Court Opinion

ID: 9698766
Source: CourtListenerOpinion
Date Created: 2023-08-25 19:59:37.605303+00
Date Added: 2024-06-11T12:30:03.859058
License: Public Domain

*697McAULIFFE, Judge,
dissenting.
I do not agree that the legislature abrogated the common law right to rescind an insurance policy procured by fraud when it enacted compulsory insurance provisions.
I.
Van Horn applied for automobile liability insurance with Atlantic in October, 1984. The written application he signed was marked “No” in response to the question “Has any driver above ... a physical impairment?” At the time, Van Horn was under the active care of a physician for epilepsy that had begun in 1982. The evidence demonstrated that in April and June of 1988, and in February of 1984, he had suffered grand mal seizures, during which he lost consciousness. In addition, Van Horn suffered light headedness, dizziness, and other symptoms associated with his condition that did not progress to unconsciousness. One year before he executed the application for insurance, Van Horn was hospitalized for a week with severe anemia, secondary to the medication he was taking for his epilepsy. At that time, his medication was changed to Klonopin, which he thereafter took four times each day. Van Horn testified that his first physician “may have said [the epilepsy] could affect my driving.” His second physician, who assumed his care in 1984, advised Van Horn “shortly after he became my patient ... that he not drive until he was safe to do so per the Motor Vehicles.... ”
Van Horn did not tell the Motor Vehicle Administration of his epilepsy. When he renewed his Maryland operator’s license in 1984, he answered “No” to the written question “Do you have any physical or mental disability, other than vision, which may affect your driving?”
The accident involving Van Horn and Wines occurred on 14 January 1987, at 11:52 p.m. Atlantic first learned of Van Horn’s epilepsy when, in investigating the claim, it learned from the police accident report that “Mr. Van Horn ... advised he had taken (Klonopin) medication for his epilepsy at approx. 2200 hrs.” After determining that Van Horn’s epilep*698sy pre-existed his application for insurance, and after further determining that Van Horn had not disclosed his condition to the Motor Vehicle Administration, Atlantic sent Van Horn a check for all premiums he had paid, and filed this action for rescission of the policy. At trial, a representative of the Motor Vehicle Administration testified that if an applicant answers “Yes” to the question concerning the existence of a physical or mental disability, a medical authorization form is requested so that the Medical Advisory Board of the Motor Vehicle Administration may obtain information from the attending physician to be used in determining whether the license should be issued.
Ted Brockman, personal lines manager and former underwriting manager of Atlantic, testified that Atlantic writes only preferred risks in its automobile casualty line. He described Atlantic’s underwriting procedures and criteria. He testified that Atlantic does not automatically refuse to write insurance for persons who have epilepsy. Rather, he said, the company’s policy is to approve those persons who disclose physical impairments if they have been cleared to drive by the medical board of the appropriate licensing agency. If, Brockman said, that board had been notified of the impairment, and “if they had cleared the individual and indicated that they hadn’t restricted his ability to drive because of a particular impairment,” the disclosure of the physical impairment on the insurance application would not prevent the issuance of the policy.
The trial judge held that “Atlantic carries the burden of showing that the policy would not have been written if the fact of Van Horn’s epileptic condition had been disclosed.” Although acknowledging the testimony of Brockman concerning Atlantic’s reliance upon determinations made by medical advisory boards, the trial judge held that Atlantic was required to show more than that Van Horn had not been cleared by the Medical Advisory Board of the Motor Vehicle Administration. Specifically, he ruled, Atlantic had the burden of showing that if Van Horn had disclosed his epilepsy to the Motor Vehicle Administration, the Medical Advisory Board would not have *699cleared him, and thus the Motor Vehicle Administration would not have licensed him.
The Court of Special Appeals disagreed, holding in an unreported opinion that “a misrepresentation is material to the risk if it is of such a nature as would reasonably influence the insurer’s decision as to whether it should insure the applicant.” The intermediate appellate court concluded that Atlantic had met that standard by its uncontradicted evidence.
II.
On the question of the appropriate burden of proof, it is clear that Atlantic, as the party seeking rescission, has the burden of proving, inter alia, the making of a material misrepresentation by Van Horn. Stumpf v. State Farm Mut. Auto. Ins., 252 Md. 696, 705, 251 A.2d 362 (1969); Erie Insurance v. Lane, 246 Md. 55, 63, 227 A.2d 231 (1967). Van Horn contends the Court of Special Appeals erroneously placed upon him the burden of proving that the misrepresentation was material. It did not. The intermediate appellate court simply held that Atlantic had met its burden, and that in the absence of any other evidence which Van Horn might have offered to controvert Atlantic’s evidence, the outcome was dictated by existing Maryland law.
