Grossly Inaccurate Material Misrepresentation Leads to Rescinding of Coverage
October 16, 2017
Recently, the United States Court of Appeals for the Sixth Circuit has ruled that an insurance company was entitled to rescind coverage under a policy because the insured made a material misrepresentation of property value at the time it applied for coverage. The case is AMI Stamping, LLC v. ACE Am. Ins. Co., No. 16-2341, 2017 U.S. App. (6th Cir. Oct. 5 2017).
AMI Stamping, LLC (AMI) is a limited liability company in Michigan. The LLC has no employees, so it transacts business through its chairman or through the employees of an affiliate company called Revstone Industries, LLC (Revstone). Revstone purchased insurance for itself and affiliated entities through an insurance agency Todd Associates, Inc., and managing agent Spankie Carolanne, who is licensed to sell property insurance in the State of Ohio. As an agent, Spankie Carolanne obtains insurance based on risk characteristics and exposures that clients have. Revstone purchased a commercial properties policy from ACE, issued by ACE's managing general agent Starr Technical Risks Agency, Inc. The policy included replacement cost coverage and a Commercial Property Conditions provision that voided coverage if the insured “intentionally concealed or misrepresented a material fact concerning” the covered property.
AMI acquired a security interest in a building in Detroit, Michigan, including the equipment and machinery stored in the building. AMI sent an “appraisal of the equipment” to the agent, Carolanne that identified each piece of machinery and equipment, and listed its value. AMI reported a total value of $138,100. The agent asked an agent at Starr, and effectively ACE, to add the property to Revstone's policy. The building was valued at $1,920,000 and “the value of the personal property (per appraisal) is $138,100, which consists entirely of machinery and equipment.”
ACE endorsed the Revstone policy adding AMI as an Additional Insured. The property was added to the schedule of insured locations. The premium was set at $1,499, in reliance on information from Carolanne for asset values.
The equipment was later stolen. AMI notified ACE who later contacted AMI to “finalize the claim” and confirm that the exact amount of the claim was $138,100. AMI responded that it was not, and AMI would be submitting a replacement cost valuation because the policy provided for payment of the equipment's replacement cost. AMI commissioned an appraisal of the replacement cost value of the equipment that had been stolen. The appraiser concluded the equipment was worth $1,907,000. AMI submitted a proof of loss for that amount. ACE declined to pay the claim, rescinded coverage, and refunded all of the premiums that AMI had paid. ACE contended that it was entitled to rescind because AMI had vastly misrepresented the equipment's value during the insurance application process.
The circuit court ruled that ACE had properly rescinded coverage. AMI contended that it had not made any misrepresentation because it had been asked for an “appraisal” of the equipment's value and that was what it had provided. The circuit court explained that accurate valuations are important to an insurer's risk estimate and premium calculations. If ACE had known that the property was valued at nearly 1.9 million dollars, they would have charged more than $1,499 a year to insure the property. Ami conceded that if it had made an unintentional misrepresentation, contract provisions regarding misrepresentations do not operate as a waiver of common law rights of rescission. AMI failed to establish a genuine issue of material fact that it made a material misrepresentation in applying for insurance coverage on which the ACE relied, so ACE was entitled to rescind the policy regardless of whether the misrepresentation was innocent or intentional.
Editor's Note:
Although it seemed like a good idea at the time to misrepresent the actual worth of the personal property that AMI had, likely saving AMI over $200,000 in premiums each year the policy was in place, when the property was stolen the actual cash to AMI amounted to much more than $200,000 per year. The company will now have to replace all of the stolen equipment themselves, because the court ruled that the insurance company was justified in cancelling the policy due to misrepresentation. If the misrepresentation had not been so vast, perhaps the initial estimate was correct and AMI just recently added a new piece of equipment to their stock, this would not be considered a material misrepresentation. In the case at hand, the misrepresentation was so vast that it would have unjustly burdened the insurance company.