Lie on Application — Lose All Coverage

Rescission Appropriate When Applicant Misrepresents Use of Vehicle

When a prospective insured seeks insurance he or she submits an application to an insurance company as the set of facts used by the insurance company in determining whether it is willing to offer the applicant a policy of insurance. The covenant of good faith and fair dealing imposed on every party to an insurance contract requires that a prospective insured truthfully respond to questions posed on the application for insurance. It matters not if the application was written, typed, or presented electronically and on line. When the applicant makes a misrepresentation of material fact to acquire the policy the insurer has the right to rescind the policy from its inception.

In Nationwide Property and Casualty Insurance Company v. Donald R. Faircloth, Jr., Robert Jones; Carolyn Jones; Randall Cohea, United States Court of Appeals, Eighth Circuit, — F.3d —-, 2016 WL 7448085 (December 28, 2016) the Eighth Circuit Court of Appeals, applying Arkansas law was asked to reverse the trial court’s summary judgment in favor of Nationwide.

BACKGROUND

In May 2013, Donald Faircloth applied online for an automobile insurance policy from Nationwide. The application asked Faircloth to identify the “primary use” of the vehicle from a multiple choice list. According to Nationwide’s reproduction of the online application, Faircloth had three choices: “Work/School (commute to/from, errands)”; “Pleasure (recreational driving)”; and “Business (deliveries, sales calls, taxi).” Faircloth answered “Work.” Nationwide approved Faircloth’s application and issued a policy.

On June 30, 2013, Faircloth hydroplaned, lost control of his vehicle, and crashed. On July 18, 2013, Nationwide decided to rescind Faircloth’s policy, Faircloth wrecked his car, and Nationwide rescinded the policy. Nationwide sought declaratory judgment that it had no duty to indemnify or defend Faircloth under the policy’s coverage because Faircloth made material misrepresentations in his online insurance application. The district court granted summary judgment to Nationwide, concluding that Nationwide was entitled to rescind the policy because Faircloth misrepresented the “primary use” of his vehicle.

Nationwide tendered the premiums to Faircloth with the notice of rescission. Faircloth did not accept or deposit the tender. On September 8, 2014, Nationwide deposed Faircloth and discovered that Faircloth used the vehicle to make business-related deliveries, putting over 1,200 miles a week on the vehicle for such deliveries. Nationwide contends that these facts establish that Faircloth also misrepresented his “primary use” of the vehicle as “work” instead of “business.” Faircloth and Nationwide filed competing motions for summary judgment.

The district court granted Nationwide’s motion for summary judgment and denied Faircloth’s motion as moot. The court held that Faircloth misrepresented his primary use of the vehicle because “[a] reasonable person in Faircloth’s position—a person putting 1,200 miles a week on his car delivering things—would have chosen business as the primary use.”

DISCUSSION

The burden of proof is particularly relevant when the party with the burden of proof moves for summary judgment and the opposing party presents evidence contesting the veracity of the movant’s evidence. In this situation, if the testimony of a witness is necessary to carry the movant’s burden of proof, the appellate court looks carefully at whether the witness is unbiased and competent, and whether his testimony is positive, internally consistent, unequivocal, and in full accord with the documentary exhibits. If the movant makes this showing, then the opposing party cannot force a trial merely to cross-examine the witness or in the hope ‘that something might turn up at the trial.

As a federal court sitting in diversity, the Eighth Circuit applies the substantive law of the forum state—Arkansas. Under Arkansas law, an insurer may rescind an insurance policy for any misrepresentation that is “material,” even if such misrepresentation is not related to the loss sustained.

The insurer bears the burden of showing that had it known of the misrepresented facts, “the circumstances were such that it would not have issued the present coverage.” Although the district court did not expressly address whether Faircloth’s misrepresentation was material, the Eighth Circuit may affirm the judgment on any basis supported by the record.  Here, the record shows that Nationwide met its burden of establishing that it would not have issued the same coverage had Faircloth chosen “business” as his primary use.

Nationwide presented the affidavit of Richard A. Yuill, an underwriter for Nationwide, which stated: “Had Nationwide known of Mr. Faircloth’s use of his vehicle as a delivery service in connection with his employment, including his full-time use [of] the vehicle as a delivery driver, he would not have been issued this policy over the online application. The policy purchased would not have been available, and he would have[,] [i]nstead, been referred to the Nationwide Call Center in order to purchase a business automobile insurance policy for the vehicle.”

Because the policy purchased would not have been available and Faircloth would have been referred to the call center to purchase a business automobile insurance policy, we conclude that had Nationwide known Faircloth’s primary use was “business,” it would not have issued the same policy.

Except for a general assertion that “materiality” is a fact question, Faircloth failed to present any contrary evidence indicating that Nationwide would have issued the same policy had he selected “business” as his primary use. Therefore, Faircloth failed to raise a genuine question of material fact as to the materiality of the misrepresentation. The district court correctly determined that Faircloth failed to raise a fact issue about how the application screen appeared.

ZALMA  OPINION

There is no excuse for a prospective insured to lie on an application for insurance. Insurers, especially auto insurers, rely almost exclusively on the facts stated in the application and a report from the state about accidents or tickets. The lie in this case was important because the insured misrepresented the use of the vehicle and because he used it to make deliveries he increased the risk of loss by driving more than represented. He lied. His policy was properly declared void from its inception.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness 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 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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