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

Heading: Was Donald Guzorek a Covered Driver?

Text: There is a second and independent ground for concluding that no coverage exists in this case. Colonial Penn argues that Dorothy Guzorek's insurance policy was void ab initio [4] because she did not reveal at the time she applied for the insurance that Donald lived with her, had a suspended license, and drove nonetheless on a fairly regular basis. Colonial Penn maintains that, under its underwriting guidelines, it would not have insured Dorothy or Donald had this information been disclosed on the application. The Guzoreks respond that Colonial Penn was never misled and that, in any event, Colonial Penn was on inquiry notice before the accident that Donald was driving Dorothy's cars. Illinois Farmers advances similar contentions in arguing that Donald was covered at the time of the accident. As explained below, we agree with Colonial Penn that Donald was not covered due to Dorothy Guzorek's material misrepresentations at the time of issuance.
As a preliminary matter, we address whether an insurer's common law right to void insurance coverage due to material misrepresentations (discussed in Part II.B infra ) survived the enactment of laws requiring all Indiana drivers to carry liability insurance or other proof of financial responsibility. Before 1983, the Financial Responsibility Act required liability insurance only after the first accident. IND.CODE § 9-2-1-4 (Supp. 1977). As a result of amendments in 1982 and 1984, see 1982 Ind.Acts. P.L. 83, § 1; 1984 Ind. Acts, P.L. 71, § 1, all drivers in this state are now required to carry minimum levels of liability insurance irrespective of their driving record. IND.CODE §§ 9-25-4-1 to -11 (1993 & Supp.1994). [5] Court of Appeals decisions have differed as to the effect of this change on the right to rescind coverage. American Underwriters Group, Inc. v. Williamson, 496 N.E.2d 807 (Ind.Ct. App.1986) expressly overruled one of the principal cases establishing this right in Indiana, Automobile Underwriters, Inc. v. Stover, 148 Ind.App. 555, 268 N.E.2d 114 (1971). Williamson reasoned that allowing the liability insurer to void coverage due to material misrepresentations conflicted with the revamped statute's policy that persons who suffer loss due to the tragedy of automobile accidents shall have a source and means of recovery. Williamson, 496 N.E.2d at 810. Nine years later, Motorists Mut. Ins. Co. v. Morris, 654 N.E.2d 861 (Ind.Ct.App.1995) revived the right to rescind in part, concluding that the liability insurer could rescind the policy in that case because the accident victims had been compensated through their own uninsured motorist coverage. Distinguishing Williamson, Morris reasoned that because the policy underlying the Financial Responsibility Act was satisfied where uninsured motorist coverage was in place, total rescission was permissible. The Court of Appeals recently reiterated the Morris view in Federal Kemper Ins. Co. v. Brown, 674 N.E.2d 1030 (Ind.Ct.App.1997), trans. denied. A federal court applying Indiana law in a diversity case observed that the holdings of Williamson and Morris appeared to conflict. Pekin Ins. Co. v. Super, 912 F.Supp. 409 (S.D.Ind.1995). Concluding that this Court would not follow either Williamson or Morris, Super held that the third party's uninsured motorist coverage was irrelevant to determining the scope of the liability insurer's right to avoid coverage, but that the liability insurer could rescind only above the minimum levels prescribed by the Financial Responsibility Act. The Super court reasoned that shifting liability to the uninsured motorist carrier would disregard Indiana's public policy ... that auto accident victims' primary means of recovery be from liability insurance. Id. at 412 (citation omitted). Super thus parted company with Morris on allocation of the loss up to the statutory minimums when the third party victim has uninsured motorist coverage. In sum, Stover permitted rescission based on material misrepresentations, Williamson held that voiding coverage is never permissible in light of changes in the Act, Morris held that the insurer could void coverage so long as the third party victim had uninsured motorist protection, and Super attempted a compromise by allowing the insurer to deny coverage only above the minimum liability amounts specified by the Act. Even if we agree with Morris that the purpose underlying the Financial Responsibility Act is to provide a source of minimum compensation for accident victims, that goal is satisfied here because the third parties in this case had uninsured motorist coverage. To this extent, but only to this extent, we agree with the analysis of this issue in Morris and Brown. Conversely, Williamson is disapproved to the extent it holds that the liability insurer can never rescind due to material misrepresentations. We leave for another day whether a liability insurer can deny coverage when the third party does not have protection against uninsured motorists. This issue is not settled under current precedent but is neither presented under these facts nor argued by the parties. Finally, we disagree with Super `s conclusion that the defrauded liability insurer should bear the loss even where the third party victim has uninsured motorist coverage. Although the Financial Responsibility Act reflects a strong preference for recovery through liability insurance, this is not the only means of compensation for accident victims. Automobile insurers in this state are required to offer uninsured motorist coverage in recognition of the fact that some people will drive without liability insurance in disregard of the law. IND.CODE § 27-7-5-2 (1993 & Supp.1994). Thus, a third party's right to recover through liability insurance is not absolute. Cf. Transamerica Ins. Co. v. Henry, 563 N.E.2d 1265, 1268 (Ind.1990) (concluding that the Financial Responsibility Act does not constitute a social policy to guarantee compensation to all victims of motor vehicle accidents). There is no injustice in placing the loss with the third party's insurer (here Illinois Farmers), who has presumably been compensated through its premiums for accepting the risk of an uninsured tortfeasor. The accident victims (Pocius and Van Winkle) gain no unfair benefit because they paid for the very coverage at issue. The sum of this is that Colonial Penn's right to deny coverage due to material misrepresentations, discussed below, is not affected under these facts by the Financial Responsibility Act or the Uninsured Motorists Coverage Act.
