Case Title: Slaby v. Cox

Citation: 250 Kan. 429, 827 P.2d 18

Docket Number: 66,471

State: kansas

Court: Kansas Supreme Court

Date: 1992-02-28T00:00:00Z

Document:
250 Kan. 429 (1992)
827 P.2d 18
VYRNON E. SLABY and MARY C. SLABY, as Guardians and Conservators for DEREK E. SLABY, Appellees,
v.
JASON A. COX and CAROLYN COX, Appellees, and ALLIANCE INSURANCE CO., Appellant/Garnishee.
No. 66,471

Supreme Court of Kansas.
Opinion filed February 28, 1992.
Timothy J. Finnerty, of McDonald, Tinker, Skaer, Quinn & Herrington, P.A., of Wichita, argued the cause and was on the briefs for appellant garnishee.
David S. Wooding, of Martin, Pringle, Oliver, Wallace & Swartz, of Wichita, argued the cause, and Terry J. Torline, of the same firm, was with him on the briefs for appellees Vyrnon E. Slaby and Mary C. Slaby.
John J. Jurcyk, Jr., and Douglas M. Greenwald, of McAnany, Van Cleave & Phillips, P.A., of Kansas City, were on the brief for amicus curiae Kansas Association of Defense Counsel.
The opinion of the court was delivered by
McFARLAND, J.:
This is an insurance coverage dispute. The district court held that coverage existed and entered partial summary judgment in favor of the injured person's conservators and natural guardians and against the garnished insurance company. Said judgment was certified pursuant to K.S.A. 1991 Supp. 60-254(b), and the insurance company appeals therefrom.
*430 The facts may be summarized as follows. On or about March 20, 1989, Joseph Cox contacted Richard Angleton relative to the purchase of automobile insurance for three vehicles driven by members of the Cox household. Angleton was an employee of Crown Insurance Agency. He was also an independent agent of Alliance Insurance Co., empowered to issue binders for such company. At the request of Cox, Angleton obtained quotes from several companies for insurance coverage for the Cox vehicles.
On March 22, 1989, at approximately 12:10 p.m., Cox's 18-year-old son, Jason, was operating one of the Cox vehicles. At this time, Derek Slaby was riding on the hood of the vehicle. Slaby slid from the hood and was seriously injured. Joseph Cox went to the scene of the accident and learned Slaby had been injured. Subsequently, at approximately 3:00 p.m. the same day, Cox met with Angleton and completed an Alliance insurance application. One of the questions asked about previous automobile accidents. The answer to the question made no mention of the Slaby accident, nor did Cox say anything to Angleton about the Slaby accident. For purposes of summary judgment, it was stipulated that Cox fraudulently answered the question relative to previous accidents. Angleton signed the application making it a binder, and Cox paid the premium during the meeting. Had the question been answered truthfully, the binder would not have been executed. Subsequently, Alliance processed the application and issued the policy effective 12:01 a.m., March 22, 1989, with policy limits of $100,000 for bodily injury.
On June 6, 1989, Alliance wrote Joseph Cox stating that it considered the policy void ab initio by virtue of Cox's failure to reveal the accident on the application. The Slabys brought an action against Jason and Carolyn Cox, seeking recovery for Derek's injuries (case No. 89-C-3100). On June 13, 1990, Alliance filed a declaratory judgment action against the Coxes and the Slabys, seeking a judicial determination that the policy was void ab initio or, alternatively, that the policy should be reformed to exclude the Slaby accident (case No. 90 C 1979).
On June 22, 1990, a consent judgment was entered against Jason Cox in the amount of $565,553.25. On August 17, 1990, the Slabys initiated a garnishment proceeding against Alliance. *431 The garnishment proceeding and the declaratory judgment action were consolidated for summary judgment purposes only.
On December 20, 1990, Alliance paid $131,105.43 into court. This represents the $100,000 policy limits plus interest on the entire judgment.
The district court held that the policy could not be rescinded (declared void ab initio) by Alliance nor would reformation be permitted. The basis for the ruling was K.S.A. 40-3118 et seq. and Dunn v. Safeco Ins. Co., 14 Kan. App.2d 732, 798 P.2d 955 (1990).
Later, Alliance filed a motion to amend the judgment to limit the coverage to $25,000, the statutory minimum. This motion was denied. Alliance appeals from all adverse rulings of the district court.
For its issues on appeal, Alliance contends the district court erred in:
1. refusing to allow rescission of the policy on the basis it was void ab initio or, alternatively, to reform the contract to exclude coverage for the Slaby accident; and
2. refusing to reduce the coverage to the statutory minimum of $25,000 (K.S.A. 40-3107[e]).
K.S.A. 1991 Supp. 40-3118(b) provides in pertinent part:
