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DTCI: Rescission of insurance policies

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stafford Stafford

If an insurance carrier discovers that its insured has misrepresented information provided in an insurance application, the insurer may have a remedy under Indiana common law: Rescind the insurance policy.

An insurer has a right to rescind a policy of insurance if an insured makes a material misrepresentation or omission of fact in its insurance application. Colonial Penn Ins. Co. v. Guzorek, 690 N.E.2d 664, 672 (Ind. 1997). The policy is voidable at the insurer’s option. Id. Some courts have stated that rescission is possible because the material misrepresentation by the insured prevents the required “meeting of minds” between the parties to the contract regarding the risk to be insured. Foster v. Auto-Owners Ins. Co., 703 N.E.2d 657, 659 (Ind. 1998).

The function of contract rescission is to restore the parties to their pre-contract position. Gary Nat’l Bank v. Crown Life Ins. Co., 392 N.E.2d 1180, 1182 (Ind. Ct. App. 1979); American Standard Ins. Co. v. Durham, 403 N.E.2d 879, 881 (Ind. Ct. App. 1980). Therefore, an insurer must return any and all premiums paid by the insured in order to effectively rescind an insurance policy. Id.

Materiality of the misrepresentation

The materiality of the misrepresentation or omission that is the basis of the rescission is a question of fact to be resolved by the fact-finder unless the evidence is such that there can be no reasonable difference of opinion. Prudential Ins. Co. of Am. v. Winans, 325 N.E.2d 204, 206 (Ind. 1975). What exactly constitutes a “material misrepresentation” has been debated. Some courts in Indiana have found a misrepresentation is material if the insurer would have refused to insure the risk or would have charged a higher premium to insure the risk had the insurer known all the facts. Colonial Penn v. Guzorek, 690 N.E.2d at 672-73. This position focuses on whether the misrepresentation was material to the underwriting decision to issue the policy and rescinds the entire policy. The materiality may also be weighed not against the underwriting decision but instead against the loss incurred. In other words, “coverage of the incurred loss would be voided if the misrepresentation affected that risk, but not all coverage would necessarily be voided” (i.e., partial rescission). Id.

The Indiana Supreme Court spoke to these issues in Colonial Penn v. Guzorek. In Guzorek, Colonial Penn sought a declaration that the automobile insurance policy it issued to Dorothy Guzorek was void and thus provided no liability coverage for an accident that occurred while Dorothy’s husband, Donald, was driving an insured vehicle. Id. The application for insurance asked for a list of all licensed drivers in the house. Since Donald had a suspended license at the time of completing the automobile insurance application, Dorothy listed only herself as a licensed driver. In addition, in the application Dorothy listed only herself as a “customary operator” even though she knew Donald drove (without a license) to and from work.

The trial court entered summary judgment in favor of Dorothy and Donald and the Court of Appeals affirmed. Id. at 667. On transfer to the Indiana Supreme Court, Colonial Penn argued that there was no coverage for Donald for the accident because the policy was void ab initio (from its inception) due to Dorothy’s failure to include in her application that (1) Donald lived with her, (2) Donald had a suspended license, and (3) Donald drove on a regular basis. Id. at 671. Colonial Penn stated that had it been aware of this information, it would not have insured Dorothy or Donald based on its underwriting guidelines. Id. In analyzing the two materiality definitions regarding material misrepresentations, the court stated:

Under the first view of materiality, Colonial Penn could rescind the policy even if Dorothy had been the driver, because Colonial Penn claims it would not have written a policy for her due to Donald’s presence in the household. We accept Colonial Penn’s assertion of its underwriting guidelines. Under the second view, Dorothy would still receive the coverage that would have issued had the facts represented in the application and relied on by the insurer actually been true. Stated another way, the insurer would retain those risks it knew it was accepting based on the information in the application, and if Dorothy rather than Donald were the operator coverage would be found. Under either view, Donald is not covered because his existence as a spouse and his driving record are clearly material to the loss actually incurred. However, the parties do not address and we do not decide whether the law would permit complete rescission of the policy or only reformation to conform to the facts represented in the application.

Id. at 673-74.

Reconciling the materiality definitions

In discussing whether an insurer’s common-law right to rescind a policy can coexist with financial responsibility laws requiring drivers to carry minimum levels of liability insurance, the court in Guzorek recognized that a public policy existed against rescission of automobile insurance policies because rescission may put other innocent drivers at a disadvantage and place them in a position where they may not be fully compensated for a loss. Id. at 671. Ultimately, the court found that an automobile policy could be rescinded in circumstances where the accident victims could be compensated through their own uninsured motorists coverage. Id. at 672. The court “[left] for another day” the issue of whether an insurer can rescind an automobile policy when an accident victim has no uninsured motorists protection. Id.