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.
The Guzoreks and Illinois Farmers argue that this is not the end of the inquiry. They assert that any right to void coverage of Donald is waived because Colonial Penn was allegedly on inquiry notice before the accident that Donald had a suspended license and was driving Dorothy's cars. We first note that there is no claim that Colonial Penn knew or should have known about Donald at the time of the original application. Although there is little Indiana precedent on the point, the general rule appears to be that the insurer may rely on representations of fact in the application without investigating their truthfulness, unless there is some reason to believe the representations are false. Price, 181 Ind.App. at 260-61, 396 N.E.2d at 137; LEE R. RUSS & THOMAS F. SEGALLA, 6 COUCH ON INSURANCE 3D § 82:17 (1996) (collecting cases). Therefore, Colonial Penn had no duty to look beneath the surface of Dorothy's representations to determine whether she had shaded the truth or left out any material information in her application in 1990. However, an insurer cannot avoid coverage where it had knowledge of the facts notwithstanding the material misrepresentations, or where a reasonable person would have investigated further and the investigation would have uncovered the truth. Johnson v. Payne, 549 N.E.2d 48, 51-52 (Ind.Ct. App.1990) (citing Price and other cases dealing with inquiry notice). Thus, when the insurer had sufficient information to place it on inquiry notice of possible falsity, whatever facts a reasonably diligent investigation would have discovered are imputed to the insurer. Id. For example, the insurer's independent knowledge of the spouse's driving record has been held to waive the right to avoid coverage. American Family Mut. Ins. Co. v. Kivela, 408 N.E.2d 805 (Ind.Ct.App. 1980). The Guzoreks and Illinois Farmers maintain that Colonial Penn was placed on inquiry notice that Donald was driving Dorothy's cars by a telephone survey conducted almost a year after Dorothy first obtained her policy. On February 7, 1991, National Reporting Systems, Inc. conducted telephone interviews with Colonial Penn's insureds residing in Indiana to ask them questions about their driving habits. The results of the interview with Dorothy were memorialized on a survey form. The interview disclosed that Donald had no dr. lic., which presumably meant no driver's license, and that Donald was nonetheless driving one of Dorothy's cars XXXX-XXXX miles per year. The affidavit of Colonial Penn's underwriting manager states that National Reporting Systems is a separate corporation from Colonial Penn. The record is otherwise silent on the relationship between Colonial Penn and National Reporting Systems. Nor is it clear whether the survey was used for underwriting or renewal purposes or for some other reason. [8] The inquiry notice rule contains an exception within the exception that is dispositive here. Even assuming the telephone survey was conducted for underwriting purposes, the facts at most show that Colonial Penn was negligent in not connecting the inconsistency between the survey and Dorothy's initial application. It is well settled that an act of negligence will not trump an intentional wrong. See, e.g., Rushville Nat'l Bank v. State Life Ins. Co., 210 Ind. 492, 1 N.E.2d 445 (1936). A person who seeks to interpose the carelessness of another as a defense must come with clean hands. Whitesell v. Strickler, 167 Ind. 602, 78 N.E. 845 (1906). Accordingly, even where the insurer is on inquiry notice, as may have occurred in this case, the requirement of reasonable prudence is not carried to the extent that the law will ignore an intentional fraud. Price, 181 Ind.App. at 261, 396 N.E.2d at 137 (citations omitted); LEE R. RUSS & THOMAS F. SEGALLA, 6 COUCH ON INSURANCE 3D § 82:21 (1996) (collecting cases holding that fraud voids the contract even where the insurer or its agents knew of the falsity). Intentional fraud occurs when there is a material misrepresentation of past or existing fact made with knowledge of or reckless disregard for the falsity of the statement, and the misrepresentation [is] relied upon to the detriment of the relying party. Adoptive Parents of M.L.V. v. Wilkens, 598 N.E.2d 1054, 1058 (Ind.1992) (citation omitted); accord Rice v. Strunk, 670 N.E.2d 1280, 1289 (Ind.1996). In this case, there is no factual dispute that the information was withheld intentionally and for the reason that Dorothy knew its disclosure would result in no coverage. Dorothy's misrepresentation was in the nature of an omission, but because the omission was the product of intentional concealment this makes no difference: Where one has a duty to disclose, concealment implies deceit, and the procurement of a contract through the concealment of facts which one is in duty bound to disclose, amounts to fraud. Rushville Nat'l Bank, 210 Ind. at 505, 1 N.E.2d at 450. Dorothy stated that she did not disclose Donald on the application because his license was suspended and he was not supposed to be driving. While this may have been true, by her own admission Dorothy knew that Donald drove her cars to his job at the time she applied for the insurance. Dorothy perhaps believed that her omission was immaterial because she was obtaining coverage only for herself. However, where a claim was asserted based on an accident with Donald driving, the result, from Colonial Penn's point of view, is the same as if coverage was fraudulently sought in the original application, and the analysis is the same. Construed most favorably to the Guzoreks, the undisputed facts show that Dorothy intentionally misled Colonial Penn as to whether Donald was a regular driver. Because Colonial Penn relied on Dorothy's failure to list Donald as a customary operator to its detriment, the omission amounted to intentional fraud. Consequently, even assuming for sake of argument that Colonial Penn was on inquiry notice of the falsity, Colonial Penn's right to deny coverage of Donald has not been waived.