Offer to Return Premium not Required as Prerequisite to Policy Rescission
September 3, 2013
The insureds, whose garage was destroyed by fire, brought an action against the insurer for breach of contract and intentional infliction of emotional distress. This case is Dodd v. American Family Mutual Insurance Company, 983 N.E.2d 568 (2013).
The Dodds owned a home insured by Farm Bureau Insurance. That home was destroyed by fire in 1998. Seeking to rebuild their home, the Dodds completed an application for property insurance with American Family Insurance Company. The application asked if the applicant had any past losses at any location, The Dodds answered in the negative. The policy was issued by American Family.
In 2003, a fire destroyed the garage and the Dodds filed a claim. During the investigation to determine the cause of the garage fire, the Dodds disclosed the 1998 fire and the insurer, treating the prior fire loss nondisclosure as a misrepresentation, voided the policy and denied coverage for the garage loss. The insureds filed a lawsuit. The trial court ruled in favor of the insurer and this appeal followed.
On appeal, the Dodds challenged the grant of summary judgment to the insurer on the grounds that American Family failed to return the premiums paid by the Dodds. However, approximately five months after the entry of final judgment and three-and-a-half months after the Dodds filed their notice of appeal, American Family filed a motion with the trial court to interplead all of the premiums it had collected from the Dodds and the court agreed to hold the funds until the conclusion of the appeal.
The Supreme Court of Indiana said that it is correct that an insurer must first offer to return the premiums it has collected from the insured within a reasonable time after the discovery of the alleged breach. Failure to offer such return of premiums, or if refused, to pay it into court, constitutes a waiver of the alleged fraud. However, the court noted that the Dodds did not assert any claim that American Family had failed to tender the premiums paid or that such failure was a prerequisite to the voiding of an insurance policy on the grounds of material misrepresentation in the policy application. Furthermore, the Dodds did not identify any designated evidence showing any failure by American Family to tender the paid premiums.
The court said that even if such an argument by the Dodds had been made, the law provides an exception to the requirement that an insurer tender a return of the premiums in order to rescind a contract. Under this exception, such a tender is not necessary where the insurer has paid a claim thereon that is greater in amount than the premiums paid. The law, as well as equity and good conscience, does not require the insurer to return the premiums where the insured was the insurer's debtor for more than the amount thereof. In this instance, the evidence showed that American Family had previously paid a claim to the Dodds for hail damage in the amount of $5,500. So, given the fact that the amount of premiums at issue is $2,079.80, the Dodds could not prevail on their claim of failure to tender premiums in any case.
The Supreme Court affirmed the trial court's grant of summary judgment to American Family.
Editor's Note: The Supreme Court of Indiana rules that, in order to rescind a policy based on alleged fraud, the insurer must first offer to return the premiums it has collected from the insured within a reasonable time after the discovery of the alleged fraud. However, such an offer to return paid premiums is not necessary as a prerequisite to rescinding the policy when the insurer has paid a claim that is greater in amount than the premiums paid.