In Georgia, an insurance company does not have to prove fraud in order to prevent recovery under a policy; the standard is actually much lower for insurance companies. A carrier can prevent recovery by showing a policyholder has misrepresented, omitted, concealed, or made an incorrect statement about a material fact when buying insurance.1
Georgia law, Ga.Code s 56-2409, provides that:
Misrepresentations, omissions, concealment of facts, and incorrect statements shall not prevent a recovery under the policy or contract unless:
1) Fraudulent; or
2) Material to the acceptance of the risk, or to the hazard assumed by the insured; or
3) The insurer in good faith would … not have issued the policy or contract … if the true facts had been known to the insurer as required either by the application for the policy or contract or otherwise.
There is no way out for policyholders to argue they made an innocent mistake.
In the case of Casey Enterprises v. American Hardware Mutual Insurance Company,2 Pendley Hills Hardware and Minit Check Grocery suffered a fire loss. Two years before, Fite Casey, as the president of Casey Enterprises, had submitted an application to American Hardware’s agent to insure the building with a Special Multi-Peril policy. When Casey was buying the insurance, the agent made notes about information provided by Casey and then transferred to the application forms. One mortgage company was listed on the application, but the second mortgage company who was owed $214, 000 on the property was not included. The application form also had a section to provide information on prior property and liability losses for the past three years. Mr. Casey advised of one burglary loss but several other losses that had happened were not disclosed on the form.
A reading of Georgia law, tells us that Casey Enterprises’ claim for insurance would fail. Surely American Hardware would argue that the prior losses are material to understanding the potential risk it was endeavoring to insure.
However, the actions that the insurance company took in this case turned the tables.
During the underwriting of the policy, an underwriter for American Hardware contacted the prior insurance company of Casey Enterprises and received a list of all the prior losses that happened when the prior Special Multi-peril insurance policy was in place.
American Hardware had this information before it bound the policy and the underwriting department approved the issuance of the policy knowing about the prior losses.
Two years into coverage, a fire occurred and caused $478,131.94 in damages and lost earnings were claimed. American Hardware issued $100,000 to Casey Enterprises and did not request a proof of loss.
Two months into the claim, American Hardware became aware of the missing information for the application about the second mortgage company on the property, and yet it continued to collect monthly payment on the policy premium for several months. It is important to note that American Hardware never said that the policy was void due to material misrepresentations.
Casey Enterprises suffered additional losses in March, May, and June of the following year and American Hardware made payments on these claims but failed to pay for the fire loss damages in full. A classic waiver of any argument of misrepresentation.
Casey Enterprises sued its insurance company for the fire damages but American Hardware filed a counterclaim alleging the entire policy was void and Casey Enterprises should return all the payments. In addition to the failure to list the mortgage company and prior losses, America Hardware alleged that the application listed only the corporation and failed to list Fite H. Casey, Jr., as the owner of the building. Finally, the insurance company alleged that Mr. Casey misrepresented and omitted information on the proof of loss for that was voluntarily supplied by the insured.
Accordingly, the judge ruled that it was on notice of the losses and could not use the omissions on the application as a basis not to pay the claim.
The district court concluded as a matter of law that the omission of Fite H. Casey, Jr. as owner and a named insured was a mutual mistake and ordered the policy reformed to include Fite H. Casey, Jr. as a named insured. The district court further held as a matter of law that the insurer waived any defense based on the misrepresentation of prior insurance losses by issuing the policy with actual knowledge of those losses. Similarly, the district court determined as a matter of law that the insurer waived any defense based on nondisclosure of the second mortgage in the policy application by collecting premiums after it had actual knowledge of the second mortgage. Finally, the district court held as a matter of law that the insurer could not rely on errors in the proof of loss because the proof of loss was submitted gratuitously and there was no evidence that the misstatements in the proof of loss were fraudulent. The court dismissed the insurer’s counterclaim for recission and restitution and granted plaintiffs’ motion for summary judgment with an award of damages in the amount of $455,522.73 including $147,522.73 in interest.
On appeal, all of the rulings by the trial court were affirmed with this detail:
In summary, although several material misstatements may have existed in the policy application, the insurer waived all defenses based on such misstatements by continuing to recognize the validity of the policy after becoming aware of the misstatements. It is undisputed that the insurer issued the policy after learning of all prior losses under Mr. Casey’s previous policy and that the insurer continued to collect premiums after discovering that Fite H. Casey, Jr. was the true owner of the insured property. Moreover, the insurer does not dispute the fact that it kept the policy in effect and collected premiums for seven months after discovering the second mortgage on the insured property. The insurer assured Mr. Casey that the fire loss would be paid and made a $100,000 payment on the fire loss without requiring a proof of the loss. The insurer neither demanded recission of the property nor stated that the policy was void due to material misrepresentations prior to the commencement of this action. Because the facts concerning waiver or estoppel here are not in dispute, Mr. Casey and Casey Enterprises, Inc. were entitled to a judgment as a matter of law. Massachusetts Mutual Life Ins. Co. v. Mayo, 81 F.2d 661 (9th Cir. 1936); General Accident Fire and Life Ins. Co. v. Schero, 151 F.2d 825 (5th Cir. 1935).
The morale of the case is if your insurance company had knowledge of the information left out on an application and acted as if everything was a-ok with coverage when you submitted a claim, you may have a good case for payment.