Claim of Material Fraudulent Misrepresentation Has to be Proven
The insurer filed a declaratory judgment action against the driver, the driver's mother, and passengers injured in an auto accident, claiming that there was no duty to defend or indemnify for the liability claims against the insured. This case is North East Insurance Company v. Young, 2011 WL 3585463 (Me.). (Note that this opinion has not been released for publication in the permanent law reports at this time.)
Hutchinson , the named insured on the auto policy, asked her sixteen-year old son, Weeks, to drive her car and bring his younger sister to town. After dropping his sister off, Weeks picked up four friends, including Alley and Young. While returning home, Weeks crossed the centerline and collided head-on with a dump truck. All of the passengers in the car were injured.
After an investigation of the accident, the insurer, North East, filed a declaratory judgment action alleging no duty to defend or indemnify on the grounds that Hutchinson made material fraudulent misrepresentations in applying for the auto insurance. The Superior Court, Cumberland County , granted the insurer's motion for summary judgment and this appeal followed.
The Supreme Judicial Court of Maine noted that, based on the evidence, Hutchinson contacted her insurance agent over a period of several months before the accident concerning insurance coverage for her auto but did not mention her son as a driver of the insured car. In fact, Hutchinson responded “no” when asked the following questions: are there any other residents in the household 14 or older; and, are there any other drivers licensed in or out of the household. The trial court saw this evidence as clearly establishing that Hutchinson fraudulently misrepresented or omitted material information about her son during the application process. Accordingly, the court declared that the rescission of the auto policy was proper, and the insurer had no duty to defend or indemnify Hutchinson or Weeks.
The appeals court said that, pursuant to state law, recovery from an insurance policy may be denied upon proof that a misrepresentation, omission, or concealment was fraudulent and material to the acceptance of the risk; both elements must be established in order for the insurer to prevail. In order to establish the first element, a party must demonstrate the following: a failure to disclose a material fact, where a legal or equitable duty to disclose exists, with the intention of inducing another to act or to refrain from acting in reliance on the nondisclosure, and that is in fact relied upon to the aggrieved party's detriment. The court added that proof (clear and convincing) that an individual had the intention to induce action in reliance on a material omission is essential in this context.
In this case, the court found that a genuine dispute of material facts existed. In particular, the parties disputed whether Hutchinson intentionally omitted naming Weeks as a driver living in her home in order to obtain insurance, and whether a reasonable insurer would have denied coverage or would have required a higher premium than the agreed rate if aware of Week's presence in the household. Moreover, the record showed that Hutchinson said she answered the agent's questions based on an understanding that she was seeking insurance only for her husband and herself. She said she did not remember any questions asking about licensed drivers in her household. The court took this to show that the evidence did not demonstrate an undisputed fact that Hutchinson was asked the critical questions or understood the important purposes for which the insurance agent questioned her.
Accordingly, the court declared that the evidence was inconclusive concerning whether Hutchinson answered as she did out of carelessness, misunderstanding, or a fraudulent purpose to obtain insurance, and so, the entry of judgment is premature. The court said that a fact finder must evaluate the weight and credibility of the evidence to determine whether Hutchinson fraudulently omitted material information in order to obtain insurance, and whether North East would have issued the policy had Hutchinson provided information about her son. The lower court's judgment was vacated and the issue was remanded to that court for fact finding on the coverage issue.
Editor's Note: All standard insurance policies have fraud or misrepresentation clauses in them so as to give the insurer the right to void the coverage. However, an insurer claiming fraud or misrepresentation on the part of the insured is one thing; to prove it, is another. The court in this appeal relied on the point that the insurer must establish facts demonstrating fraudulent misrepresentation or omission by clear and convincing evidence. The insurer did not do so here and so, summary judgment for the insurer was denied.