Based on the discussion in Guzorek regarding financial responsibility laws, other courts in Indiana have limited the application of the second definition of materiality to cases involving automobile insurance policies. See Allianz Ins. Co. v. Guidant Corp., 884 N.E.2d 405 (Ind. Ct. App. 2008); Allied Prop. & Cas. Ins. Co. v. Good, 938 N.E.2d 227 (Ind.Ct.App. 2010). In limiting the use of the second definition, the court in Guidant, noted that “[i]t is apparent that ‘the law’ to which the [Guzorek] court was referring was the financial responsibility law, not contract law, because general contract law plainly permits the complete rescission of a contract.” Allianz v. Guidant, 884 N.E.2d at 415.

The two materiality definitions can be reconciled. The first definition measuring the materiality against the underwriting decision deals with situations where the underwriting decision would have been affected by the information misrepresented. Rescission based on this definition will typically be effective when an insurer has a written underwriting guideline specifying its policy to not insure certain types of risks or can otherwise affirm that such types of policies would never have been written. The second definition measuring the materiality against the loss incurred suggests that, even if the insurer would have written the risk otherwise, the misrepresentation can still lead to bar coverage for a particular loss if the misrepresentation affected the loss. Although it is unsettled whether the second definition is applicable only to the rescission of automobile insurance policies, it arguably can be applied in any circumstance in which at least a portion of the coverage would have been issued irrespective of the misrepresentation.

Waiver of right to rescind

An insurer can rely on the representations made in an insurance application and has no independent duty to extend its resources to conduct investigations to determine the truthfulness of the information contained in an application. Colonial Penn v. Guzorek 690 N.E.2d at 674; State Farm Mut. Auto. Ins. Co. v. Price, 396 N.E.2d 134, 137 (Ind. Ct. App. 1979). However, an insurer can waive its ability to rescind a policy if it has actual knowledge of a misrepresentation or has sufficient information to place it on inquiry notice of a misrepresentation in an application. Colonial Penn v. Guzorek, 690 N.E.2d at 674; Allied Prop. v. Good, 938 N.E.2d at 232; see also American Family Mut. Ins. Co. v. Kivela, 408 N.E.2d 805 (Ind. Ct. App. 1980) (insurer’s right to rescind the policy was waived when before the date of loss the insurer had actual notice of a misrepresentation on the application regarding the spouse’s poor driving record). If an insurer has sufficient information to place it on inquiry notice of a potential falsity in the application at issue, it may wish to conduct a reasonable investigation of the potential false information. If it does not, whatever facts would have been discovered in a reasonable investigation may be imputed to the insurer and can result in the insurer waiving its right to rescind the policy.

An insured’s intent to deceive the insurer in an application is irrelevant to an insurer’s right to rescind a policy in Indiana. However, if an insured knowingly makes a misrepresentation in an application, an insurer may be able to overcome a waiver argument presented by an insured and successfully rescind a policy. As noted in Guzorek, even if an insurer takes steps to investigate the truthfulness of the application information and fails to notice inconsistencies in the application, the insurer’s actions amount only to negligence. Colonial Penn v. Guzorek, 690 N.E.2d at 675. Although negligent, the insurer’s actions will not trump a material misrepresentation made by the insured with knowledge of, or reckless disregard for, the falsity of the representation. Id. Therefore, if an insured intentionally misrepresents facts because, for instance, the insured knows the disclosure will result in no coverage, the insurer’s failure to reveal the inaccurate information during an investigation will not waive the insurer’s right to rescind the policy.

Effect of rescission on mortgagees

A question that may arise when a property insurance policy is rescinded is whether the insurer has a duty to indemnify the mortgagee for the amount of the loss sustained by a property owner despite the fact the policy was rescinded. Indiana courts have found that a mortgagee is entitled to payment when a claim is denied because of an insured’s actions (e.g., arson), if certain policy language is present. Property Owners Ins. Co. v. Hack, 559 N.E.2d 396, 400 (Ind. Ct. App. 1990). However, Indiana appellate courts are silent on the specific issue of whether, under a standard mortgage clause, an insurer’s rescission of a policy due to the insured’s material misrepresentations relieves it of its duties to a mortgagee.

Some jurisdictions suggest that, under a standard mortgage clause that provides that the insurance will not be invalidated by an act of the insured, the mortgagee is entitled to receive insurance benefits even if the insured, through its actions or omissions, caused the rescission of the insurance policy. The reasoning is usually that a standard mortgage clause creates an independent and separate contract between the insurer and mortgagee. See May v. Market Ins. Co., 387 So. 2d 1081 (La. 1980); Jones v. WestBanco Bank Parkersburg, 460 S.E.2d 627 (W. Va. 1995); Nationwide Mut. Ins. Co. v. Hunt, 488 S.E.2d 339 (S.C. 1997); Hartford Fire Ins. Co. v. Associates Capital Corp., 313 So. 2d 404 (Miss. 1975). Other jurisdictions have treated the issue differently, finding that an insurer could void a policy as to a mortgagee due to misrepresentations made on an insurance application by the insured. See Pacific Ins. Co. v. Kent, 120 F. Supp. 2d 1205 (C.D. Cal. 2000); Weekly v. Missouri Property Ins. Placement Facility, 538 S.W.2d 375 (Mo. Ct. App. 1976).