In Stumpf, supra, 252 Md. at 711-12, 251 A.2d 362, quoting from Silberstein v. Life Ins. Co., 189 Md. 182, 190, 55 A.2d 334 (1947), this Court said:
A false representation in an application for insurance is material to the risk if it is such as would reasonably influence the insurer’s decision as to whether it should insure the applicant.
To the same effect, see Nationwide v. McBriety, 246 Md. 738, 744, 230 A.2d 81 (1967) (“The issue of materiality depends upon whether the misrepresentation of the true facts would reasonably have affected the determination of the acceptability of the risk.”); and Casualty Ins. Co. v. Schmidt, 166 Md. 562, 568, 171 A. 725 (1934) (misrepresentations material “if they were such as would reasonably influence the decision on the *700question whether this man should be insured against loss or disability from accident or ill health, which means, of course, if they were such as would reasonably form a material factor in estimating the chances of loss or outlay on the insurance”).
What constitutes a material misrepresentation justifying rescission in life or health insurance policies or in annuity contracts is governed by statute. Article 48A, § 374 of the Md.Code (1957, 1991 Repl.Vol.) provides:
All statements and descriptions in any application for a life or health insurance policy or annuity contract, or for the reinstatement or renewal thereof, by or in behalf of the insured or annuitant, shall be deemed to be representations and not warranties. Misrepresentations, omissions, concealment of facts, and incorrect statements shall not prevent a recovery under such policy or contract unless either:
(1) Fraudulent; or
(2) Material either to the acceptance of the risk, or to the hazard assumed by the insurer; or
(3) The insurer in good faith would either not have issued, reinstated, or renewed the policy or contract in as large an amount, or at the same premium or rate, or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer as required either by the application for the policy or contract or otherwise.
The principles set forth in this statute, although not directly applicable to casualty insurance policies, are generally in accord with the contract law applicable to this case. The Restatement (Second) of Contracts § 162(2) (1974) provides that:
A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so.
Section 164(1) of the Restatement provides:
If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other *701party upon which the recipient is justified in relying, the contract is voidable by the recipient.
Section 167 addresses when a misrepresentation should be considered an inducing cause:
A misrepresentation induces a party’s manifestation of assent if it substantially contributes to his decision to manifest his assent.
Comment (a) to § 167 explains further:
A misrepresentation is not a cause of a party’s making a contract unless he relied on the misrepresentation in manifesting his assent. * * * It is not necessary that this reliance have been the sole or even the predominant factor in influencing his conduct. It is not even necessary that he would not have acted as he did had he not relied on the assertion. It is enough that the manifestation substantially contributed to his decision to make the contract.
Applying these principles to this case, it is apparent that Van Horn’s misrepresentation was material. Brockman testified that if Van Horn had disclosed the epilepsy, Atlantic would have conducted a further investigation to determine whether the Medical Advisory Board of the Motor Vehicle Administration had approved Van Horn for a license. If it had, Atlantic (in the absence of any other disqualifying information) would have issued the policy without an increase in premium. Although Brockman did not explicitly state that the policy would not have been issued if the applicant did not meet Atlantic’s underwriting standard, i.e., approval by the appropriate licensing authority after consideration of the disability, that conclusion was implicit in his testimony.
Petitioners did not suggest at trial that Atlantic’s criterion was illegal or discriminatory. On its face, the standard appears to be fair and reasonable. If a government licensing authority, charged with the safety of the public and aided by its board of experts, clears the applicant as safe to drive, Atlantic considers the risk slight enough to justify the issuance of the policy. On the other hand, if the licensing authority concludes that the disability is likely to affect the *702applicant’s ability to drive to the extent that a license should not be issued, insurance is properly denied. Van Horn withheld pertinent information from the Motor Vehicle Administration, and thus by his own misconduct rendered himself incapable of meeting Atlantic’s reasonable underwriting requirement. Van Horn’s misrepresentation that he did not have a physical impairment was, under the circumstances of this case, “such as would reasonably influence the insurer’s decision as to whether it should insure the applicant,” Stumpf, supra, 252 Md. at 711-12, 251 A.2d 362, and was therefore a material misrepresentation.1
III.
The majority holds that the compulsory motor vehicle insurance laws of this State have implicitly abrogated the common law right of an insurer to rescind a policy of automobile liability insurance procured by fraudulent or material misrepresentation, at least insofar as rescission might affect the rights of third parties who suffer damages as a result of an accident occurring before rescission. The theory is that the comprehensive insurance package enacted by the legislature was intended to provide, as far as practicable, a minimum level *703of security for payment of damages caused by the negligent operation of motor vehicles, and that allowing a policy to be voided from its inception is necessarily inimicable to that objective.
