Opinion ID: 2085597
Heading Depth: 3
Heading Rank: 2

Heading: Effect of material misrepresentations in the application

Text: The right to void coverage due to fraud in the making of the policy is well established in the common law. In the insurance context, this protects the insurer's right to know the full extent of the risk it undertakes when an insurance policy is issued. Accordingly, a material misrepresentation or omission of fact in an insurance application, relied on by the insurer in issuing the policy, renders the coverage voidable at the insurance company's option. See, e.g., State Farm Mut. Auto. Ins. Co. v. Price, 181 Ind.App. 258, 260, 396 N.E.2d 134, 136 (1979) (collecting cases). Some decisions have described this as a failure of the meeting of the minds as to the terms of the contract, specifically the risk to be insured. Stockberger v. Meridian Mut. Ins. Co., 182 Ind.App. 566, 577, 395 N.E.2d 1272, 1279 (1979). Under one definition, a misrepresentation or omission is material if knowledge of the truth would have caused the insurer to refuse the risk or to charge a higher premium for accepting the risk. Brunnemer v. Metropolitan Life Ins. Co., 213 Ind. 650, 658, 14 N.E.2d 97, 100 (1938); Mutual Benefit Life Ins. Co. v. Miller, 39 Ind. 475, 486 (1872). This inquiry focuses on whether the representation was false and material to the decision to issue the policy. Whether the applicant intended to mislead or knew of the falsity is irrelevant: False representations, concerning a material fact, which mislead, will avoid an insurance contract, like any other contract, regardless of whether the misrepresentation was innocently made or made with a fraudulent design. Metropolitan Life Ins. Co. v. Becraft, 213 Ind. 378, 384, 12 N.E.2d 952, 954 (1938) (citation omitted); accord Automobile Underwriters, Inc. v. Stover, 148 Ind.App. 555, 268 N.E.2d 114 (1971), overruled on other grounds by American Underwriters Group, Inc. v. Williamson, 496 N.E.2d 807 (Ind.Ct.App.1986). A second approach to materiality in a case, such as this, where rescission is attempted after a loss has been incurred, would measure the materiality not against the underwriting decision, but rather against the loss. In other words, coverage of the incurred loss would be voided if the misrepresentation affected that risk, but not all coverage would necessarily be voided. Under either view, the materiality of the representation or omission is a question of fact to be resolved by the factfinder unless the evidence is such that there can be no reasonable difference of opinion. Prudential Ins. Co. of Am. v. Winans, 263 Ind. 111, 115, 325 N.E.2d 204, 206 (1975). The crucial misrepresentation in this case occurred when Dorothy failed to list Donald as a customary operator on the personalized quotation/enrollment form even though he drove several times per week to his job. Colonial Penn contends, and the Guzoreks do not appear to dispute, that its underwriting guidelines at that time prohibited writing policies for applicants, or members of their household, who had a suspended or revoked license within the prior five years. Equally important, Dorothy did not disclose that Donald even existed. By leaving his name off the application, Dorothy was able to avoid giving follow-up information about Donald's driving record that would have affected Colonial Penn's decision to issue the policy. [6] Colonial Penn argues that the undisputed facts show that had Dorothy been completely forthcoming on the application in 1990, the policy would not have been issued. [7] Accordingly, Colonial Penn contends it is entitled to rescind the policy and owes no insurance obligations arising out of the October 20, 1992 accident. Whether or not the policy was totally rescindable on these facts, we hold that Donald is not covered. Under the first view of materiality, Colonial Penn could rescind the policy even if Dorothy had been the driver, because Colonial Penn claims it would not have written a policy for her due to Donald's presence in the household. We accept Colonial Penn's assertion of its underwriting guidelines. Under the second view, Dorothy would still receive the coverage that would have issued had the facts represented in the application and relied on by the insurer actually been true. Stated another way, the insurer would retain those risks it knew it was accepting based on the information in the application, and if Dorothy rather than Donald were the operator coverage would be found. Under either view, Donald is not covered because his existence as a spouse and his driving record are clearly material to the loss actually incurred. However, the parties do not address and we do not decide whether the law would permit complete rescission of the policy or only reformation to conform to the facts represented in the application.