Breach of Warranty Allows Insurer to Void Policy

False Statement on Application Attached to and Made a Part of Policy is a Breach of Warranty and Allows Voidance of Policy

The Supreme Court of Ohio was asked to determine whether specific language in an insurance policy was sufficient to warn the insured that misstatements as to warranties in her application for the policy rendered the policy void from the beginning (“void ab initio”).

In Nationwide Mutual Fire Insurance Company v. Pusser et al., Slip Opinion No. 2020-Ohio-2778, No. 2018-1137, Supreme Court of Ohio (May 6, 2020) the trial court granted the insurer summary judgment only to be reversed by the court of appeal and submitted to the Supreme Court.

FACTS

This case involves an automobile-insurance policy between Diane Lapaze, and Nationwide Mutual Fire Insurance Company (“Nationwide”). Barbara Pusser is Lapaze’s sister and lived with Lapaze when Lapaze obtained the insurance policy from Nationwide. On August 13, 2012, Pusser was driving the car covered under the policy when it struck a pedestrian, Robert D. Boak, who died as a result of the accident.

The application that Lapaze submitted to Nationwide indicated that she was the only member of her household; neither Pusser nor any other person was listed as a member of Lapaze’s household. The application was incorporated into the policy under the policy’s terms.

Nationwide sought declaratory judgment claiming that it had issued the policy in reliance on the information in Lapaze’s application and that because of Lapaze’s misstatements, the policy was void ab initio based on the following language in the policy: “If it is determined that any warranty made by the policyholder is incorrect, this policy may be held void ab initio.” The policy also stated that information provided in the application about “other operators in the household” was a warranty, which “if incorrect, could void the policy from the beginning.”

The trial court granted summary judgment to Nationwide, determining “that the automobile insurance policy in question was ‘void ab initio‘ * * * due to breach of warranties contained in the policy and policy application concerning disclosure of all drivers and other operators in Diane Lapaze’s household.” The Seventh District Court of Appeals reversed.

ANALYSIS

The Misstatement Regarding The Warranty In The Application For The Insurance Policy Rendered The Policy Void Ab Initio

Nationwide sought a declaration that: “an insurance policy sufficiently warns the insured of the consequences of warranty misstatements where the policy states that it ‘may be held void ab initio.’”

When an insured’s statement is a warranty, a misstatement of fact voids the policy ab initio. For the policy to be void ab initio, however, the insurer must have included a statement in the policy to the effect that the representation in the application is a warranty or incorporated by reference the application into the policy.

The Supreme Court noted that Nationwide plainly incorporated the application into the policy. The policy states, “The application for this policy is incorporated herein and made a part of this policy. When we refer to the policy, we mean this document, the application, the Declarations page, and the endorsements.” (Emphasis deleted.) The policy also states that answers provided to questions in the application are warranties, which “if incorrect, could void the policy from the beginning.”  And it says that information provided regarding “other operators in the household” is a warranty.

In reversing, the court of appeals determined that the language included in the policy was insufficient to plainly warn Lapaze that the policy could be rendered void ab initio because the language “speaks of possibilities, not certainties.” To the Supreme Court the court of appeals appeared to have been persuaded by the on-its-face nonmandatory nature of the word “could.” But the nonmandatory nature of the word “could” does not change the fact that the policy baldly states that a misstatement in the insured’s warranty, which plainly occurred here, renders the policy subject to being void ab initio.

That Nationwide could void the policy is patent, regardless of whether Nationwide used the word “could” in the policy (as opposed to “shall”), because the insured is sufficiently forewarned that a breach of warranty can lead to a void policy.

An insurer is not required to itself void an insurance policy and return the insured’s premium before the insurer may file a complaint for declaratory judgment

Nationwide submited that “an insurer is not required to void a policy and return an insured’s premium before bringing a declaratory judgment action regarding whether the insurance policy is void ab initio.”

The court of appeals determined that because Nationwide had failed to itself declare the policy void and return Lapaze’s premium to her, it failed to even attempt to void the policy by its terms. The Supreme Court concluded that the court of appeals’ reasoning unduly elevated form over substance.

Nationwide’s suit for declaratory judgment was a blatant attempt to have the policy judicially declared void. Requiring Nationwide to itself declare the policy void and return Lapaze’s premium before seeking a declaratory judgment would likely have served no purpose and been uneconomical, not to mention that such a requirement would leave an insured without insurance during the pendency of the declaratory judgment action. Once an insurance policy has been judicially declared void, an insurer can return any premium that the insured paid on the policy.

ZALMA OPINION

The Supreme Court concluded that the insurance policy involved in this case plainly stated that a breach of a warranty in the application for the policy rendered the policy void ab initio, that is, from its inception. Ohio requires a warranty while other states allow misrepresentation or concealment of a material fact to rescind a policy from its inception. A warranty, by definition, if breached is always material.


© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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