Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

In Bennett v. American Hallmark Insurance Company of Texas, Shellie Bennett wanted homeowners’ insurance for his home. He met with his insurance agent who completed Mr. Bennett’s insurance application for him. The application was for coverage with American Hallmark Insurance Company of Texas (“AHICT”). A few months after getting coverage with AHICT, Mr. Bennett’s home was destroyed by a fire. Like many homeowners with this type of coverage, he filed a property damage insurance claim with AHICT, expecting that the carrier would pay the covered loss.

During its investigation of the fire claim, AHICT learned that Mr. Bennett had been unemployed at the time that he bought his home. It seems he was also unemployed at the time that he applied for the insurance coverage with AHICT. Mr. Bennett’s insurance application, however, indicated that he was employed. AHICT took advantage of this discrepancy and used it as the basis to deny his claim. AHICT alleged that he made a material misrepresentation on his insurance application.

Mr. Bennett sued AHICT for wrongful denial of his claim. During the course of the lawsuit, AHICT filed a motion for summary judgment on the breach of contract and bad faith claims arising from its denial of the claim based on material misrepresentation of employment status on the policy application.

The U.S. District Court for the District of South Carolina explained that, when reviewing the facts in a light most favorable to Mr. Bennett, there was evidence that his insurance agent did not ask him if he was employed. The facts also demonstrated that Mr. Bennett signed the application without reading it. When taking into consideration the agent’s actions and the fact that Mr. Bennett did not review his application, the Court decided to deny AHICT’s motion for summary judgment on the breach of contract claim, concluding:

[T]here is a genuine issue of fact for determination by a jury as to whether or not Plaintiff intended to deceive Defendant with regard to his employment status.

Additionally, the U.S. District Court for the District of South Carolina denied AHICT’s motion for summary judgment on the bad faith claim, explaining:

[I]f a jury were to find that [Bennett] had no intent to deceive [AHICT], it is possible that a jury could also find that [AHICT] was unreasonable in relying on the error of its own agent to deny coverage without investigating the circumstances surrounding the completion of [Bennett's] insurance application.

The decision above is specific to the U.S. District Court for the District of South Carolina. Courts in other jurisdictions might decide a similar case differently. Regardless of the jurisdiction, this is another example of a case where the insurance company’s motion for summary judgment was without merit.

In the recent case of Scottsdale Ins. Co. v. Prayer Tabernacle Early Church of Jesus Christ Number 1, No. 10-0346, 2011 WL 3320544 (S.D. Al. Aug. 2, 2011), the fraud provision of an Alabama church’s insurance policy was the focus. The policy provision stated:

A. CONCEALMENT, MISREPRESENTATION OR FRAUD

This Coverage Part is void in any case of fraud by you as it relates to this Coverage Part at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact concerning:

1. This Coverage Part;
2. The Covered Property;
3. Your interest in the Covered Property; or
4. A claim under this Coverage Part.

Originally, the church submitted insurance claims for losses from Hurricane Ivan and Hurricane Katrina. The church’s insurer, Scottsdale, paid the claims in 2004 and 2005. In 2009, the church submitted a supplemental claim for damage and invoked the appraisal clause of the policy. Scottsdale sought to investigate the claim by inspecting documents and records.

The church submitted receipts and invoices for work allegedly performed on the property. Although the church’s representative testified to the authenticity of the invoices, the companies that purportedly worked on the property had no records of ever doing any work or receiving any payment from the church. Additionally, and perhaps most fatal to the church’s claims, the invoices it submitted did not look like invoices that the contractors normally used. In fact, the heading on one invoice “appear[ed] to be cut from their yellow pages ad and pasted onto another form.” In addition, the heading and portions of another contractor’s advertisement “appear[ed] to match the heading on the invoice submitted by [the church].” The court held that, “[t]he evidence clearly indicates that these invoices were made up or altered and although defendant denied such allegations in its answer, it has offered no evidence or even argument to dispute these allegations.”

