Earth-movement exclusion ruled applicable only to natural events
The insureds in this Florida case had an "all-risk" homeowners policy. While it was in effect, the insureds reported a loss for structural damage to their home and damage to personal property that they said resulted from nearby blasting activities.
The carrier denied the claim and requested summary judgment on the basis of the policy's earth-movement exclusion. In the exclusion, the peril was defined as follows:
"Earth movement, earthquake, including land shock waves or tremors before, during or after a volcanic eruption; landslide; mine subsidence; mudflow; earth sinking, rising or shifting..."
At the trial court's hearing on the summary judgment motion, the carrier relied on State Farm Fire & Casualty Co. vs. Castillo, 829 So. 2d 242 (Fla. 3d DCA 2002), in which a state appellate court held that an earth-movement exclusion excluded coverage for any loss resulting from earth movement, regardless of its cause. Based on that case, the trial court entered summary judgment in favor of the carrier.
On appeal, the insureds argued that the trial court erred in granting summary judgment on the basis of the Castillo decision because the language in the earth-movement exclusion in that case was materially different from the language in the exclusion in the insured's policy. The appeals court agreed that the exclusion in Castillo was much broader but nonetheless concluded as a matter of law that "under the plain language" of the insureds' policy, their loss was not covered.
The insureds appealed that decision to the state Supreme Court. It found there is a distinction between losses caused by natural events, which are often cataclysmic and widespread, and losses caused by man-made events. When losses are caused by human activity, an insurer has the opportunity to recover some of the payments made to its insured by asserting subrogation rights against the entity responsible for the activity, the court noted.
After citing a number of cases dealing with this issue, the Supreme Court said an overwhelming majority of courts have concluded that unless an earth-movement exclusion specifically states it applies to earth movement "regardless" of its cause, it applies only to earth movement that arises from natural events. The Supreme Court agreed with that interpretation.
The carrier asserted that the "earth sinking, rising or shifting" language in the earth-movement exclusion's definition should be construed to include a man-made activity, like blasting. The court agreed such a construction is conceivable, but it said it was by no means the most reasonable, given that the words preceding "earth sinking, rising or shifting," such as "earthquake," "landslide" and "mudflow," generally connote natural events.
While the decision precluded the insurer from using the earth-movement exclusion to deny the insureds' claim, it did not resolve the issue of whether the claimed losses actually resulted from the blasting work. The case was sent back to the trial court for a finding of fact on this issue.
Fayad vs. Clarendon National Insurance Co., No. SC03-1808 (Fla. 03/31/2005) 2005.FL.0001233.
Insurer allowed to rescind policy because of numerous material misrepresentations
The insured in this California case bought a building in February 2000 in the name of his trust. His broker submitted an application to another broker, who was an authorized underwriter for a carrier that issued a policy for the building.
The following November, the building was destroyed by arson. The arsonist, an acquaintance of the insured, died in the fire. In an ensuing investigation, the carrier discovered several alleged misrepresentations in the insured's application and rescinded the policy. The insured sued the carrier.
The carrier responded by moving for summary judgment on two alternative grounds: (1) The material misrepresentations on the application gave it the right to rescind the policy under two sections of the state insurance code. (2) The policy's dishonest-acts exclusion barred coverage because the insured's representative (the arsonist), to whom the ensured had entrusted the building, intentionally set fire to it. The trial court granted summary judgment on both grounds, and the insured appealed.
The application stated the following: (1) The property to be insured consisted of a 3,420 square-foot commercial building. (2) The building was to be used by the insured as a video production studio and offices. (3) The business to be conducted in the building had $20,000 in payroll and generated $300,000 in receipts. (4) There was no existing insurance on the building. (5) The building had no uncorrected fire code violations. (6) The building had a burglar alarm. (7) Records & Records & Filmworks, Inc. (later changed to the named insured) was the purchaser of the building.
