Misrepresentation, Cancellation, and Voiding of Policy
September 28, 2015
In this declaratory judgment action, the insureds appeal an order granting summary disposition in favor of the insurer. This case is Auto-Owners Ins. Co. v. Motan, Docket No. 321059, 2015 WL 5247261 (Mich. App. Sept. 8, 2015).
The litigation concerns a commercial insurance policy entered into between M&S Quick Stop and Auto-Owners Insurance. The agent for M&S contacted an independent agent indicating that he wanted to purchase insurance for M&S. The insurance agent filled out an application and the agent signed it without reviewing it for accuracy.
The policy was issued by Auto-Owners. Subsequently, after an investigation, the insurer sent a notice of cancellation to M&S based on misrepresentations in the application. M&S claimed in the application that no previous policy had been cancelled. The fact was that M&S had one previous policy non-renewed and another cancelled for nonpayment of premiums. M&S also asserted that it had no previous losses or claims when in fact, several claims had been made. And, M&S was also cited by the state for non-sufficient funds checks.
After the notice of cancellation was sent but before it became effective, M&S was destroyed by fire. A claim was submitted to Auto-Owners, but the claim was denied. The insurer filed a declaratory judgment action seeking a declaration that the policy was void by virtue of several misrepresentations in the application. The trial court granted summary judgment to Auto-Owners and M&S appealed.
The Court of Appeals of Michigan noted that it is well-settled that an insurer may rescind an insurance policy because of material misrepresentation in the application for insurance. In this instance, moreover, the policy stated that the coverage would be void in any case of fraud by the named insured or if the named insured or any other insured intentionally concealed or misrepresented a material fact concerning the covered property.
M&S did not dispute that the application contained numerous misrepresentations but it argued that Auto-Owners waived its rights to rescind or void the policy once it chose to cancel the policy at a specific future date and thereafter required the insured to pay premiums for coverage up to the effective date of cancellation. The court disagreed.
The court said that the insurer based its cancellation on a failure by the insured to disclose the cancellation of a previous policy due to non-payment. Subsequently, Auto-Owners discovered additional misrepresentations and then sought rescission of the policy. In other words, said the court, the misrepresentation that formed the basis for the decision to cancel the policy was different from the misrepresentations that formed the basis for the subsequent decision to void the policy. Because there is no evidence that the insurer was aware of the additional misrepresentations at the time it cancelled the policy, it did not waive its right to later rescind or void the policy.
M&S also argued that Auto-Owners was not entitled to rescind or void the policy because there are genuine issues of material fact as to whether the misrepresentations were material or intentional. The court disagreed with this argument.
The court pointed out that the insurer provided an affidavit from an underwriter who averred that the misrepresentations were material and that Auto-Owners would not have issued the policy had it been aware of the various misrepresentations. It was clear to the court that Auto-Owners relied upon the misrepresentations in the application to determine that M&S was eligible for insurance coverage and to determine the premiums to be paid. Given its reliance, the insurer was entitled to rescind the policy.
The only remaining question facing the appeals court was whether Auto-Owners had to return all premiums paid by M&S. The court found that case law determined that an insurer cannot earn a premium without having to provide coverage. The insurer must either rescind the policy upon discovering misrepresentations and refund the premium or cancel the policy, retaining the premium earned until the effective date of the cancellation. The insurer cannot have its premium and deny coverage too.
The appeals court affirmed the trial court ruling in favor of Auto-Owners but also remanded the case to that court with instructions to order the insurer to return all premiums paid by M&S.
Editor's Note: The Court of Appeals of Michigan agreed with the trial court that the insurer has a right to rescind an insurance policy because of material misrepresentations in the application for insurance. The court also declared that an insurer cannot earn a premium without providing coverage. In this instance, Auto-Owners had a right to rescind the policy but it had no right to retain any premium paid by M&S since no coverage was provided at any time based on the rescission of the policy.