What You Say to an Insured May Impact the Scope of Coverage
Earlier this year, the Utah Supreme Court held in Youngblood v. Auto-Owners, that a policyholder can try to prove that he relied reasonably on the agent’s misrepresentations about coverage despite the plain language of the policy. (1) Youngblood bought a business auto policy which did not extend UIM coverage to pedestrians, and later was injured while a pedestrian. He claimed that the agent represented specifically and repeatedly during the application process that he would be covered as a pedestrian.
Auto-Owners pointed out that the policy language did not extend coverage, and the court agreed. Youngblood also admitted that he received a copy of the policy before the accident and did not read it. The court held that Youngblood should have the opportunity to present to a jury his claim that he reasonably relied on the agent’s representations. The court suggested that Youngblood may have a difficult time proving that his reliance on the agent’s verbal statements was reasonable: “Insurance purchasers fail to read their policies at their peril.” If the written terms of coverage are clear and understandable, it is more difficult for the insured to prove reasonable reliance on contrary representations by the agent. Also, the test is not whether Youngblood himself relied on the agent, but whether a reasonable person would have done so. According to the court, this standard will guard against a jury verdict based on undue sympathy.
Inusred Misrepresentations As a grounds for Rescission
Claims handlers deal routinely with losses which are not covered because of an exclusion in the policy. However, rescission of the policy is different. On the one hand, an exclusion or limitation in the policy may require a finding of no coverage for a particular loss, but the policy remains in effect for the policy period and the insurer retains the premium. On the other hand, rescission is an entirely separate theory. Rescission “unmakes” the insurance contract and places the parties back where they were prior to the issuance of the policy, because the policy contract was obtained on false grounds.
Recently, a United States District Judge in Utah granted summary judgment in favor of the insurer to rescind a policy based on misrepresentations by a corporation about its financial condition in its application for a directors and officers liability policy. The corporation had made material misstatements about its financial situation in its application for insurance, which the insurer had relied on when it decided to issue the policy. (2)
Only extreme cases can justify rescission. Trivial or innocent misstatements are not enough. The insured must have some knowledge that the misstatement is untrue. The misrepresentation by the applicant must be material, or made with intent to deceive, and the insurer must rely on it; or the fact misrepresented must contribute to the loss. “Material” in this instance means that the insurer would have rejected the application or would have charged a higher premium for the risk if it had known. (3)
Rescission is a useful tool for the insurer in a proper case. Each case is different and these general rules are not a substitute for your counsel’s opinion based on the facts of the particular case.
(1) Youngblood v. Auto-Owners Ins. Co., 2007 UT 28, filed March 23, 2007.
(2) ClearOne Communs., Inc. v. Lumbermens Mut. Cas. Co., -- F. Supp. 2d --, 2005 U.S. Dist. LEXIS 26187 (D. Utah Oct. 21, 2005).
(3) Utah Code Ann. § 31A-21-105, Representations, warranties, and conditions; Hardy v. Prudential Ins., 763 P.2d 761 (Utah 1988); Berger v. Minnesota Mut. Life Ins., 723 P.2d 388 (Utah 1986); Perkins v. Great-West Life, 814 P.2d 1125 (Ut. App. 1991); Derbridge v. Mutual Protective Ins., 963 P.2d 788 (Ut. App. 1998).
Written by Roger H. Bullock
