Insurance Will Never Pay a Profit Based on a Lie

Posted on February 25, 2021 by Barry Zalma

Michigan Concludes Policy Void When Insured Lies On Application About a Material Fact

In March 2014, plaintiff paid the amazing sum of $10,000 to purchase a home in Flint, Michigan. On March 8, 2017, plaintiff went to Hickman Insurance Agency and consulted with an agent to obtain an insurance policy. Plaintiff recalled that the agent asked him typical questions to fill out the application for insurance, but the completed application contained several inaccurate statements. Most significantly, the application listed that the purchase price and current market value of the home was $75,000 a blatant misrepresentation.

In Stephen Council v. Allstate Vehicle And Property Insurance Company, Hickman Agency, Inc., and Brian K. Hickman, No. 351676, State Of Michigan Court Of Appeals (February 18, 2021) the appellate court found who was responsible for the misrepresentation and its impact on the claim.

FACTUAL BACKGROUND

Plaintiff stated that he did not know where the agent came up with the $75,000 number because he did not tell him that number. Plaintiff agreed that he was given the application to read and sign. He also agreed that his initials were on the page that contained the misstated purchase price and that his signature was under a warning that Allstate rely on the statements in the application. It also warned that in the event of any misrepresentation or concealment made by the applicant the Company may deem this binder and any policy issued pursuant to this application, void from its inception.

On October 18, 2017, a fire damaged plaintiff’s home. When plaintiff submitted a claim to Allstate for the replacement value of the home, Allstate voided the insurance policy, because, at an examination under oath he advised that the signature on the application was his and had Allstate been made aware of the actual cash amount you paid for the property the policy would not have been issued. Allstate issued a refund check to plaintiff for the paid premiums.

Plaintiff sued for breach of contract against Hickman and Allstate and negligence against Hickman, arguing that the agent had breached his duty of loyalty to plaintiff by misrepresenting the nature of the coverage and failing to inform plaintiff about the changes to the application. The circuit court granted defendants’ motions for summary disposition finding that there was no genuine issue of material fact where plaintiff was responsible for the contents of the application after he signed the application and acknowledged that the information contained within was true.

ANALYSIS

Genuine Issue Of Material Fact

Plaintiff argued that there was a genuine issue of material fact as to whether plaintiff or the agent made the misstatement on the application. In Montgomery v Fidelity & Guaranty Life Ins Co, 269 Mich App 126, 128-130; 713 NW2d 801 (2005) the plaintiff applied for a life insurance policy and erroneously stated in the application that the decedent had not used tobacco within the previous five years despite his significant smoking habit. When the decedent was killed in a car accident the plaintiff argued that the trial court erred by granting the defendant’s motion for summary disposition because there was a genuine issue of material fact as to whether the plaintiff or the agent made the misrepresentation. Whether it was plaintiff or the agent who misrepresented the material fact was irrelevant because plaintiff signed the authorization, stating that he had read the questions and answers in the application and that the information provided was complete, true, and correctly recorded failure to read an agreement is not a valid defense to enforcement of a contract.

The Court of Appeal opined that a “contracting party has a duty to examine a contract and know what the party has signed, and the other contracting party cannot be made to suffer for neglect of that duty. Regardless of who actually completed the application, plaintiff signed the authorization, attesting to the completeness and truth of the answers, after the application was completed.”

The question of who came up with the misstatements was not a genuine issue of material fact because regardless, plaintiff was responsible for the misrepresentations when he was given an opportunity to read the application and authorized that the it was true and accurate.

Plaintiff cannot claim on appeal that defendants committed fraud. Further, there was no evidence that the insurance agent intentionally attempted to trick or deceive plaintiff into signing an untrue insurance application. Overall, there is no indication that plaintiff was excused from his duty to read the insurance application.

Even when viewed in a light most favorable to plaintiff, the trial court correctly concluded that plaintiff was responsible for the misrepresentations in the application regardless of whether the agent completed the application on plaintiff’s behalf.

ESTOPPEL

The policy in this case was voided, in part, because the application misstated the purchase price of the home as $75,000 when plaintiff actually paid $10,000. It is well established that failure to read an agreement is not a valid defense to enforcement of a contract.

Materiality Of Misrepresentations

A misrepresentation is material when knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make the contract. Allstate submitted an affidavit of a field product manager in the underwriting department who testified that Allstate would not have issued the policy had it known the truth. Therefore, the misstatement regarding the purchase price of the home was material because Allstate would not have authorized the policy had it known the true purchase price of the home.

ZALMA OPINION

Telling an insurer that a house is seven and a half times more value than the cost and true value raises a moral hazard that no intelligent insurer would accept since a fire – intentional or accidental – would allow an insured to profit from the loss. Insurance can never be a gamble. The insured, by lying on the application for insurance, and signing it over the warning that any lie on the application would allow the insurer to void the coverage, was his own enemy. The application was fraudulent and the rescission of the policy was the appropriate avenue available to the insurer.

? 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at https://www.zalma.com and [email protected].

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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