Often, when a property insurance claim is reported (even one undisputedly covered) one of the first things many carriers will do is review the application for the policy to see if the insured answered questions either incorrectly or incompletely. This is because Section 627.409 of the Florida Statute allows insurers, in certain limited circumstances, to rescind the policy and prevent the insured from recovering under the contract altogether because of that statement or omission. The relevant provision of the statute states:
Representations in applications; warranties.—
(1) . . . A misrepresentation, omission, concealment of fact, or incorrect statement may prevent recovery under the contract or policy only if any of the following apply:
(a) The misrepresentation, omission, concealment, or statement is fraudulent or is material either to the acceptance of the risk or to the hazard assumed by the insurer.
(b) If the true facts had been known to the insurer pursuant to a policy requirement or other requirement, the insurer in good faith would not have issued the policy or contract, would not have issued it at the same premium rate, would not have issued a policy or contract in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss.
Earlier this year, the issue of whether an insurer may rescind coverage for a claim under Section 627.409 was addressed by Florida’s Second District Court of Appeal in Mora v. Tower Hill Prime Insurance Company.1 In Mora, homeowners Ruis and Rosaura Mora completed an application for an insurance policy from Tower Hill Prime Insurance Company covering their new Florida home and checked “No” to the following question:
Do you have any knowledge of any prior repairs made to any structures on the insured location for cracking damage?
Almost five years after they purchased the home, the Mora’s made a claim for sinkhole related damage to their property. After investigating the Mora’s claim, Tower Hill confirmed that a sinkhole loss had occurred and extended coverage. However, a dispute subsequently arose on the extent of damage caused by the sinkhole and the amount needed to repair the damage, leading the Mora’s to file suit against Tower Hill in 2011.
During the discovery phase of litigation, Tower Hill was provided with two forms relating to a real estate inspection performed when the Mora’s initially purchased the property. The forms, which were signed by Mrs. Mora, noted cracks around the pool and a "large crack" on the ceilings of the home. There were also hand-written notes which appear to indicate repair instructions, including "repair 3 cracks in drywall at ceiling," "repair drywall at . . . stairwell base board," "repair nook window drywall cracks," "repair cracks at entry under soffit (stucco)," and "fix cracks" under three windows. At their depositions, however, both Mr. and Mrs. Mora maintained they did not recall having noticed any cracks in their home when they purchased it 7 years prior.
Tower Hill moved for summary judgment based upon the Mora’s answer to the application question regarding "cracking damage" and these two inspection forms. Though Tower Hill presented no evidence demonstrating either the extent of the alleged cracks or the nature of the repairs performed by the Mora’s to address these cracks, the insurer filed a two-page affidavit from its vice president of underwriting stating that Tower Hill would not have issued or renewed the homeowner’s policy to the Mora’s if it had known of the existing "cracking damage" noted in the two forms. The trial court determined this evidence alone was enough to declare the policy void and granted summary judgment in favor of Tower Hill.
The appellate court, however, reversed the trial court’s ruling. In its opinion, the court began by noting there are only two situations where a policy may be forfeited. The first is where the insured "knowingly makes a false statement in hopes that the insurance company will rely on that statement to issue the insurance policy." The second, more common situation – and the one presented in Mora – arises when the insurer proves that the insured made a misrepresentation (even unknowingly), that the insured’s statement was material and that the insurer detrimentally relied on it. Additionally, "[u]nder subsection 627.409(1)(b), the insurer needs to provide an explanation as to why ‘in good faith’ and ‘pursuant to a policy requirement or other requirement’ it would not have issued the policy or would not have issued it under the same terms."
The appellate court concluded that Tower Hill did not prove the answer to the question in the application was a misrepresentation, and even if it was, the carrier had not established the representation was material to the acceptance of its risk or that the "true facts" would have caused it not to issue the Mora’s policy. Tower Hill could not equate "cracking damage" in Tower Hill’s application with the "cracks" or "repair" of cracks in the inspection forms. As the appellate court explained:
[A]n insured might not regard repair of common drywall or stucco cracks as a matter that involved more than normal maintenance. In other words, an insured might conclude that Tower Hill added the word "damage" to the question to limit the inquiry to events more significant than common drywall "cracking." . . . If Tower Hill intended "cracking damage" to include all repairs of any crack in drywall or stucco, then it would seem the questions on its applications were ambiguous. In this record, Tower Hill has not established beyond factual dispute that the Moras made a misrepresentaiton on their applications when they indicated that they were unaware of any prior repairs for "cracking damage" on their home.
Tower Hill’s claim it would not have issued the policy to the Mora’s had it known about the "cracks" noted in the inspection form was similarly rejected by the appellate court:
[O]n this record the ‘true facts’ for purposes of section 627.409 are nothing more than facts that the house had drywall, stucco, and other cracks that were resolved without complication by the builder before the sale to the Moras in 2005. It is a simple fact of life that most new Florida homes develop nonstructural cracks in drywall, stucco, and other areas in the several years following their construction. Tower Hill cannot seriously contend that it refuses to insure all homes in Florida that have a history of minor maintenance to drywall and stucco at the time of the application. If that were true, then it would only insure a handful of homes in Florida.
The conclusory opinion of Tower Hill’s assistant vice president of underwriting in the affidavit simply does not present sufficient facts to explain why the answers to this specific question on the applications were material to the risk and something on which Tower Hill detrimentally relied or why the ‘true facts’ in the inspection reports were a matter that would have caused Tower Hill ‘in good faith’ not to issue the two policies ‘pursuant to a policy requirement or other requirement.’
While the facts surrounding the Mora’s claim may have been enough to overcome Tower Hill’s summary judgment motion, an important lesson to be taken from Mora is that it is important for policyholders to pay careful attention to the questions asked in an application for a policy. An incorrect answer could come to haunt the insured years later if their insurer discovers the misstatement and rescinds coverage. However, and as the opinion in Mora demonstrates, insurance carrier’s ability to do so is not without limits.