The facts, however, were the following: (1) The building's size was less than 2,000 square feet. (2) The business conducted in the building had no officers or employees, and was used only to film a music video for two days in May or June of 2000. (3) The business in the building generated approximately $6,500 in receipts from February 2000 to the time of the fire. (4) The building was insured by the California FAIR Plan, an insurer of "last resort." (5) The building was subject to a City of Los Angeles abatement order stating that it could not be occupied without a clearance or repaired without a permit. Among its deficiencies were that it was open to unauthorized entry; that it was littered with combustible debris; and that the property had excessive dry weeds or vegetation, broken windows, damaged or missing doors, damaged exterior wall coverings, damaged interior wall and ceiling coverings, and deteriorated flooring. No permit had been obtained to correct these deficiencies. (6) The building had no burglar alarm. (7) The building was owned by the insured's family trust.
In addition, the insured leased the building to a garment-manufacturing business in July. In August, a city inspector cited the tenant for failure to obtain a certificate of occupancy, and the insured was forced to release the tenant from the lease and return most of the rent payments. According to the insured, he then met a person who represented himself as a business consultant with a prospective buyer for the property. The insured said he gave this person the keys to the vacant property for the purpose of showing it to the prospective buyer. (The consultant was the person who later was accused of setting the fire that destroyed the building and who had died in it.)
At trial the insured admitted that the application "contained inaccuracies" that caused the carrier to rescind the policy but claimed those inaccuracies were not material and were solely the fault of his brokers.
The carrier's underwriter declared that had she known the building had uncorrected fire code violations, was substantially smaller than had been represented, and was not to be used as studios and offices for the insured's own music video company, she either would have underwritten the policy differently or declined to underwrite it altogether. She also said the existence of prior insurance coverage under the California FAIR Plan was an important underwriting consideration, because it indicated past problems in acquiring insurance. She said she would have undertaken further investigation had she known the property was insured under the FAIR Plan.
The insured used an expert witness, another broker, who stated in a declaration that the purported misrepresentations were not material to underwriting the policy. She said the rep- resentation that there was no coverage on the building should have been a bigger "red flag'" than the fact that it was covered under the FAIR Plan. In regard to the changes in the use of the building and absence of a central alarm system, the expert witness said the underwriter should have conducted further inquiry and argued that the failure to do so constituted a waiver of these issues.
The carrier objected to the declaration of the expert witness, arguing that it was based on speculation and conjecture. The trial court agreed.
The trial court granted summary judgment in the carrier's favor, finding that the information sought by the carrier's underwriter and denied to it by the plaintiff's false answers and omissions was material to the decision to provide coverage. The trial court further concluded that coverage was excluded because the loss was the consequence of the dishonest act (arson) of the plaintiff's "authorized representative." The insured appealed.
The appeals court noted that the carrier based its right to rescind on two sections of the state insurance code. Section 331 states: "Concealment, whether intentional or unintentional, entitles the injured party to rescind insurance." Section 359 simi- larly provides: "If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time the representation becomes false."
"Requiring full disclosure at the inception of the insurance contract and granting a statutory right to rescind based on concealment or material misrepresentation at that time safeguard the parties' freedom to contract," the appeals court said. The court cited another case stating that an insurance company "has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination, to the end that a wise discrimination may be exercised in selecting its risks."
The court also decided that another section of the insurance code (Sec. 2071) requiring willful misrepresentation to void a fire insurance policy did not preclude the carrier from exercising its rights under Insurance Code sections 331 and 359 to rescind the policy based on the lesser standard of negligent or unintentional misrepresentations.
The court said the test for materiality of misrepresentations is whether the information would have caused the underwriter to reject the application, charge a higher premium or amend the policy terms, had the underwriter known the true facts.