At common law the right of rescission ab initio for fraud and misrepresentation was available to an insurance company. See American States Ins. Co. v. Ehrlich, 237 Kan. 449, 701 P.2d 676 (1985); Klein v. Farmers & Bankers Life Ins. Co., 132 Kan. 748, 297 Pac. 730 (1931); Dunn v. Safeco Ins. Co., 14 Kan. App.2d 732.
Kansas appellate courts have twice considered the impact of K.S.A. 1991 Supp. 40-3118(b) on an insurance company's common-law *432 right of rescission for fraud in the application for insurance. These cases are Continental Western Ins. Co. v. Clay, 248 Kan. 889, 811 P.2d 1202 (1991), and Dunn v. Safeco Ins. Co., 14 Kan. App.2d 732.
In Dunn, the court held:
In Dunn, however, the claim at issue was one filed by the insureds themselves under the collision provisions of the policy. The Dunn court held:
....
In Continental Western, 248 Kan. 889, we had two claims being made under the policy for which rescission was being sought: (1) by the insured and (2) by a passenger injured in the insured's vehicle.
After quoting the above portions of Dunn, we stated:
Both Dunn and Continental Western involved factual situations where fraudulent statements were made by the insured in the application for insurance, a binder or policy was issued, and then the incident giving rise to the claim or claims occurred. In the case before us, at the time the accident occurred in which Derek Slaby was injured there was no policy or insurance in effect. With knowledge that the accident had occurred and that Slaby had been injured, Joseph Cox filled out the application for insurance, stating there had been no accidents, and obtained an insurance binder. By virtue of insurance practice, the insurance policy subsequently issued stated it was effective at 12:01 a.m. the day the binder was signed rather than sometime after 3:00 p.m. when the binder was actually executed. Whether this practice arises from convenience to avoid computation of partial day premiums or to facilitate obtaining "edge to edge" or continuous coverage is unknown.
The question we must decide is whether the particular facts herein take the case out from under the rule that an insurance company cannot retrospectively avoid coverage to an injured innocent third party on the grounds of fraud or misrepresentation in the application for insurance. We believe that they do.
Under the Kansas Automobile Injury Reparations Act (K.S.A. 40-3101 et seq.), before a motor vehicle may be registered the *436 owner must obtain liability insurance, K.S.A. 1991 Supp. 40-3118(a) provides, in part:
The public policy behind the Act is to assure that coverage of at least the statutory minimum levels of liability insurance exists on any vehicle covered by the Act. It is against that public policy to allow insurance companies to renege on the coverage promised as to an innocent injured third party because of an insured's fraudulent acts in obtaining the insurance. Here it is undisputed there was no coverage at the time the third party was injured. Joseph Cox's subsequent fraudulent acts resulted in a policy being issued which listed the effective time as 12:01 a.m. of the day the binder was executed  thereby ostensibly covering the accident which had already occurred. Had Joseph Cox done nothing after learning of the accident there would be no policy to dispute. The injured party would have been in exactly the same situation he was in when injured. The rule prohibiting an insurance company from taking away coverage which existed when the injury occurred and the reasons for the rule do not apply. The Cox vehicle was not registered or being operated at the time of the injury as a result of or in reliance on Alliance having insured the same.
We do not believe rescission which would void the policy ab initio is appropriate herein. The appropriate relief is to reform *437 the policy to exclude coverage for the accident herein by making the policy effective at the time the binder was executed.
Additionally, to hold otherwise would tend to defeat the public policy which lies behind mandatory automobile insurance and encourage people to risk operating uninsured motor vehicles. If one can wait to buy insurance until after an accident occurs and thereby gain coverage therefor, it lessens the incentive to comply with the mandatory insurance law of Kansas.
We conclude that the district court erred in refusing to reform the insurance policy herein to exclude coverage for the Slaby accident.
By virtue of the foregoing determination, we need not address the second issue in the appeal relative to whether or not the $100,000 coverage in the policy should be reduced to the $25,000 statutorily mandated minimum coverage.
The judgment is reversed, and the case is remanded to the district court for further proceedings consistent with the opinion herein.