Opinion ID: 3170827
Heading Depth: 3
Heading Rank: 1

Heading: Material Misrepresentation Standard

Text: “A misrepresentation is an assertion that is not in accord with the facts.”8 Restatement (Second) of Contracts § 159. When Mr. Christy first purchased the CGL Policy, K&D was a sole proprietorship, and Travelers drafted the CGL Policy to reflect that status. Thus, Mr. Christy’s original representation as to the form of his business was in accord with the facts. The issue here then is whether, during the subsequent renewal periods, Mr. Christy’s silence about the change in his business structure qualified as “an assertion that is not in accord with the facts.” See Restatement (Second) of Contracts § 159. As explained below, to determine whether silence rises to the level of a misrepresentation, we must first analyze materiality. If information is not material, an insured has no duty to disclose in the absence of a specific inquiry. And if the insured has no duty to disclose, mere nondisclosure will not be considered an affirmative 8 New Mexico courts have adopted the Restatement’s formulation of law related to material misrepresentations. See Sisneros, 142 P.3d at 38. Accordingly, in the absence of New Mexico authority to the contrary, our discussion similarly relies on the Restatement, as well as decisions from the New Mexico courts. 14 representation. Thus, the question before us is: When does an insured have a duty to disclose changes in circumstances that occur after issuance of a policy? The Restatement distinguishes between an affirmative misrepresentation, an act of concealment that rises to the level of an affirmative misrepresentation, and mere nondisclosure, which may be the equivalent of an affirmative misrepresentation under certain circumstances. Id. §§ 159–61. In cases like this involving a mere nondisclosure, the party failing to disclose must know or have reason to know that the undisclosed fact will influence the decisionmaking of the other party before the nondisclosure will be treated as an affirmative misrepresentation. Id. § 161; see also id. § 161 cmt. b (“In order to make the contract voidable . . . the non-disclosure must be either fraudulent or material. . . . [O]ne is expected to disclose only such facts as he knows or has reason to know will influence the other in determining his course of action.”). A leading treatise on insurance contracts similarly distinguishes between an affirmative misrepresentation, concealment, and mere failure to disclose: In the law of insurance, “concealment” is the designed and intentional withholding of any fact material to the risk which the insured in honesty and good faith ought to communicate to the insurer but which the insured designedly and intentionally withholds. Mere silence, however, is not concealment, at least in the absence of a specific inquiry, for it is the context of the surrounding circumstances which determines the legal significance of such silence. 6 Couch on Insurance § 81:21 (emphasis added). “A party applying for insurance is bound to answer truthfully all questions concerning facts material to the risk but generally has no duty where the application makes no specific inquiries.” Id. § 84:2. 15 And although the materiality of a particular fact is a factor in deciding whether the insured should have disclosed it, “a prospective insured has no duty to inform an insurer even with respect to a material factor unless the insured has been asked about it or otherwise made to know that it is a material basis for issuance of the policy.” Id. § 84:6. “Also, because the insured normally is a lay individual and not particularly knowledgeable in the field of insurance risks, it is unreasonable to impose on the insured a continuing duty to notify the insurer of any change which would materially affect the acceptance or continuation of the risk.” Id. § 84:9. For Mr. Christy’s mere silence on the change in his business structure to rise to the level of an affirmative misrepresentation, Travelers must have made a specific inquiry or Mr. Christy must have known or should have known the structure of his business was material to Travelers’ decision to renew the CGL Policy. Under the Restatement and Couch, the insurer has the obligation to inquire about those facts it considers material to its risk, rather than placing the burden on the untrained insured to disclose any and all changed circumstances that his insurer may consider significant. New Mexico’s general adherence to the Restatement convinces us that its courts would place the onus of inquiry on Travelers as the insurer, rather than expecting Mr. Christy as the lay insured to divine which facts might be material to Travelers’ decision to issue or renew a policy. That is, unless Mr. Christy had knowledge that the information was material to Travelers. The Massachusetts Court of Appeals reached a similar conclusion in Quincy Mutual Fire Insurance Co. v. Quisset Properties, Inc., 866 N.E.2d 966 (Mass. App. 16 Ct. 2007). In Quincy, the insured purchased a commercial auto insurance policy through his corporation. Id. at 968–69. At the time the insured purchased the policy, the application accurately reflected all material facts. Id. at 969. The insured renewed the policy for the next nine years, but at no time did the insurer require the insured to complete a renewal application or questionnaire. Id. At the renewal period, the insurer sent the insured a copy of the new policy and a letter that stated “in the event of a loss or if there is any change