Insurance applications are extremely important. An otherwise covered claim can be denied because of an application error. A recent case1 quoted Michigan law about misrepresentation in the application of a property insurance policy:

[T]he ‘well-settled law of [Michigan] that where an insured makes a material misrepresentation in the application for insurance[,] . . . the insurer is entitled to rescind the policy and declare it void ab initio.’ Lake States Ins. Co. v. Wilson, 586 N.W.2d 113, 115 (Mich. Ct. App. 1998)… A fact or representation in an application for insurance is material when communication of it would have resulted in an insurer rejecting the risk or charging an increased premium. See Brooks v. U.S. Liberty Mut. Fire Ins. Co., No. 09-CV-10352, 2009 WL 5171728 (E.D. Mich. Dec. 30, 2009) (citing Oade v. Jackson Nat’l Life Ins. Co. of Michigan, 632 N.W.2d 126 (Mich. 2001)). And recission is justified even when the misrepresentation is innocent, so long as the insurer relied on it…. see also Stevens v. Liberty Ins. Corp., No. 11-14695, 2012 WL 2408719 (E.D. Mich. June 26, 2012) (permitting insurer to rescind policy following an innocent misrepresentation about property taxes even when the ‘previous owner had promised to pay any outstanding taxes with the purchase money [plaintiff] paid for the property’). Finally, an insurer ‘has no duty to investigate or verify the representations of a potential insured.’ Titan Ins. Co. v. Hyten, 817 N.W.2d 562, 576 (Mich. 2012) (citing Keys v. Pace, 99 N.W.2d 547 (Mich. 1959)).

Every state is a little different about how to treat wrong answers in the insurance application. Some states require fraud intent. Others will allow an innocent answer to void a policy. Most states have statutes or regulations preventing insurance companies from abusing the application process as a means to avoid paying claims. It is important to carefully view the state’s common, statutory, and regulatory law when faced with alleged misrepresentations that might void the policy.

The Michigan case involved a fire insurance claim where the policyholder provided an incorrect answer about delinquent property taxes on a house she was purchasing. The judge recited the facts of the case:

In May 2019, Peatross purchased a home on Santa Rosa Drive in Detroit, Michigan by quitclaim deed, meaning the seller made no warranties about the title.

About a week prior to the purchase, Peatross had met with the seller, who told her that ‘everything [with the property] was up to date and everything was up to code.’…Though Peatross took this to mean that the property taxes were current, she did nothing to verify that assumption… In truth, the seller had not paid property taxes in 2016, 2017, or 2018.

On the same day that she purchased the property, Peatross applied for homeowner’s insurance over the phone with Liberty….The sales representative asked Peatross a series of questions, including whether the property taxes were current….Peatross replied, ‘to my knowledge, they are.’…The sales representative then checked the box indicating that the taxes were current…. Had she said the taxes were delinquent, the representative would have then asked: “have the real property taxes on this dwelling been delinquent for two or more years?”…And had she told the representative that the property taxes for 2016, 2017, and 2018 were delinquent, Liberty would have rejected her application.

…

Tragically, on December 27, 2019, Peatross’ home caught fire. There are no allegations that she was in any way responsible.

Liberty investigated the loss and soon discovered the delinquent property taxes. So in February 2020, they sent Peatross a letter refunding her premium and rescinding the policy back to its inception date. Liberty explained that it did so ‘because of what is believed to be material misrepresentations on your application . . . Specifically, . . . You indicated that the real property taxes on the insured property were not delinquent. Our investigation has revealed that [they were] . . . Had we known . . . we would not have issued this policy.’

The wrong answer was about delinquent taxes. Through its written underwriting standards, the insurer could prove that a correct response would have led it not to issue the policy. As you can guess, the court found that this is a situation where the answer was incorrect and material to issuing the policy. Accordingly, the court ruled against the policyholder finding:

Peatross made a misrepresentation about the property taxes in her application for insurance, and the Sixth Circuit has already made clear that such misrepresentations, even if innocent, are material. See Hatcher v. Nationwide Prop. & Cas. Ins. Co., 610 F. App’x 507, 510 (6th Cir. 2015) (‘[A]n omission in an insurance application about delinquent taxes would be material.’).

…

[T]he contract clearly permitted Liberty to rescind Peatross’ policy. The policy required Peatross to affirm and agree to the following statement: ‘I can confirm that the facts stated in my application are true . . . [and] I understand that misrepresentation of information in my application could void some or all of my coverage.’ And, as discussed, Peatross made a material misrepresentation about the delinquent status of the taxes. So Liberty was within its rights to rescind the policy.

It does not take a rocket scientist to figure out that asking many innocuous questions on applications and almost inviting people to give wrong answers can be a very easy way leading to denied claims. Post-loss underwriting has long been a profit process for some insurance carriers. During the application process, agents should provide extraordinary examples and warnings about what can happen when incorrect answers are given. Most of the time, there is no loss, so that no post-loss underwriting ever occurs. But what happens if the loss occurs, and a close examination of the application leads to a bad coverage result?

Thought For The Day

The wrong answer is the right answer in search of a different question.
—Bruce Man
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1 Peatross v. Liberty Mutual Personal Ins. Co., No 20-10919 (E.D. Mich. Dec 14, 2021).