On appeal, Taylor argued that the phrase "had a foreclosure" either unambiguously refers to a foreclosure sale or is ambiguous and should be construed in her favor. (Credit: zimmytws/Shutterstock.com)
In a dispute over alleged material misrepresentations in a homeowners insurance application, the U.S. Court of Appeals for the Eighth Circuit examined the meaning of the question whether an insurance applicant had "had a foreclosure." In Hiscox Dedicated Corporate Member, Ltd. v. Taylor, 53 F.4th 437 (2022), the Eighth Circuit held that question to be ambiguous and construed it against the insurer. The court reversed and remanded for the Western District of Arkansas to continue sorting out the dispute.
Suzan Taylor owns residential property in Hot Springs National Park, Arkansas. In early 2018, Taylor worked with an independent insurance agent to apply for home insurance from Hiscox Dedicated Corporate Member Limited. Taylor and her agent completed an industry-standard application form which included the following question: "Has the applicant had a foreclosure, repossession, bankruptcy or filed for bankruptcy during the past five (5) years?"
Taylor answered no. However, "[o]nly six days before Taylor submitted her application," Taylor's mortgagee had issued a "Notice of Default and Intention to Sell." The document set a date and time when Taylor's home would be sold. Through her attorney, Taylor reached an agreement with the mortgagee, and her house was not sold. Taylor did not disclose these events in her insurance application to Hiscox. Relying on her application, Hiscox issued a policy to Taylor.
Six months later, a fire destroyed Taylor's home. She submitted a claim under her Hiscox policy. But during its claim investigation, Hiscox discovered that Taylor had not disclosed the foreclosure proceedings. Hiscox rescinded the policy and refused to pay Taylor's claim. Hiscox then sought a declaratory judgment from the district court for the Western District of Arkansas that it had properly rescinded the policy and had no obligation to Taylor. Taylor asserted counterclaims for breach of contract, bad faith and improper rescission.
The district court agreed with Hiscox that Taylor's answer in the negative to the question of whether she had "had a foreclosure" on the policy application was a material misrepresentation. The district court held that the application "question was unambiguous because the filing of the foreclosure against the Residence obviously constituted a foreclosure." Taylor appealed.
The Eighth Circuit reviewed the district court's decision de novo under Arkansas substantive law, which provides that "an insurer may rescind an insurance policy if the policyholder made a material misrepresentation on the application, even if the misrepresentation is unrelated to the loss sustained." The Eighth Circuit agreed with the parties that applications for insurance, like insurance policies, are interpreted "in favor of the insured and strictly against the insurer" under Arkansas law.
On appeal, Taylor argued that the phrase "had a foreclosure" either unambiguously refers to a foreclosure sale or is ambiguous and should be construed in her favor. Hiscox agreed with the district court that the term "foreclosure" unambiguously includes the initiation of foreclosure proceedings.
The Eighth Circuit agreed with Taylor, finding the application question ambiguous. First, the court observed, "the term 'foreclosure' commonly means different things depending on the context in which it appears. Sometimes people use the word 'foreclosure' to mean the foreclosure sale itself …. The word can also reasonably mean the process leading up to that sale."
In reading the term "foreclosure," the Eighth Circuit agreed with the Sixth Circuit's reading of a similar insurance term in Provident Bank v. Tennessee Farmers Mutual Insurance Co., ("'Foreclosure' is capable of two reasonable interpretations and therefore is ambiguous."). The Eighth Circuit rejected Hiscox's insistence that Black's Law Dictionary and Arkansas statutes show that "foreclosure" unambiguously includes the initiation of foreclosure proceedings, relying instead on the common understanding of foreclosure, which can be either the "commencement of [the foreclosure] process or its completion by sale."
Moreover, the Eighth Circuit parsed the question to which Taylor responded and viewed as material to its analysis that the question asked, "not only whether the applicant had had a foreclosure but also whether the applicant had had a 'bankruptcy or filed for bankruptcy.'" The court observed that while bankruptcy, like foreclosure, is a "procedure that culminates in an event that alters the rights of the parties involved," the insurance application question "was careful to distinguish between the commencement of that process ('filed for bankruptcy') and the culmination of it (just 'bankruptcy'). The application doesn't draw a similar distinction for foreclosures."
The court found it unimportant why the application might have included this distinction for bankruptcy because, regardless, "a reasonable applicant might understand the difference in treatment between foreclosures and bankruptcies as an invitation to disclose only foreclosures that were completed with a sale." Nor did the court find persuasive Hiscox's purpose-driven rationale that it "was important for it to know if foreclosure proceedings had been commenced" to assess the applicant's risk. The court admonished, "[i]f Hiscox wanted certain information so it could make an informed insurance decision, it should have asked Taylor for it in a clear, unambiguous way."
The Eighth Circuit further found unpersuasive Hiscox's suggestion there was "no reason to apply the typical rule that ambiguities are construed in favor of the insured" because "it did not draft the form in question." Hiscox admitted that it regularly used the standard form Taylor submitted and did not dispute that it required applicants to use that form or something similar. Because "[t]he rule about construing ambiguities in favor of the insured applies not only when the insurer drafts the words in question but also when it 'chooses' those words," the court held the ambiguity should be resolved in Taylor's favor.
All told, the Eighth Circuit held "the question asking Taylor whether she had 'had a foreclosure' was ambiguous and so her response in the circumstances was not a misrepresentation entitling Hiscox to rescind the policy."
Whether Taylor will get her claim paid, however, remains to be seen. Though the district court resolved the motions for summary judgment on the "had a foreclosure" question alone, Hiscox alleged a number of other material misrepresentations by Taylor in her application that could also provide grounds to deny her claim and rescind her policy. The Eighth Circuit thus "le[ft] those matters to the district court to sort out in the first instance on remand."
Gina Tonn is an attorney at the Minneapolis litigation boutique Greene Espel PLLP. Gina provides business clients with advice and counsel in a variety of litigation matters. Before joining Greene Espel, she clerked for The Honorable Jane Kelly at the Eighth Circuit Court of Appeals as well as The Honorable John R. Tunheim at the U.S. District Court for the District of Minnesota—and she brings her significant clerkship experience to bear in her work with clients. Gina is a graduate of the University of Minnesota Law School, where she was Editor-in-Chief of the Minnesota Law Review.
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