To Save $34 Policy Rescinded

There is No Good Reason to Misrepresent Facts To Insurer

When an insurer evaluates the potential risks faced by an insured it needs to know the properties where the insureds live and, if they have more than one home, the identity and location of each home. Insurance premiums are calculated based upon the risks of loss that the insurer is assuming.

In Mount Vernon Fire Insurance Company v. Jack L. Gabelhausen, Jr., and the Estate of Judith Gabelhausen, United States District Court for the District of Montana, Missoula Division, CV 16-91-M-DLC (July 10, 2017) the USDC for the District of Montana was asked to require an umbrella insurer to defend the insured while the insurer sought to rescind the policy because the insured failed to advise the insurer of its residence where the accident that resulted in a suit occurred.


On March 7, 2014, Jeff Wycoff (“Wycoff”) was allegedly catastrophically injured when he fell 25 feet off the edge of an infinity swimming pool at a house on the island of St. Thomas, in the United States Virgin Islands. The home was owned, in part, by Respondents Jack L. Gabelhausen, Jr., and his wife, Judith Gabelhausen1 (collectively, “the Gabelhausens”). At the time, the Gabelhausens were renting the St. Thomas property to a third-party for a wedding.

On October 20, 2015, Wycoff filed suit against the Gabelhausens, as well as the co-owner of the St. Thomas property, Jim Schueler (“Schueler”), in the District Court of the Virgin Islands, Division of St. Thomas and St. John. The complaint in that case alleges that the St. Thomas property was maintained in a dangerous condition by the Gabelhausens and Schueler, and Wycoff was injured as a result.

The Gabelhausens had a $1 million primary policy with Guardian. In addition to the Guardian policy, the Gabelhausens had also purchased an insurance policy for personal umbrella liability coverage (the “umbrella policy”) with Petitioner Mount Vernon Fire Insurance Company (“Mount Vernon”). This umbrella policy was effective from January 29, 2014, through January 29, 2015, and provided $5,000,000 in personal umbrella liability coverage.

From January 2007 to January 2014, the Umbrella policy premiums were actuarially based on the insurance company’s understanding that the Gabelhausens only owned two homes. It is undisputed that prior to the 2014 policy period, the Gabelhausens provided no notice that they were partial owners of the St. Thomas property.

In light of Wycoff’s accident and the subsequent civil suit, Mount Vernon filed a petition for declaratory relief pursuant to 28 U.S.C. § 2201(a). This petition requests rescission of the umbrella policy due to Respondents’ alleged misrepresentations concerning their ownership of the St. Thomas property.


The parties have put forth multiple arguments in support of their cross-motions for summary judgment. Mount Vernon contends that the umbrella policy should be rescinded based on material misrepresentations by the Gabelhausens concerning the number of residences they owned.

Mount Vernon also asks requests that the Court rescind the policy due to the Gabelhausens’ failure to inform the company about the St. Thomas property. Thus, even if the Gabelhausens were absolved of liability in the underlying Wycoff litigation, and the issue of coverage for the accident became moot, Mount Vernon’s rescission claim would continue in this case.


Rescission of an insurance contract is permitted pursuant to Montana Code Annotated (“MCA”) § 33-15-403. Steinback v. Bankers Life and Cas. Co., 15 P.3d 872, 874 (Mont. 2000) (Montana Supreme Court affirmed district court’s ruling that insurance company was entitled to rescind policy pursuant to MCA § 33-15-403). Subsection 403(2) provides that: “Misrepresentations, omissions, concealment of facts, and incorrect statements do not prevent a recovery under the policy or contract unless: ¶ (a) fraudulent; ¶ (b) material either to the acceptance of the risk or to the hazard assumed by the insurer; or ¶ (c) the insurer in good faith would either not have issued the policy or contract or would not have issued a policy or contract in as large an amount or at the same premium or rate or would not have provided coverage with respect to the hazard resulting in the loss if the true facts had been made known to the insurer as required either by the application for the policy or contract or otherwise.”

Mount Vernon asserts that rescission of the umbrella policy is warranted under MCA § 33-15-403(2)(c), because in good faith, it would not have issued the umbrella policy at the same premium if the Gabelhausens would have disclosed their ownership interest in the St. Thomas property as required by the application for the policy and the policy itself.

In support of its argument, Mount Vernon submitted an affidavit from Brian Hogan (“Hogan”), Vice President-Product Team Personal Lines for United States Liability Insurance Group (“USLI”). Mount Vernon is an underwriting company owned by USLI. Hogan averred that the Gabelhausens did not provide notice of the St. Thomas property until after the March 2014 accident. The policy premiums from January 2007 to January 2015 did not take into account the Gabelhausens’ ownership interest in the St. Thomas property. Hogan averred that had Mount Vernon known about the St. Thomas residence, “it would have charged [Mr.] Gabelhausen an additional premium of $34 to reflect the underwriting risk of owning” the St. Thomas property.


An omission or misrepresentation may be material if, had the truth been known, the reasonable and prudent insurer would not have issued the policy or would have issued it at a higher premium. The Gabelhausens’ failure to disclose the St. Thomas property was a material omission if, had Mount Vernon known about the property, it would have issued the umbrella policy at a higher premium.

The Gabelhausens have failed to put forth any competing evidence that Mount Vernon would not have charged a higher premium for the umbrella policy had it known about the St. Thomas property. Hogan’s clearly testified that the addition of the St. Thomas property would have warranted and resulted in an increased premium.


The Gabelhausens also contend that rescission of the umbrella policy is precluded because the term residence is ambiguous. However, if the language of the policy is clear and explicit, a court may not rewrite it and must enforce the policy as written. Courts will not distort contractual language to create an ambiguity where none exists.

The Court agreed with the Gabelhausens that the policy renewal forms do not define “residence.” However, the policy itself clearly provides a definition for “Residence,” and this definition precludes the Gabelhausens’ secondary argument that a reasonable consumer of insurance would be confused by the term “residence.” A reasonable consumer of insurance who believes that three residences are listed under an umbrella policy would take note of the fact that only two residences are listed. It is just as unreasonable to expect coverage for three homes when only two are clearly listed

The court concluded that Mount Vernon is entitled to rescind the umbrella policy.


Whenever an insured applies for insurance he or she is required by the covenant of good faith and fair dealing to honestly respond to all inquiries asked by the insurer and advise the insurer of material facts so that it can adequately charge a premium appropriate to the risks the insurer is asked to take. In this case, the failure to advise the insurer of a residence saved the insured $34 in premium and cost them up to $5 million in coverage.


ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

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.

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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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