Material Misrepresentation and Coverage under Homeowners Policy

The insurer brought an action to rescind coverage under a homeowners policy, alleging that the insureds made a material misrepresentation. The trial court ruled in favor of the insurer and an appeal was made by the insured to the Court of Appeals of Georgia . This case is Pope v. Mercury Indemnity Company of Georgia, 677 S.E.2d 693 (2009).

In July 2004, the Popes, acting through their independent insurance agent, Woodworth, applied for a homeowners policy with Mercury Indemnity. In response to specific questions in the application, the Popes admitted they had a swimming pool, a diving board, and a trampoline. Mercury issued the policy with effective dates of July 13, 2004 to July 13, 2005. On August 20, 2004, an underwriter at Mercury sent a notice to the agent informing him that the policy was being cancelled due to the presence of the diving board and trampoline. After a discussion with the agent, the underwriter agreed to reinstate the policy if the Popes would remove the diving board. Woodworth had the Popes remove the diving board and took pictures of this to show the insured. The policy was then reinstated. Sometime after providing the pictures to Mercury, the Popes reinstalled the diving board.

In July 2005, the Popes' property sustained significant tornado damage. The adjuster sent by Mercury to assess the damage took pictures of the property and the diving board. Mercury then initiated a lawsuit seeking to rescind the policy based on the insureds' material misrepresentation that they had permanently removed the diving board. The trial court granted judgment to the insurer and this appeal followed.

The appeals court noted that Georgia law stated: misrepresentations, omissions, concealment of facts, and incorrect statements made by an insured during negotiations for an insurance policy will bar recovery under that policy where they were material either to the acceptance of the risk or to the hazard assumed by the insurer. Moreover, to avoid coverage under this statute, the insurer only had to show that the representation was false and that it was material.

The unrefuted evidence in this case showed the appeals court that the presence (or absence) of a diving board was material to Mercury's decision as to whether to insure the Popes. After all, the insurer had originally cancelled the policy because of the diving board, and agreed to reinstate the policy only after the board was removed. Moreover, the director of underwriting at Mercury testified that Mercury does not provide coverage to homeowners who have diving boards because Mercury is not willing to underwrite that type of risk. Therefore, the appeals court upheld the decision of the trial court.

The Popes had argued that the trial court was in error because the misrepresentation regarding the removal of the diving board was not in their application for insurance. However, the appeals court said that the statute allowed the barring of coverage for misrepresentations when they were made either in any application or in negotiations for a policy. In this instance, the Popes agreed to remove the diving board in exchange for reinstatement of the policy and this to the appeals court was part of negotiations for insurance coverage. The evidence was sufficient to establish that the Popes participated in the reinstatement process and, in doing so, made a material misrepresentation to the insurer.

Editor's Note: Most, if not all, insurance policies have the concealment or fraud condition clause allowing the insurer to cancel coverage if the insured has engaged in fraudulent conduct or misrepresentation of material facts or circumstances. How this clause is enforced varies according to individual state law, but if the insurer has facts to support its position (such as Mercury had in this case), the argument for policy rescission is made that much easier.