Rescission Requires Proof of Deception About a Material Fact

Summary Judgment Reversed Because Issues of Fact Remained

People whose claims are denied attempt – often successfully – to make the denial a class action that will allow the plaintiff and the plaintiff’s lawyer with a windfall. Insurers who use the remedy of rescission without clear and convincing evidence, often run afoul of the courts, and can open the door to class actions.

In Michael Bradley, individually and on behalf of a class of other similarly situated individuals v. Direct Auto Insurance Company, No. 2-19-0426, 2020 IL App (2d) 190426-U, Appellate Court Of Illinois Second District (February 7, 2020) Plaintiff, Michael Bradley (Bradley), individually and on behalf of others similarly situated, appealed from the circuit court of Kane County’s orders denying his motion to stay and granting summary judgment in favor of defendant, Direct Auto Insurance Company (Direct Auto), regarding his complaint asserting violations of the Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act). Bradley argues on appeal that the circuit court erred.

BACKGROUND

Bradley purchased an automobile insurance policy issued by Direct Auto in May 2015 to cover his 2014 Kia Forte. The insurance application asked if there were “any other cars in the household other than those listed on the application?” Bradley understood the term “household” to mean family members or dependents. Because he was not married, had no children, and owned no other vehicles, he answered the question in the negative. At the time he completed the insurance application, Bradley was renting a room in a house owned by Lewis Stonehouse. Stonehouse owned a 2007 GMC Yukon that was also garaged at the same address. Bradley did not consider Stonehouse to be part of his “household.” Bradley did not intend to drive any vehicle other than his own, including Stonehouse’s, nor did he intend for any other person to drive it.

Shortly after midnight on June 18, 2015, Bradley’s vehicle was damaged in a collision while being driven by Devon Jayne, who was a friend of Stonehouse’s daughter, Ashley and was driving without Bradley’s permission.  Bradley submitted an affidavit and stated:

“On 6/18/15, the insured went to sleep. His keys were on the counter. Devon wanted to go driving so Ashley took the insured’s keys and took his 2014 Kia Forte for a ride. Devon was driving and Ashley was the passenger. The insured had no knowledge they took his vehicle as he was sleeping.”

Direct Auto sent Bradley correspondence on September 1, 2015, stating that his policy was “null and void from inception due to a MATERIAL MISREPRESENTATION on [his] policy application.” Individually and on behalf of others similarly situated, Bradley filed a single-count complaint against Direct Auto on June 24, 2016, asserting violations of the Consumer Fraud Act. He alleged that as a business strategy, Direct Auto targets low-income customers by offering auto insurance at below-market rates; that the insurance coverage provided by Direct Auto is illusory because it never intended to pay out claims; and, as a standard practice, it denies coverage to its policy holders. Bradley alleged that Direct Auto violated the Consumer Fraud Act because it engaged in unfair or deceptive acts or practices.

The circuit court granted Direct Auto’s motion for summary judgment in a written order on April 18, 2019. It listed the elements for a claim under the Consumer Fraud Act, which it stated were that (1) the defendant committed a deceptive act or practice; (2) the defendant intended the plaintiff to rely on the deception; and (3) the deception occurred in a course of conduct involving trade or commerce. It concluded that there was no evidence of a deceptive act by Direct Auto or an act intended by it to induce reliance by Bradley, and that there was no evidence of a separate and independent tort, or other act beyond a breach of contract that would support a claim under the Consumer Fraud Act.

ANALYSIS

Direct Auto’s motion was premised on evidence that, in its view, affirmatively disproved Bradley’s allegations that its investigation and subsequent decision to rescind his insurance policy constituted a deceitful or unfair act. Most notably, Direct Auto attached the affidavit of Torello, Direct Auto’s claim manager. Torello identified each step Direct Auto took in investigating Bradley’s claim, as well as identified what information it received, when it received that information, and what it did with that information. In ultimately granting Direct Auto’s motion for summary judgment, the circuit court clearly relied on this affidavit in finding that there was “nothing fraudulent or deceptive in the method of the investigation conducted by [Direct Auto],” nor did Bradley “rely on any misrepresentations …”

To establish a violation under the Act, a plaintiff must establish:

  1. a deceptive act or practice by the defendant;
  2. the defendant’s intent that the plaintiff rely on the deception;
  3. the occurrence of the deception during a course of conduct involving trade or commerce; and
  4. the consumer fraud proximately caused the plaintiff’s injury.

Alternatively, a plaintiff may recover against a defendant for an unfair practice as opposed to deceptive conduct. The appellate court agreed with the Plaintiff that there were genuine issues of material fact as to whether Direct Auto’s conduct was deceptive or unfair under the Consumer Fraud Act such that entry of summary judgment in favor of Direct Auto was improper. As noted by Direct Auto, the linchpin of Bradley’s argument is that Direct Auto knew that his statement that there were no “other cars in the household other than those listed on the application” was not a material misrepresentation when it rescinded his policy.

To establish rescission the trial court had to determine (1) whether the statement was false and (2) whether the Plaintiff intended to deceive Direct Auto on his insurance application or whether the statement materially affected the acceptance of the risk or hazard assumed by Direct Auto.

Bradley alleged that Direct Auto violated the Consumer Fraud Act by, among othr things, rescinding policies without a legal basis and with the knowledge that its policyholders could not afford to litigate the dispute. These allegations are not specific to Bradley, but instead relate to Direct Auto’s participation in the insurance market generally. The court reversed the summary judgment entered in favor of Direct Auto, and remanded the case back to the trial court.

ZALMA OPINION

Trial courts dislike granting motions for summary judgment because they are often reversed and eliminate the right to a trial. In this case the trial court granted the insurer’s motion because it proved a material misrepresentation. The court did not consider the fact that the loss was clearly and unambiguously excluded because the insurer elected to use the equitable remedy of rescission rather than use the exclusion. At trial they should use the exclusion and and produce evidence that there is no legal basis for the allegation that the policy was illusory by simply showing the number of claims actually paid each year. In addition they can bring on an underwriter to explain what would have happened had Bradley advised of the other vehicles in the building where he lived.


© 2020 – Barry Zalma

This article, and all of the blog posts on this site, digest 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  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.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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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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