Misrepresentation and Policy Voidance
The insureds, whose garage was destroyed by fire, filed an action against the insurer for breach of contract and intentional infliction of emotional distress. The insurer claimed misrepresentations in filing the insurance application allowed coverage to be voided. This case is Dodd v. American Family Mutual Insurance Company, 956 N.E.2d 769 (Ct. App. Ind. ).
Michael and Katherine were not yet married and they lived together in Katherine's house. In 1998, the house was destroyed by fire. The insurer at that time paid for the loss but did not renew the policy. Later that year, Michael executed an application for homeowners insurance from American Family on a new house, and on the application, Michael indicated that he had not had any past losses at any location. He further stated that his girlfriend, Katherine, would live in the house. The policy was issued to Michael in December, 1998.
Michael and Katherine married in 2000, and Michael regularly renewed the home insurance policy with American Family and his name alone was on the policy. In 2003, the garage and its contents were destroyed by fire and the Dodds submitted a claim to American Family. During the investigation of the fire loss, the insurer learned about the 1998 fire that had destroyed the previous residence and so, the insurer denied coverage for the garage loss. The Dodds sued for breach of contract. The insurer filed a motion for summary judgment and the trial court granted the motion. This appeal followed.
The appeals court noted that the Dodds concede the fact that Michael made a material misrepresentation in his application for homeowners insurance from American Family. Nevertheless, the parties dispute the impact of the misrepresentation upon the validity of the insurance policy.
The Dodds argued that the misrepresentations merely rendered the insurance policy voidable at American Family's option, and they contend that the insurer did not follow the appropriate steps to exercise its option to void the policy. Specifically, the Dodds said that the insurer did not return the policy premiums and in the absence of an effective election by American Family to void or rescind the policy, the policy remained in effect. American Family countered that Michael's material misrepresentation rendered the policy void from the outset. As a result, the insurer said it was not obligated to return the premiums in order to deny the claim.
The court said that the applicant for insurance failed to disclose material facts relevant to the insurance coverage. Specifically, Michael requested insurance in his name alone rather than in his and Katherine's names, and he failed to disclose the prior fire loss. In this instance, the court decided, Michael's misrepresentations applied to his insurance coverage and voiding coverage for Michael results in voiding the entire policy.
The court concluded that the policy was subject to full rescission, but the policy was voidable at American Family's option rather than void at the outset. The court reviewed the policy wording and noted that it provided that the insurer “may void this policy if the statements you have given us are false and we have relied on them”. This clause clearly stated to the court that the policy is voidable at the insurer's option, rather than void from the outset.
As for the insurer's failure to return the premium, the court said that state law invalidates an insurer's attempt to rescind an insurance policy when that is the case. However, American Family did tender the policy premium to the trial court, but this was after final judgment had been entered. Under these circumstances, the appeals court ruled that there are disputes of material fact as to whether American Family effectively rescinded the policy after discovering the material misrepresentation. Thus, the matter had to be addressed by the trier of fact and not summarily dismissed.
The ruling of the trial court was affirmed in part and reversed in part. The misrepresentations in the filing of the insurance application rendered the policy voidable at the insurer's option, but issues of material fact precluded summary judgment on the breach of contract claim.
Editor's Note: The Court of Appeals in Indiana emphasized two principles in this decision that should be noted. The court held that material misrepresentations on an application for insurance render an insurance policy voidable rather than void at the outset. And, failure to return a premium invalidates an insurer's attempts to rescind an insurance policy.
So, even though the American Family policy stated that the policy was void if any insured made a material misrepresentation, the court ruled that, actually, the policy was voidable; there is a clear distinction. And, even though the opinion on the failure to return a premium is based on Indiana precedent, insurers should be aware of similar court rulings in other jurisdictions.