The church argued that because the insurer had previously provided coverage benefits and failed to appraise the loss as requested, it could not assert policy defenses, but the court held that the insurer had a right to investigate the 2009 claim before appraising the loss, and held the policy void because of the altered invoices.

The clear lesson from this case is that making up evidence to support an insurance claim is never a good idea. This case is proof that such misdeeds will not go unnoticed by the courts.

In Texas Farm Bureau v. Rogers, 04-10-00546-CV (Tex.App.—San Antonio, July 27, 2011), the Texas Fourth Court of Appeals was presented with an insurance lawsuit that involved concealment by the insured. In 2008, the homeowner obtained an insurance policy from Texas Farm Bureau providing $160,000 of coverage for her dwelling and $96,000 for her personal belongings inside her home. On January 14, 2009, a fire completely destroyed the insured’s home and all of its contents. The insured made a claim on the policy, and Texas Farm Bureau (“TFB”) quickly began a criminal background check on the insured, as well as a cause and origin investigation on the claim. A few days later, TFB obtained the insured’s criminal record, which included convictions for DWI, public intoxication, theft, assault, and forgery, as well as numerous probation violations. TFB’s underwriting manager became aware of the insured’s criminal record and decided to rescind the insured’s policy. In early February, TFB sent notice to the insured that it was rescinding the policy as of the original application date and returning the insured’s premium payment based on the concealment of her criminal record on the policy application.

The policy contained a provision stating:

2. Concealment or Fraud. This policy is void as to you and any other insured, if you or any other insured under this policy has intentionally concealed or misrepresented any material fact or circumstance, made false statements or committed fraud relating to this insurance, whether before or after a loss.

In its letter to the insured, TFB stated that

“[D]ue to the material misrepresentation on the original application concerning your prior criminal convictions[, w]e consider the above contract null and void…” 

At the trial level, the jury found that TFB had ratified the insurance policy, making it enforceable. TFB appealed the jury’s finding to the Fourth Court of Appeals. In its appeal, TFB argued that the insurance policy could not have been ratified because the contract was void based on the insured’s misrepresentation. TFB contended that the jury’s finding that it ratified the insurance contract with the insured was immaterial and had no legal basis.

The Fourth Court of Appeals noted that aside from concluding that TFB ratified the insurance policy, the jury also concluded that the insured made a material misrepresentation. And because the jury found that the insured made a material misrepresentation in her policy application, “the policy was void and could not be ratified. Therefore, the jury’s finding that Farm Bureau ratified the insurance contract was immaterial and will not support an award of damages and attorney’s fees.”

So take the court’s ruling in Texas Farm Bureau v. Rogers as a cautionary tale. Even though it may seem like a good idea to conceal certain facts on your insurance application, in the long run, it may prove to be a very, very bad idea.

Most applications require the applicant to state whether there is any damage or disrepair to the property and whether there are any known sinkholes in the area. This information is important to insurance companies so they can decide whether they want to take the risk and underwrite the policy. I have seen it on far too many occasions where insureds have suffered a confirmed sinkhole loss at their home or business, but their claim is denied because of a misrepresentation on the application.

While most everyone relies on their insurance agent to fill out the application and signs the application without reading it, it is a very bad idea to do so. Everyone who signs an insurance application should read it thoroughly and make sure all information is correct at the time the application is submitted. If there is damage or disrepair at the property (i.e. cracks, etc.) or if there are any known sinkholes in the area at the time the application is filled out, this information must be disclosed. Even if you follow the advice in my last post and purchase sinkhole coverage, if you do not disclose all information on the application, the insurance company may nonetheless deny your covered claim. Don’t let that happen to you.

Be familiar with the condition of your property at the time you fill out the application and disclose all known conditions that are responsive to questions presented in the application. If you don’t, you may be buying a very big headache down the line.