In Pennsylvania Nat’l Mut v. Gartelman, 288 Md. 151, 154, 416 A.2d 734 (1980), this Court said:
In Maryland, there is an established legislative policy designed to make certain that those who own and operate motor vehicles in this State are financially responsible.... This legislative policy has the overall remedial purpose of protecting the public by assuring that operators and owners of motor vehicles are financially able to pay compensation for damages resulting from motor vehicle accidents.... To effectuate this legislative policy, the owner of a motor vehicle registered in Maryland is required to provide security, usually in the form of a vehicle liability insurance policy. (Citations omitted.)
Certainly, the 1972 legislation represents a comprehensive effort on the part of the legislature to have every motor vehicle required to be registered in this State insured (or otherwise financially secured) against loss whenever it is registered or operated. Just as surely, allowing rescission of a policy issued to satisfy compulsory requirements cuts against the desire to have all vehicles insured at all times. The question is, did the legislature intend to prevent rescission of all or part of the liability coverage of such policies, or did it intend to permit rescission but provide other remedies for third persons who otherwise would have benefited from the rescinded coverage? Strong arguments may be made for each alternative.
Prohibiting rescission guarantees coverage for the injured third party, at least to the extent of minimum coverage required by the statute.2 To that extent, the result is “fair,” *704and in keeping with the intent of the legislature that all vehicles should be insured.
Prohibiting rescission is not fair, however, to the innocent insurer3 who has been induced to enter into the contract of insurance by fraud or material misrepresentation of an insured. Traditional concepts of justice and fair play underlie the contract principles that have long permitted rescission under these circumstances. Although the legislature might well decide that abrogation of those established principles is required to effectuate a greater public good, I do not lightly assume or infer such an intent.
Of course, if rescission is prohibited the insurer is not entirely without a remedy. It may proceed against the insured for damages caused by the insured’s deceit or negligent misrepresentation. Requiring that action does, however, place a significant burden upon an innocent party, and the prospects of collecting a judgment may be bleak.
On the other hand, if basic contract principles continue to apply, and rescission is permitted, the injured third party is not without a remedy. In addition to requiring uninsured motorist coverage, which will protect the third party if he is an insured under a policy of motor vehicle insurance, the legislature has provided a fund for the protection of qualified persons who suffer damages because of the negligence of an *705uninsured motorist. The Maryland Automobile Insurance Fund, created by ch. 73 of the Acts of 1972 (replacing the Unsatisfied Claim and Judgment Fund) permits a person such as Wines to recover damages “caused by an uninsured operator or owner whose whereabouts are ascertainable for serving process” to the limits established by the financial responsibility laws. Maryland Code, Art. 48A § 243H(a)(3).
A number of State legislatures have decided that the common law right of an insurer to rescind a motor vehicle liability policy should be abrogated, and have specifically so provided. See Anno. Rescission or avoidance, for fraud or misrepresentation, of compulsory, financial responsibility, or assigned risk automobile insurance. 83 ALR.2d 1104, 1106 (1962).
A number of courts have held, either by reference to the particular language of compulsory vehicle insurance statutes or because of the public policy found to have been announced by their passage, that the common law right of rescission did not survive the passage of such statutes. See, e.g., Sentry Indem. Co. v. Sharif, 248 Ga. 395, 282 S.E.2d 907 (1981); American Underwriters Group v. Williamson, 496 N.E.2d 807, 811 (Ind.App.1986); Teeter v. Allstate Ins. Co., 9 A.D.2d 176, 192 N.Y.S.2d 610, 619 (1959).
In this case, Wines points to two statutory provisions that were once in effect in this State, and which he believes addressed the question of rescission. Subsection (c)(6)(vi) of Section 7-324, Art. 66 1/2, Md.Code, (1957, 1970 Repl.Vol.) (repealed) required that a policy of insurance, when offered as proof of financial responsibility, must provide:
That the liability of the insurance carrier shall become absolute whenever loss or damage included in the policy occurs, and the satisfaction by the insured person of a final judgment for the loss or damage shall not be a condition precedent to the right or obligation of the carrier to make payment on account of the loss or damage....
Subsection (f) of the same section provided:
No policy of insurance offered as proof of financial responsibility under this subtitle shall be cancelled, or an*706nulled as respects any loss or damage, by any agreement between the person named in the policy and the insurance carrier after the insured person has become involved in an accident resulting in loss or damage and any cancellation or annulment shall be void.
