Avoiding Common Pitfalls And Preserving Defenses In The Event Of Application Misrepresentation

Mary Alice Jasperse | Drew Eckl & Farnham

When faced with evidence that an insured misrepresented material facts on an application for insurance, the stakes are high: taking the position that a policy is void ab initio and provides no coverage for a loss usually results in litigation. Insurance carriers are wise to ensure that the case is strong before proceeding down the path of rescission. This article provides guidance on which ducks to align, attractive pitfalls to avoid when building a case for rescission, and recent decisions discussing these topics.

Under Georgia law, a statement made in an insurance application must be one of the following to prevent recovery under a policy:

(1) Fraudulent;

(2) Material either to the acceptance of the risk or to the hazard assumed by the insurer; or

(3) 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 premium rate as applied or would not have provided coverage with respect to the hazard resulting in the loss if the true facts had been known to the insurer as required either by the application for the policy or contract or otherwise.

O.C.G.A. § 33-24-7(b). A mere incorrect statement does not prevent recovery unless it falls within one of the above categories. Subparagraph (3) outlined above contains the broadest language and can encompass omissions as well as fraudulent statements. Indeed, a carrier need not prove that an omission was purposefully made under O.C.G.A. § 33-24-7(b)(3). See Perkins v. American Intern. Specialty Lines Ins. Co., 486 B.R. 212 (2012).

Materiality

While the misrepresentation does not have to affect the loss itself, the misrepresentation must have a material affect on the risk. Globe Indem. Co. v. Hall, 94 Ga. App. 628, 95 S.E.2d 759 (1956). In order to prove that an insured’s omission or misrepresentation had a material effect on the risk, it is necessary (but not necessarily sufficient) for an insurance carrier to prove through testimony from an underwriter that a truthful statement would have influenced the carrier in determining whether or not to accept the risk, or in setting the amount of premium relating to the risk. McLeod v. United Presidential Life Ins. Co., 136 F.Supp.2d 1313 (N.D. Ga. 2000).

Wise insurers will consult all applicable underwriting guidelines and confirm that written policies support the testimony of any underwriters. In a recent decision regarding a life insurance policy decided by the Northern District of Georgia, the court denied the carrier’s motion for summary judgment and found that a jury question existed regarding the materiality of a purported omission of a medical diagnosis. Glushchak v. Transamerica Life Ins. Co., 2022 WL 1670777 (N.D. Ga. March 31, 2022). In that case, carrier’s underwriter testified that an unreported medical condition would be material to the issuance of coverage. However, the court focused on underwriting guidelines which stated that if the particular medical diagnosis was “treated, resolved or eradicated,” then life insurance coverage could be issued at the standard rate. Because the insured was taking antibiotics that could commonly be treated in two weeks, Judge Totenberg found that a reasonable jury could find that the insured’s medical condition was “treated” at the time he submitted his application. Since the medical condition could be found to be “treated”, the underwriting guidelines contradicted the employee’s testimony that the diagnosis would affect the charged rates. Id. at *18-19. It can sometimes be difficult to obtain all facts necessary to determine the extent of a misrepresentation or omission immediately after a loss. If this is the case, filing a declaratory judgment action would allow the carrier to perform discovery on unresolved questions prior to filing a motion for summary judgment. Certain policies also provide the opportunity for a carrier to take an examination under oath of the insured.

Auto Policies

When contemplating the rescission of a personal lines auto policy, careful consideration must be given to O.C.G.A. §§ 33-24-22 and 33-24-45, which contain specific requirements for noticing a cancellation of insurance, the content of such notice, and the appropriate grounds for cancellation. Importantly, if a carrier attempts to rescind an auto policy without following the strict requirements of O.C.G.A. § 33-24-45, such an attempt will be ineffective. Liberty Ins. Corp. v. Ferguson, 263 Ga. App. 714, 589 S.E.2d 290 (2003); Pearce v. Southern Guaranty Ins. Co., 246 Ga. 33; 268 S.E.2d 623 (1980).

