Insurer Does Not Waive Right to Rescind Policy After Cancellation Due to Misrepresentation – If the Rescission is Based on Different Misrepresentations
The recent case of Auto-Owners Ins. Co. v. Yahia Motan & Motan Yahia reminds all practitioners of the importance of accurate responses in insurance applications. Auto-Owners addressed the issue of misrepresentations made in commercial insurance policies. 2015 Mich. App. LEXIS 1659 (MI App. 1st Dist. 2015). Decided on September 8, 2015, the Michigan Appellate Court found in favor of the insurer, finding that it relied on the insured’s misrepresentations made in the application to justify cancellation and rescission.
Najieb Jabbar, an agent of Motan and M&S Quick Stop, contacted James Anderson, an independent insurance agent, and indicated he wanted to purchase insurance for M&S. Anderson filled out an application using information provided to him by Jabbar, which Jabbar signed without reviewing for accuracy.
There was no dispute that this application contained numerous misrepresentations, including stating “no” when asked whether any previous policy coverage had been declined, cancelled or non-renewed in the previous three years. M&S actually had two separate policies cancelled or non-renewed within this time frame, one of which was with Auto-Owners and cancelled for non-payment of premiums. Further, Anderson indicated that M&S had no prior losses or claims, when in reality, M&S had several. Finally, Anderson indicated that M&S had not had its liquor license suspended, violated, or revoked in the previous five years. M&S was actually cited by the Michigan Department of Licensing and Regulatory Affairs for numerous violations.
Based on these representations, Auto-Owners issued an insurance policy to M&S. Less than three months later, Auto-Owners sent a notice of cancellation, after Auto-Owners learned of the previous cancelled Auto-Owners policy. It was still in the dark about the other misrepresentations at that point. After the notice of cancellation was sent, but before it became effective, M&S was destroyed by a fire. Motan submitted a claim, and Auto-Owners denied coverage. Auto-Owners then sought a declaratory judgment that this policy was void due to misrepresentations. Motan responded with a breach of contract claim, and initiated a third-party complaint against Anderson, alleging that he negligently filled out the application.
Because Motan had made material representation on the application, the trial court granted summary judgment to Auto-Owners. It also granted summary judgment in favor of Anderson, as the misrepresentation were attributable to Motan, not Anderson.
On appeal, Motan argued two things: (1) Auto-Owners waived its right to rescind or void the policy because it chose to cancel the policy at a specific future date, and required Motan to pay premiums for coverage up until this date; (2) Auto-Owners was not entitled to rescind or void the policy because there were genuine issues of material fact as to whether the misrepresentations were material or intentional. The Appellate Court disagreed with both arguments.
Key to the Appellate Court’s disagreement with Motan’s first argument is the fact that Motan was not forthcoming with its information. It stated: “We do not dispute the general proposition that an insurer may waive its right to rescission by first seeking cancellation of an insurance policy on the same grounds…However, ‘a litigant cannot be held estopped to assert a defense, or to have waived his right thereto, because of facts he does not know[.]’” (citation omitted)(emphasis added). Here, Auto-Owners based its cancellation on its discovery that Motan failed to disclose that its previous policy with Auto-Owners was cancelled for non-payment. Additional misrepresentations were later discovered. Because the misrepresentation which formed the basis for Auto-Owners’ decision to cancel the policy (prior policy with Auto-Owners was cancelled for non-payment) was different from those that formed the basis for its later decision to void the policy, it did not waive its right to later rescind.
Second, the facts misrepresented by Motan were material. Auto-Owners provided an affidavit from one of its underwriters, stating that the misrepresentations were material and the policy would not have been issued had Auto-Owners been aware of them. In Michigan, “a fact or representation in an application is ‘material’ where communication of it would have had the effect of ‘substantially increasing the chances of loss insured against so as to bring about a rejection of the risk or the charging of an increased premium.’” (citations omitted). Further, if the insurer relied on the misrepresentation, rescission is justified regardless of whether the misrepresentation was innocent or intentional.
Nevertheless, the Appellate Court did remand this matter to the trial court to order Auto-Owners to return all premiums paid to Auto-Owners by Motan.
A simple check of the application may have yielded some of the information misrepresented, such as the fact that Motan had had a previous policy with Auto-Owners. This case serves as a gentle reminder that fact-checking is always an appropriate course of action, and could save extensive litigation costs.