A Follow Up to the Question of When Post-Loss Misrepresentations are Material

There are a few issues here that need to be clarified for our insureds out there who may be dealing with an insurance company making accusations of misrepresentations.  First, the rules are different depending on whether the alleged misrepresentation occurred before the loss or after the loss.  The one I see more often is the misrepresentation that occurs during the application process. That topic is certainly worthy of several posts on its own, but suffice it to say here that a material misrepresentation on an insurance application that increases the risk of loss can completely void the policy, meaning that the insurance company will refund the premiums as if the policy never existed at all.  As for misrepresentations that occur after the loss during the claim process, the law is much more generous to the insured.  In those cases, to avoid its obligations under the policy, the insurance company has the burden to show that the misrepresentation was intentional and designed to deceive. A simple mistake isn't enough. For example, if an insured fills out his proof of loss and makes a mistake in adding his personal property inventory and thus fills in the wrong number on the proof of loss, that would not be an intentional misrepresentation.  


Another requirement is that the alleged post-loss misrepresentation be material in nature.  So what is material?  In Nix v. Sentry Ins., 668 S.W.2d 462 (Tenn. Ct. App. 1983), the Court of Appeals dealt with precisely that question.  In that case, the issues at trial centered around whether the plaintiff had committed arson and whether the plaintiff had made material misrepresentations regarding what property was actually destroyed by the fire and its value.  The trial court found that there was no arson, but that there had been misrepresentations concerning the value of the property destroyed in the fire. The judge therefore found that the insurance company had no liability for the loss.  On appeal, the Tennessee Court of Appeals reversed, holding:


When the false swearing is in the application it forms the basis upon which the contract rests, and if fraud enters into it the policy would be voided even though the policy does not so provide.  But after the loss occurs then voiding the policy is in the nature of a penalty or forfeiture; in other words, in such cases the holding is virtually that, although the insured has had a loss, and may be entitled to recover from it, yet, as he has been guilty of fraud in the proofs, he must have his policy vacated and set aside as a punishment for such fraud, or attempted fraud.  In the latter case, as in all cases of forfeiture, a strict construction should be adopted, and the forfeiture not enforced except on the plainest grounds, if at all.


Nix, 666 S.W.2d at 463-64.  Most importantly to the issue of materiality, the court also noted "that if rights are to be forfeited under the terms of this insurance policy, the concealment or misrepresentation made must be relative to the loss claimed."  In that case, the insurance company pointed to alleged misrepresentations concerning the insured's financial condition which might have provided a motive for arson, but did not point to any specific misrepresentations in the proof of loss.  Because the court found there was no arson, any misrepresentations concerning the insured's financial condition were not material to the issue of his valuation of certain personal property, and the policy could not be voided.  


Nix is a very important case, and can be incredibly useful in insurance disputes.  It obviously isn't a license to misrepresent material facts, but it does substantially limit an insurance company's ability to void a policy altogether when the alleged misrepresentations just don't have anything to do with the issues at hand. 

Response to a Reader's Question - What Types of Post-Loss Misrepresentations Are Material?


Thanks to a reader who submitted this question – what types of misrepresentations are material in that the insurer would be entitled to deny coverage if these misrepresentations were made? I presume the question was posed because of provisions existing in most insurance policies which indicate the policy is void “if you or any other insured under this policy has intentionally concealed or misrepresented any material fact or circumstance relating to this insurance.” An insurance company may defend a suit for the proceeds of a fire insurance policy by proving that the insured(s) intentionally concealed and/or misrepresented a material fact during the claims process. Hendrix v. Insurance Co. of N. Am., 675 S.W.2d 476, 481 (Tenn. Ct. App.1984);Wilder v. Tennessee Farmers Mut. Ins. Co., 912 S.W.2d 722, 725-26 (Tenn. Ct. App. 1995).

The question then is – what is material? Also, note that it is not just a matter of telling the truth, as all attorneys tell their clients to do under oath, but its also a matter of concealment, as coverage can be denied where an insured intentionally withheld a full disclosure of the truth as to material issues relating to the insurance. Southern Guaranty Ins. Co. v. Dean, 252 Miss. 69, 172 So. 2d 553 (1965).



Under Tennessee law, in order to void an insurance policy based upon post-loss misrepresentations by the insured, the insurer must establish that the insured’s misrepresentations were material in nature and were “willfully and knowingly made with the intent to deceive or defraud the insurer.” Wassom v. State Farm Mut. Auto. Ins. Co., 173 S.W.3d 775, 783 (Tenn. Ct. App. 2005). Obviously, if the insured knows that the fire was of incendiary origin and swears that the origin is unknown, he or she commits fraud and violates a stipulation against fraud and false swearing. Union Fire Ins. Co. of Paris, France, v. Ryals, 25 Ala. App. 300, 145 So. 503 (1932). But that’s an easy one, isn’t it?  What else can be material?


Obviously, if the insured knows that the fire was of incendiary origin and swears that the origin is unknown, he or she commits fraud and violates a stipulation against fraud and false swearing. Union Fire Ins. Co. of Paris, France, v. Ryals, 25 Ala. App. 300, 145 So. 503 (1932). But that’s an easy one, isn’t it? What else can be material? What else is sufficient?


The Wassom case established at least five principles applicable to post-loss misrepresentation:


1.  An insurer is entitled to accurate information to determine how the loss occurred. Wassom, at 784. 


2.  A misrepresentation is material when it impacts how a company investigates the claim. Id. 


3.  It does not matter that the insured later “decided to come clean and tell [the insurer] what really happened….”   Id. at 785. 


4.  “In determining whether a misrepresentation was material, the misrepresentation must be viewed at the time it was made and not in hindsight.” Id. 


5.  “An insurance company need not establish that it relied to its prejudice upon false or fraudulent statements in a proof of loss in order to establish a breach of contract and void the policy.” Id.


Other courts have expressed the same sentiment that post-loss misrepresentations were material if any such statement “might have affected the attitude and action of the insurer.” Fine v. Bellefonte Underwriters Ins. Co., 725 F.2d 179, 183 (2d Cir. 1984). Likewise, the Second Circuit found materiality of post-loss misrepresentations to exist if the misrepresentations “may be said to have been calculated either to discourage, mislead or deflect the company's investigation in any area that might seem to the company, at that time, a relevant or productive area to investigate.” Id.


So, use these general rules to apply to your facts. I submit to the readers that Tennessee law no longer requires a misrepresentation as to value – anything that had the potential to affect the attitude and actions of the insurer, and was intended to mislead parts of the company’s investigation at the time made, can be material. It’s a case by case analysis.


Keep those reader’s questions coming!