"It seems unreasonable," the court said, "to conclude that an incorrect answer to any question on an insurance application automatically would constitute a material misrepresentation for purposes of rescission. For example, there might be instances when the question on the application is not relevant to an underwriting decision or the answer is such that the insurance company could not have relied upon it. Thus, we can conceive of situations when the issue of materiality might be a factual one." But the court said no such factual issues were present in this case. "The misrepresentations were material," the court said.
The court next turned to the insured's argument that the misstatements in his application were such that they should have prompted the insurer's underwriter to investigate matters further, and that by failing to investigate, the carrier waived its right to rescind the policy. The court said waiver is the intentional relinquishment of a known right. An insurer does not waive its right to rescind a policy on the ground of false representations if it was unaware of the falsity of those representations, it said.
The appeals court said that even if the declaration of the insured's expert witness had been admitted in evidence, her opinions would not render all of the underwriter's considerations and determinations unreasonable. The expert admitted that some of the information the carrier sought in the application was relevant to underwriting the risk or setting the premium. She also did not dispute that the insured's responses concerning the size and ownership of the building, the payroll and receipts of the business conducted, and the existence of insurance were false. While the insured's witness concluded there was "very little reliance on the representations made in the application," the appeals court noted such a conclusion concedes there was some reliance on the representations. The expert witness also acknowledged that at least one misrepresentation affected the amount of premium and coverage, the court said. Accordingly, the expert's declaration, even if considered, would not create a triable issue of fact as to materiality or waiver, the appeals court concluded.
The undisputed evidence showed that there were material misrepresentations in the application, the appeals court said, and, based on them, the carrier had the right to rescind the policy. The trial court therefore properly granted summary judgment to the insurer, the appeals court said.
(In upholding the trial court's summary judgment on the grounds of material misrepresentation, the appeals court did not consider whether the insurer's other grounds--its dishonest-acts exclusion--also barred coverage.)
Mitchell vs. United National Insurance Co., No. B170364 (Cal.App.Dist 2 03/08/2005) 2005.CA.0002094 (www.versuslaw.com).
Readers can get in touch with Don Renau via e-mail at drenau@thepoint.com
The insureds in this Florida case had an "all-risk" homeowners policy. While it was in effect, the insureds reported a loss for structural damage to their home and damage to personal property that they said resulted from nearby blasting activities.
The carrier denied the claim and requested summary judgment on the basis of the policy's earth-movement exclusion. In the exclusion, the peril was defined as follows:
"Earth movement, earthquake, including land shock waves or tremors before, during or after a volcanic eruption; landslide; mine subsidence; mudflow; earth sinking, rising or shifting..."
At the trial court's hearing on the summary judgment motion, the carrier relied on State Farm Fire & Casualty Co. vs. Castillo, 829 So. 2d 242 (Fla. 3d DCA 2002), in which a state appellate court held that an earth-movement exclusion excluded coverage for any loss resulting from earth movement, regardless of its cause. Based on that case, the trial court entered summary judgment in favor of the carrier.
On appeal, the insureds argued that the trial court erred in granting summary judgment on the basis of the Castillo decision because the language in the earth-movement exclusion in that case was materially different from the language in the exclusion in the insured's policy. The appeals court agreed that the exclusion in Castillo was much broader but nonetheless concluded as a matter of law that "under the plain language" of the insureds' policy, their loss was not covered.
The insureds appealed that decision to the state Supreme Court. It found there is a distinction between losses caused by natural events, which are often cataclysmic and widespread, and losses caused by man-made events. When losses are caused by human activity, an insurer has the opportunity to recover some of the payments made to its insured by asserting subrogation rights against the entity responsible for the activity, the court noted.
After citing a number of cases dealing with this issue, the Supreme Court said an overwhelming majority of courts have concluded that unless an earth-movement exclusion specifically states it applies to earth movement "regardless" of its cause, it applies only to earth movement that arises from natural events. The Supreme Court agreed with that interpretation.
