May 31, 2011
On May 26, 2011, the Indiana Court of Appeals dealt with an issue of first impression in
French v. State Farm Fire & Cas. Co., ___ N.E.2d ___ (Ind. Ct. App. 2011), Cause No. 18A02-1005-PL-489: Can an insurer rescind an insurance contract if the insured fails to disclose material facts when applying for the policy? The Court answered that question in the negative.
less..
The Frenches bought a manufactured home and contacted an insurance agent about purchasing insurance for the home. When Mr. French met with the agent, he answered all of the agent's questions truthfully, but the agent never asked about the method of construction. Instead, the agent was told that the home was "under construction" and she assumed this meant that it was not a manufactured home. Based on the application, State Farm entered into a homeowners' insurance policy with the Frenches. The amount the home was insured for reflected the agent's understanding that the home was "stick-built" rather than manufactured. Less than a year later, the home burnt down.
After the home was destroyed, the Frenches sought to replace it with a "stick-built" home, but State Farm refused to pay more than the replacement cost of a manufactured home. The Frenches brought an action against State Farm for breach of contract and both parties moved for summary judgment. The trial court denied both parties' motions for summary judgment and both parties appealed.
On appeal, the Court addressed many issues that we will not discuss. The issue that we found most interesting was the Court's discussion of State Farm's argument that it should be allowed to rescind the insurance contract entirely based on the Frenches' concealment of the purchase price of the manufactured home or the fact that it was a manufactured home. The Court examined several cases from other jurisdictions addressing this issue in the context of both personal property and real estate insurance and elected to follow the real estate cases.
We find the reasoning of the real estate cases to be persuasive and so adopt the seemingly unanimous position that failure to disclose true value in a real estate insurance context will not give rise to a rescission claim. Some of the real estate cases cited above specifically note that the insurance company did not inspect the property in question before issuing coverage, as was the case here. This strikes us as a valid point, and one on which the real estate cases can be readily distinguished from the personal property cases that reach opposite conclusions. Here, for example, it would have been a simple matter for a State Farm agent to visit the Frenches' home, at which point it would have been immediately apparent that it was a manufactured home, even without going inside. ... We conclude that even if Jerry concealed or failed to disclose the true value or nature of his manufactured home, such does not give rise to a claim of rescission by State Farm. We do not think it is an unreasonable rule that insurance companies fail to ascertain the true value of insured real property at their peril, as they are in a far better position to accurately ascertain that value than most homeowners.
The Court's conclusion is essentially pragmatic and insurance companies may want their agents to visit a home before submitting an insurance application. However, this issue could have been easily avoided if the agent had simply asked Mr. French about the method of the home's construction. Litigants will want to consider using this case whenever they want to shift the burden of performing a particular act to another party.
Lesson:
- An insured's failure to tell the insurer about the method of a home's construction will not provide the insurer with a basis for rescinding the insurance contract.
Trackback Address :: http://www.indianalawupdate.com/trackback/217