Because of the uncertainty under Indiana law surrounding an insurer’s obligation to a mortgagee included on a policy after rescission of the policy, if the insurer chooses not to pay the mortgagee for the principal of the loan (up to the policy’s “limits of liability”), an insurer may file a declaratory judgment action and seek a determination of its obligations by a court.

Summary

Although rescission is an area of law that continues to develop in Indiana and some questions remain regarding the application of the materiality definitions outlined in Guzorek, Guzorek provides a good road map of the law surrounding rescission that may be useful to insurers, insureds and their attorneys as they navigate the issues presented when a misrepresentation in an insurance application is discovered.•

Ms. Stafford is an attorney in the Indianapolis office of Kightlinger & Gray and is a member of the DTCI Insurance Coverage Section. The opinions expressed in this article are those of the author.

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  1. Am I the only one who sees that the City is essentially giving away the MSA site AND giving millions to build new buildings on the site when this site would be the perfect place for the Justice Complex? Across from City-County, check; keeping it centrally located, check, etc. It's my understanding that the GM site must be purchased by the City from Motors Liquidation Company. STOP WASTING WHAT WE ALREADY HAVE AND OUR TAX DOLLARS! The Ballard Administration has not been known for it's common sense...never voted for him and never will!

  2. This guy sounds like the classic molester/manipulator.

  3. Louis D. Brandeis was born in 1856. At 9 years of age it would have been 1865. The Brandeis family did not own slaves. My source Louis D. Brandeis: A Life, by Melvin L. Urofsky.