The carrier asserted that the "earth sinking, rising or shifting" language in the earth-movement exclusion's definition should be construed to include a man-made activity, like blasting. The court agreed such a construction is conceivable, but it said it was by no means the most reasonable, given that the words preceding "earth sinking, rising or shifting," such as "earthquake," "landslide" and "mudflow," generally connote natural events.
While the decision precluded the insurer from using the earth-movement exclusion to deny the insureds' claim, it did not resolve the issue of whether the claimed losses actually resulted from the blasting work. The case was sent back to the trial court for a finding of fact on this issue.
Fayad vs. Clarendon National Insurance Co., No. SC03-1808 (Fla. 03/31/2005) 2005.FL.0001233.
Insurer allowed to rescind policy because of numerous material misrepresentations
The insured in this California case bought a building in February 2000 in the name of his trust. His broker submitted an application to another broker, who was an authorized underwriter for a carrier that issued a policy for the building.
The following November, the building was destroyed by arson. The arsonist, an acquaintance of the insured, died in the fire. In an ensuing investigation, the carrier discovered several alleged misrepresentations in the insured's application and rescinded the policy. The insured sued the carrier.
The carrier responded by moving for summary judgment on two alternative grounds: (1) The material misrepresentations on the application gave it the right to rescind the policy under two sections of the state insurance code. (2) The policy's dishonest-acts exclusion barred coverage because the insured's representative (the arsonist), to whom the ensured had entrusted the building, intentionally set fire to it. The trial court granted summary judgment on both grounds, and the insured appealed.
The application stated the following: (1) The property to be insured consisted of a 3,420 square-foot commercial building. (2) The building was to be used by the insured as a video production studio and offices. (3) The business to be conducted in the building had $20,000 in payroll and generated $300,000 in receipts. (4) There was no existing insurance on the building. (5) The building had no uncorrected fire code violations. (6) The building had a burglar alarm. (7) Records & Records & Filmworks, Inc. (later changed to the named insured) was the purchaser of the building.
The facts, however, were the following: (1) The building's size was less than 2,000 square feet. (2) The business conducted in the building had no officers or employees, and was used only to film a music video for two days in May or June of 2000. (3) The business in the building generated approximately $6,500 in receipts from February 2000 to the time of the fire. (4) The building was insured by the California FAIR Plan, an insurer of "last resort." (5) The building was subject to a City of Los Angeles abatement order stating that it could not be occupied without a clearance or repaired without a permit. Among its deficiencies were that it was open to unauthorized entry; that it was littered with combustible debris; and that the property had excessive dry weeds or vegetation, broken windows, damaged or missing doors, damaged exterior wall coverings, damaged interior wall and ceiling coverings, and deteriorated flooring. No permit had been obtained to correct these deficiencies. (6) The building had no burglar alarm. (7) The building was owned by the insured's family trust.
In addition, the insured leased the building to a garment-manufacturing business in July. In August, a city inspector cited the tenant for failure to obtain a certificate of occupancy, and the insured was forced to release the tenant from the lease and return most of the rent payments. According to the insured, he then met a person who represented himself as a business consultant with a prospective buyer for the property. The insured said he gave this person the keys to the vacant property for the purpose of showing it to the prospective buyer. (The consultant was the person who later was accused of setting the fire that destroyed the building and who had died in it.)
At trial the insured admitted that the application "contained inaccuracies" that caused the carrier to rescind the policy but claimed those inaccuracies were not material and were solely the fault of his brokers.
The carrier's underwriter declared that had she known the building had uncorrected fire code violations, was substantially smaller than had been represented, and was not to be used as studios and offices for the insured's own music video company, she either would have underwritten the policy differently or declined to underwrite it altogether. She also said the existence of prior insurance coverage under the California FAIR Plan was an important underwriting consideration, because it indicated past problems in acquiring insurance. She said she would have undertaken further investigation had she known the property was insured under the FAIR Plan.