Refunding Premiums

When rescinding a policy, the carrier must return all premiums paid by the insured since the inception of the subject policy. American General Life Ins. Co. v. Schoenthal Family, LLC, 555 F.3d 1331 (11th Cir. 2009). The rationale behind the return of premiums is that it places the parties back at the status quo ante and prevents the carrier from being unjustly enriched by the rescission.

Waiver

Perhaps the most frustrating and sometimes unforeseen misstep a carrier can make is taking some action inconsistent with asserting its right to rescind the policy or delaying a rescission. Both inconsistent actions and delay can result in a waiver of the right to rescind. Grange Mut. Cas. Co. v. Bennett, 350 Ga. App. 608, 612, 829 S.E.2d 834 (2019); Lee v. Mercury Ins. Co. of Georgia, 343 Ga. App. 729, 808 S.E.2d 116 (2017). As the court held in Bennett, “[i]f an insurer, instead of rescission, issues a denial of coverage and cancels the policy with a future effective date. . . the right and defense of rescission is waived as a matter of law.” Id. at 612. Often carriers are motivated by good intentions when sending a denial, coupled with a notice of cancellation on a future date in that they wish to provide the insured with the opportunity to obtain a different insurance policy without a lapse in coverage. However, Georgia courts have no sympathy for this argument and apply the opposite rationale, finding that the failure to rescind “lulls the insured into not purchasing other insurance and thus subjects the insured’s property to continuing non-coverage.” Florida Intl. Indem. Co. v. Osgood, 233 Ga. App. 111, 503 S.E.2d 371 (1998). 

As indicated above, a delay in time can also result in a finding of waiver or a jury question regarding question of whether a carrier waived its right to rescind the policy.

Lee v. Mercury Ins. Co. of Georgia, 343 Ga. App. 729, 808 S.E.2d 116 (2017). In Lee, the court found a question of fact existed regarding waiver where the carrier took two recorded statements and an examination under oath, renewed the policy, requested and received a proof of loss, and waited over 7 months after a fire before rescinding the policy. The delay, coupled with the carrier’s inability to explain what additional investigation remained ongoing during the 7-month period, resulted in a jury question regarding whether the carrier waived its right to subsequently rescind the policy. Id. at 747-48.

The Middle District of Georgia recently addressed the question of waiver in a case with facts similar to those in Lee, discussed above. Nautilus Ins. Co. v. Baconsfield Apartments, Inc., 2022 WL 11860469 (M.D. Ga. Oct. 20, 2022). In Baconsfield Apartments, the insured answered “no” to a question on an insurance application which asked: “Is the building currently damaged by fire or otherwise?” The buildings had, in fact, sustained prior fire damage that remained unrepaired at the time of the application. After Nautilus placed coverage, Baconsfield Apartments submitted a claim for fire loss. Nautilus investigated the claim and discovered that four previous fires occurred at the property. As a result of this investigation, Nautilus issued a cancellation notice informing the insured that coverage would remain in place for another 45 days, after which it would be cancelled. After sending the notice of cancellation, Nautilus engaged in an extensive claim investigation, including the taking of an examination under oath of multiple owners. Approximately 7 months after receiving the report that identified the four prior fires, Nautilus filed a complaint for declaratory judgment seeking to rescind the policy.

While the Middle District of Georgia found that the misrepresentation was material as a matter of law, a question of fact existed regarding the issue of waiver and regarding potential exposure for bad faith damages under O.C.G.A. § 33-4-6.

Conclusion

As discussed herein, unassuming and well-meaning carriers can be subject to rather harsh outcomes. In the context of waiver, carriers must delicately balance the desire to thoroughly investigate a claim and flesh out all facts with the requirement to take prompt action to rescind a policy when presented with facts supporting an application misrepresentation. Often the safest option for carriers is to file a declaratory judgment action early in the claim investigation in order to preserve the right to rescind while also taking advantage of the opportunity to conduct discovery. In order to meet the “uncertainty” component of filing a declaratory judgment action, carriers must refrain from issuing a denial letter or from rescinding the policy prior to filing the complaint for declaratory relief.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.