In Hiscox Dedicated Corporate Member Ltd. v. Taylor, the Eighth Circuit Court of Appeals recently affirmed the right of an insurer under Arkansas law to void a policy based on a misrepresentation in an application, even if that misrepresentation was not knowing on the part of the insured or material to the insurer, based on the plain language of a “concealment or fraud” provision in the policy.
The insured had applied for property insurance on her residence in Arkansas. The application asked whether the insured “had a foreclosure” in the preceding five years, to which she answered “no.” As it turned out, this was false twice over. Foreclosure proceedings had been initiated against her in 2014 to foreclose on another property she owned, and that property was sold in a foreclosure sale in 2016, two years before she applied for the policy. What’s more, she had received a notice of default regarding the property she was seeking to insure six days before she applied for the policy.
Knowing none of this, the insurer — representing a syndicate of underwriters — issued her a policy covering the property with limits of $2.6 million. Six months later, the house burned down under circumstances that, according to the insurer’s investigation, suggested a possibility of arson. After discovering the misrepresentation related to foreclosures, the insurer rescinded the policy, returned the premium to the insured, and filed an action seeking a declaration that it had properly rescinded the policy.
Years of litigation ensued, including two trips to the Eighth Circuit. Initially the district court granted summary judgment for the insurer based solely on the second foreclosure proceeding, initiated six days before the insured submitted her application. She appealed, and the Eighth Circuit held that the term “foreclosure” was ambiguous in that it could refer to the initiation of the proceedings or only to the final sale. Because the second foreclosure proceeding had not resulted in a foreclosure sale at the time the insured submitted her application, the court said, her “no” answer was not a misrepresentation under the latter interpretation.
On remand, the district court focused only on the first foreclosure proceeding. Because that proceeding had both been initiated and resulted in a foreclosure sale during the five years preceding the insured’s application, under any interpretation of the term “foreclosure,” it was false. And, based on uncontroverted testimony from the insurer’s underwriters, the district court concluded that the misrepresentation was material. (Presciently, perhaps, one of the underwriters had testified that when an insured under a residential property insurance policy has a prior foreclosure, there is a higher chance that she may try and burn her house down.) Thus, the court said, the insurer was within its rights to rescind the policy. Finally, the district court rejected the argument that, because, while working for another syndicate of underwriters, the insurer’s local agent had learned of the first foreclosure, the insurer should be treated as having known of the first foreclosure, barring rescission on that basis.
The Eighth Circuit affirmed. It agreed with the district court that under any meaning of the term “foreclosure” the first foreclosure counted, and so the “no” answer was false. The court also agreed that the evidence showed materiality beyond dispute and, applying Arkansas agency law, agreed that knowledge obtained by the insurer’s agent in working for a different syndicate of underwriters could not be imputed to this insurer.
But the court went on to explain that materiality ultimately did not matter. That was so because the policy included a provision providing that there would be no coverage if the insured had “[m]ade false statements; relating to this insurance.” The court agreed with the district court that the plain language of policy did not require materiality to the insurer — only that the application contained a representation that was false. It did not even require, the court said, for the insured to know that the representation was false. Treating the provision as essentially a strict liability rule, the court concluded that any false statement, material or not and knowing or not, would satisfy the provision and preclude coverage.