The insured used an expert witness, another broker, who stated in a declaration that the purported misrepresentations were not material to underwriting the policy. She said the rep- resentation that there was no coverage on the building should have been a bigger "red flag'" than the fact that it was covered under the FAIR Plan. In regard to the changes in the use of the building and absence of a central alarm system, the expert witness said the underwriter should have conducted further inquiry and argued that the failure to do so constituted a waiver of these issues.
The carrier objected to the declaration of the expert witness, arguing that it was based on speculation and conjecture. The trial court agreed.
The trial court granted summary judgment in the carrier's favor, finding that the information sought by the carrier's underwriter and denied to it by the plaintiff's false answers and omissions was material to the decision to provide coverage. The trial court further concluded that coverage was excluded because the loss was the consequence of the dishonest act (arson) of the plaintiff's "authorized representative." The insured appealed.
The appeals court noted that the carrier based its right to rescind on two sections of the state insurance code. Section 331 states: "Concealment, whether intentional or unintentional, entitles the injured party to rescind insurance." Section 359 simi- larly provides: "If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time the representation becomes false."
"Requiring full disclosure at the inception of the insurance contract and granting a statutory right to rescind based on concealment or material misrepresentation at that time safeguard the parties' freedom to contract," the appeals court said. The court cited another case stating that an insurance company "has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination, to the end that a wise discrimination may be exercised in selecting its risks."
The court also decided that another section of the insurance code (Sec. 2071) requiring willful misrepresentation to void a fire insurance policy did not preclude the carrier from exercising its rights under Insurance Code sections 331 and 359 to rescind the policy based on the lesser standard of negligent or unintentional misrepresentations.
The court said the test for materiality of misrepresentations is whether the information would have caused the underwriter to reject the application, charge a higher premium or amend the policy terms, had the underwriter known the true facts.
"It seems unreasonable," the court said, "to conclude that an incorrect answer to any question on an insurance application automatically would constitute a material misrepresentation for purposes of rescission. For example, there might be instances when the question on the application is not relevant to an underwriting decision or the answer is such that the insurance company could not have relied upon it. Thus, we can conceive of situations when the issue of materiality might be a factual one." But the court said no such factual issues were present in this case. "The misrepresentations were material," the court said.
The court next turned to the insured's argument that the misstatements in his application were such that they should have prompted the insurer's underwriter to investigate matters further, and that by failing to investigate, the carrier waived its right to rescind the policy. The court said waiver is the intentional relinquishment of a known right. An insurer does not waive its right to rescind a policy on the ground of false representations if it was unaware of the falsity of those representations, it said.
The appeals court said that even if the declaration of the insured's expert witness had been admitted in evidence, her opinions would not render all of the underwriter's considerations and determinations unreasonable. The expert admitted that some of the information the carrier sought in the application was relevant to underwriting the risk or setting the premium. She also did not dispute that the insured's responses concerning the size and ownership of the building, the payroll and receipts of the business conducted, and the existence of insurance were false. While the insured's witness concluded there was "very little reliance on the representations made in the application," the appeals court noted such a conclusion concedes there was some reliance on the representations. The expert witness also acknowledged that at least one misrepresentation affected the amount of premium and coverage, the court said. Accordingly, the expert's declaration, even if considered, would not create a triable issue of fact as to materiality or waiver, the appeals court concluded.
The undisputed evidence showed that there were material misrepresentations in the application, the appeals court said, and, based on them, the carrier had the right to rescind the policy. The trial court therefore properly granted summary judgment to the insurer, the appeals court said.
(In upholding the trial court's summary judgment on the grounds of material misrepresentation, the appeals court did not consider whether the insurer's other grounds--its dishonest-acts exclusion--also barred coverage.)
Mitchell vs. United National Insurance Co., No. B170364 (Cal.App.Dist 2 03/08/2005) 2005.CA.0002094 (www.versuslaw.com).
Readers can get in touch with Don Renau via e-mail at drenau@thepoint.com
