of management's knowledge of insurance, insurance law and how to conduct a complete investigation, Goodfaith avoided a fraudulent $3 million claim and recovered expenses. Goodfaith's leadership refused to settle and was willing to work for more than five years to defeat this fraudulent arson-for-profit claim.
Recommendations to Prevent Future Occurrences
Goodfaith learned from its mistake in accepting Levonian as an insured. It has, since this case, changed its internal underwriting policy concerning acceptance of high-value scheduled personal property. Now, before a risk like that presented by Levonian is accepted, the underwriters are required to:
- Use a detailed application form and have the insured warrant the absolute truth of the facts stated in the application.
- Read every word in the appraisal for accuracy.
- Obtain information about the experience and expertise of the appraiser.
- Check the claims database for prior loss and cancelation history before accepting the risk.
- Contact the claims department to determine if staff members have any experience with the appraiser or the insured.
Goodfaith management also instituted a company policy that it advertises to its agents, brokers and the public at large that it will never pay a claim it believes to be fraudulent. As a result of the new policy, Goodfaith has seen a major reduction in suspected fraudulent claims.
About the Author
Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims-handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance-related disputes.