in conditions existing at the time this policy was written, please notify our office.” Id. Six years after purchasing the initial policy, the insured’s corporation was dissolved. Id. But the insured did not notify the insurer of the dissolution. Id. at 969–70. Subsequently, the insured made a claim on the commercial policy, which was denied for failure to notify the insurer of the dissolution of the company. The Massachusetts Court of Appeals reviewed “whether [the insured’s] failure to notify [the insurer] of [the company’s] dissolution represents a material misrepresentation that increased the risk of loss to the insurer.” Id. at 970. It answered that question in the negative, concluding that an insurer has a duty to inquire into facts and circumstances it deems material to its coverage decisions. Id. at 971–74. The court explained: Insureds are not in a position to recognize risk-enhancing circumstances as readily as the insurer, who can more easily identify and evaluate circumstances that are material to the decision to underwrite and insure the risk. Information not asked for is presumably deemed immaterial. Moreover, imposing the burden of inquiry on the insurer poses no undue burden and reduces, if not eliminates, the difficult determination of 17 what is, or is not, material to the risk of loss from the perspective of an insurer. Id. at 973 (citation omitted). We conclude that the Quincy court’s analysis is consistent with the Restatement and most likely to reflect New Mexico’s views on this issue. Furthermore, the cases Travelers cites as support for its argument that New Mexico would place the burden on the insured are inapposite. For example, Travelers relies on Rael v. American Estate Life Insurance Co., 444 P.2d 290 (N.M. 1968), for the proposition that a failure to disclose material information constitutes a misrepresentation. But in Rael, the insurer’s application specifically asked whether any family member had undergone any “medical or surgical advice or treatment or operations in the past 5 years.” Id. at 291 (internal quotation marks omitted). Despite the fact that, during the five-year period, the insured’s wife and daughter had both received medical treatment, including surgeries, the insured answered “No.” Id. at 291–92. Not surprisingly, the New Mexico Supreme Court held that an insurer is entitled to true and complete answers to the questions it asks before issuing a policy. Id. at 292. But Rael did not address a situation, like the present, in which the insured truthfully answers the application questions, circumstances later change, and the insurer arguably does not make further inquiry. Because Rael addressed only an insured’s obligation not to lie in response to a direct question from the insurer, it is not controlling here. 18 Travelers’ reliance on Rehders v. Allstate Insurance Co., 135 P.3d 237 (N.M. Ct. App. 2006), is similarly misplaced. Travelers argues Rehders stands for the proposition that an insured is presumed to know and understand the insurance significance of changing his business from a sole proprietorship to a corporation. But Rehders cannot be read so broadly. Rehders involved a commercial insurance policy issued in the name of a sole proprietorship from 1983 until 2001. Id. at 239–40. In September 2001, the sole proprietors notified Allstate that they had changed their business from a sole proprietorship to a corporation and requested that their policy be modified to reflect that change. Id. at 240. Allstate issued a new policy in the name of the corporation. Id. Subsequently, the proprietors’ son was injured in an accident with an uninsured driver. Id. Under the prior policy, the son was arguably covered under the provisions relating to sole proprietorships. Id. But under the new policy issued to the corporation, Allstate denied coverage, asserting the son was not an insured. Id. The New Mexico Court of Appeals agreed with Allstate, holding the proprietors could not have reasonably expected that coverage for their son would remain the same after changing their business organization and obtaining a new policy. Id. at 247. Travelers relies on Rehders to argue that insureds are always presumed to understand a change in business form will have insurance implications. But the Rehders court’s holding is limited by the facts at issue there. Specifically, the insureds changed their business organization, obtained a new insurance policy that unambiguously did not provide coverage for the subsequent accident, and then 19 attempted to negate the change they had requested to obtain more favorable coverage after an accident. The Rehders court did not consider a situation like this case, where the same policy is in place but there has been a change in the business form of the insured. As a result, it is not controlling. In sum, the CGL Policy may only be reformed or rendered void if Mr. Christy made a material misrepresentation by failing to disclose the change to his business form. Mr. Christy’s nondisclosure will only be considered a misrepresentation if he had a duty to inform Travelers of the change. And Mr. Christy only had such a duty if the incorporation of his business was material. A finding of materiality depends on whether Mr. Christy knew or should have known that changing his business form would affect Travelers’ decision to renew. Accordingly, we now consider whether the evidence presented of Mr. Christy’s knowledge on this point was undisputed or instead created a material issue of fact which precludes summary judgment.