  4. My name is Matthew Lucas Major, I recently went through a jury trial in Bloomington , In. It was the week of Feb 19-21. Although I have been incarcerated since August 5, 2014. The reason I 'am writing to you sir is on the 21 of February the jury came in with a very excessive and wrongful verdict of guilty on 6 child molesting charges against my daughter who was 9 at the time I was accused. I also had 2 other Felonies one of Intimidation and 1 of Sexual Vicarious Gratification. Judge Marc Kellam on the second day of trial gave me a not guilty on those 2 felonies. The jury was sent out during that time and when brought back Judge Kellam told them to not concern themselves with the 2 Felonies that he ruled on them. They were told to not let evidence they had already heard influence there verdicts. I never in my life touched any child sexually and definitely not with my own daughter. When I was arrested Detective Shawn Karr told me I would be convicted guilty just on my daughters word even without evidence. That's just what happened. my public defender did me so wrong he never once proved to the court and jury all the lies the child told, and Jeremy Noel my public defender could of proven the lies easily. The stories in Serenity's depositions and Forensic interview changed and were not consistent as Prosecutor Darcie Fawcett claimed they were. Yet my attorney never mentioned that. The facts that the child accused me of full penetration in her vagina and rectum was proven lies. Doctor Roberta Hibbard of Riley hospital in Indianapolis confirmed Serenity's hymen intact, no scars, no tearing, no signs of rape to her. Yet my attorney didn't use that knowledge . the DNA was all in my favor. I tell you I will spend my entire life in prison going through rape and beatings etc. even Judge Kellam abused his authority by telling the jurors to listen and believe what the prosecutors side in evidence like my daughters testimony. In one interview with the detectives my daughter got flustered with her mom and said on camera " I'm saying what you told me to mom"!! Yet Mr. Noel said nor did anything to even resemble a defense attorney. Judge Kellam allowed edited version of a taped conversation between the child and her mother. Also Judge Kellam allowed the Prosecutor too bring in to my case a knife found under my seat, the knife wasn't part of my case. She was allowed by my attorney and the judge to put a huge picture of it on the screen and huge picture of my naked privates in a full courtroom and open court. Ms. Fawcett says to jury see how easy Mr. Major could reach the knife and cut his Childs throat. Even though I had no weapons charge against these cases. This gave the jurors prejudice thought against me thinking I threatened her with that knife and how scared she would of been knowing i could get it and kill her. On my sentencing court March 19, 2014 my public defender told Judge Kellam he wish to resign from being my attorney and wished for the court to give me outside council to file a error to trial or appeal. We were denied. Now after openly knowing my public defender don't want to represent me he has to. Well when as parents we make our kids clean a room when they really don't wish to, well the child will but don't mean she will do a good job, that's where I'm at with Mr. Noel. please dont ignore mine and my families pleas for your help . we have all the legal proof you could need to prove Im innocent. Please dont make my spend years in prison innocent when you can fix this wrong. Im not saying Im a perfect man or that I was a perfect dad to my 2 children none of us are. Ive made some bad choices in life and I paid for them. But I didnt ever touch or rape my daughter . I love my children with all my heart. And now through needing attention and a ex-wife who told my granny several times she wish she could put me in prison to get me out of their lives. Well my ex finally accomplished her goal. Sad part is she is destroying our daughter with all this horrific lies and things she taught my daughter to say. My daughter will need therapist to ever hope for a chance of a normal life after what she had done to her by her mom and their side of the family. My daughter told everyone even on stand she had a dream months before i supposedly molested her in this dream I was molesting her and when I finally did it matched her dream perfectly. She admitted to watching movies about little girls being molested and watching U-Tube videos about child molesting all before it happened supposedly to her. Doesn't that sound very unusual that a non molested 9 yr old would need to know so much about being molested? The only reason I could think a 9 year old would need so much information is to be prepared to know what to say and be able to say how it felt what took place etc.. So when questioned by authorities she would be prepared. And there again sir if a parent is pre grooming a 9 year old child she would need intimate details . Like telling her daughter about a couple moles on my private area. The child admitted to sneaking my cell and looking many many times at nudes of me and my girlfriend even one where my penis was entering my girlfriends vagina. In that picture my moles are obvious. Yet when prosecutor showed everyone in court my privates and pictures of the moles she said the only way the child would know about them is if she saw them for herself. My attorney once again said nothing about the pictures my child saw. Or could a ex-wife be able to describe my moles to help her case against getting rid of me? I beg you help me. This is my very existence. Ive lost everything , a good job, a wonderful girlfriend, my freedom, but worse thing Ive lost is my children. They were my reason to get up every morning and strive to be better. The wonderful bond I had with my Serenity is gone. After this I would be afraid to even hug her for fear of what next can they do to me. I'm not afraid to tell you I sit here in this cell and try to hold back my tears. Everyone knows you cant show weakness in prison. My life has already been threatened here at Wabash Valley Prison. After only 3 days of arrival. I was tricked into signing a waiver now Im in G Block General Population with 6 child molesting felony charges. Mrs. Hart as a 18 year old I almost died hooked to machines in hospital almost 1 month and now I know that fear was childish compared to this . I cant help but put emotions in this, after all Mrs. Hart Im human and God help Me I never been more afraid in my life. I didnt hurt my little girl I didnt touch her sexually. As much as it shreds me and fills my mind what Im facing I worry more about my mom and granny because of their great love for me mam they are suffering so deeply. I aint done this things but my loved ones suffering right along beside me and If you take my case you will be in essence freeing them also. I sent momma this letter and asked her to email it to you. I'm scared I have been done so unjustly by our legal system and I need you to fix this and give me freedom. I ask you please don't just ignore my pleas. Here in America its nice to be able to trust our legal justice system, well they destroyed my and my loved ones trust in our justice system . And I'm trusting in You !!! My entire family is suffering this nightmare with me. My 77 year old granny had a stroke and isn't doing so well. My single mother that raised 3 kids alone is dying from Lupus and since my arrest has stayed so sick and weary. Our lives torn to peices by a government I was taught I could trust in. my momma has tried so many innocent project and wrongfully accused and cant get anywhere. please please help me. A quote from the late Nelson Mandela: To be free is not merely to cast off ones chains, But to live in a way that respects and enhances The Freedom Of Others. I have Faith in you and your clinic to cast my chains off and give me freedom I do deserve as a wrongfully accused Man, son, brother, father, friend. Matthew Major DOC# 246179 Cause # : 53c02-1308-FA-000779 God Bless you. Please contact me with your decision so I know you made a life changing decision for me , just please at least write me so I know you care enough about your citizens to respond to cries for your help. You can speak openly with my mother Charlotte Spain (828) 476-0406: 71 Lakeview Dr. Canton, NC 28716 Thank You Matthew Major I know yall get thousands of request and inmates claiming innocence, and each person who are innocent deserve to have organizations like yours willing to fight for them and I give yall so much Thanks and I thank God everyday yall are out there caring enough to help free the innocents. Since discovering firsthand how easily lives and families can be destroyed by Poor Defense attorneys not doing their job . And Prosecutors allowed to do as they please in court

  5. Frankly, it is tragic that you are even considering going to an expensive, unaccredited "law school." It is extremely difficult to get a job with a degree from a real school. If you are going to make the investment of time, money, and tears into law school, it should not be to a place that won't actually enable you to practice law when you graduate.

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