This Court considered the first of these two subsections in National Indemnity v. Simmons, 230 Md. 234, 186 A.2d 595 (1962), and there held that “defenses based upon lack of notice or other cooperation by the insured are not available to the insurer.” Id. at 243. The Court has not had occasion to consider the intended effect of this subsection on the right of rescission. Subsection (f) would appear by its terms to deal only with agreements made by the insurer and the insured after a loss. In any event, both of these subsections were expressly repealed by ch. 73 of the Acts of 1972, and were not re-enacted in any replacement legislation.4
The Attorney General of Maryland recently responded to an inquiry from the Insurance Commissioner concerning the right of an insurer to rescind an automobile liability insurance policy because of a material misrepresentation in the application for insurance. 71 Op. Att’y Gen. 173 (1986). He concluded that Maryland’s compulsory insurance laws did not abrogate the common law right of rescission. After discussing the effects of §§ 234A and 240AA of Art. 48A Md.Code (1957, 1991 Repl.Vol.) (dealing with unfairness and discrimination in underwriting, and with procedures for cancellation and nonrenewal) he opined:
It is doubtful that the General Assembly, by enacting §§ 234A and 240AA as well as a compulsory automobile insurance law, intended to deprive an insurer of the right to seek judicial rescission of an automobile liability insurance contract as an alternative to cancellation or nonrenewal. Absent a clear expression of legislative intent to the con*707trary, we believe that the right to seek judicial rescission of an automobile liability insurance policy remains intact. (Emphasis in original; footnote omitted.)
71 Op. Att’y Gen. at 179.
Although a strong case may be made in favor of a policy prohibiting rescission of motor vehicle liability policies, equally strong arguments exist in preserving the common law right of rescission. In the absence of any express resolution of the question by the legislature, I would not presume an intent to abrogate the common law, nor read into the statute language expressly repealed. I would affirm the judgment of the Court of Special Appeals.

. I have not directly discussed the question of whether a plaintiff must demonstrate a causal connection between the misrepresentation and the loss in order to justify a rescission, because that question was neither presented to the trial court nor embraced within the petition for certiorari. I note in passing, however, that because the materiality of the misrepresentation is determined by reference to the time the contract of insurance is made, and relates to the effect on the insurer’s decision to issue the contract, the overwhelming majority of courts have held that, in the absence of a contrary statute, there need be no causal connection between the misrepresentation and the loss. See, e.g., Mutual Life Ins. Co. of N.Y. v. Morairty, 178 F.2d 470, 475 (9th Cir.1949), cert. denied, 339 U.S. 937, 70 S.Ct. 673, 94 L.Ed. 1355 (1950); Southern Farm Bur. Life Ins. Co. v. Cowger, 295 Ark. 250, 748 S.W.2d 332, 336 (1988); Campbell v. Prudential Ins. Co. of America, 15 Ill.2d 308, 155 N.E.2d 9, 11 (1959); Darnell v. Auto-Owners Ins. Co., 142 Mich.App. 1, 369 N.W.2d 243, 246 (1985); Continental Assur. Co. v. Shaffer, 157 F.Supp. 829, 834 (W.D.Mich.1957). Compare Carroll v. Jackson Nat. Life Ins. Co., 304 S.C. 491, 405 S.E.2d 425, 427 (App. 1991).

. If rescission is to be prohibited on the theory that it is inconsistent with the general legislative scheme of mandated minimum liability coverage, it would seem logical, and consistent with our earlier holdings concerning prohibited exclusions, to prohibit rescission only to the *704extent of the minimum security required. See State Farm Mut. v. Nationwide Mut., 307 Md. 631, 643-44, 516 A.2d 586 (1986). I therefore disagree with the majority on this issue as well.

. An insurer will not be "innocent” if its reliance on the misrepresentation is not justified. Thus, where good faith or reasonable standards of fair dealing require a further investigation by the insurer that would lead to discovery of the misrepresentation, the reliance is not reasonable. See Restatement (Second) of Contracts § 172 (1974), providing that:
A recipient’s fault in not knowing or discovering the facts before making the contract does not make his reliance unjustified unless it amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.
Van Horn does not suggest that Atlantic failed to act in good faith in accepting his representation.

. Indeed, contrary to the suggestion of the majority that the legislature intended coverage in favor of third parties no matter how egregiously wrong the conduct of the insured, it is clear that lack of cooperation by the insured may defeat coverage where there is prejudice to the insurer. See Md.Code (1957, 1986 Repl.Vol.) Art. 48A § 482.