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.
On April 30, 2009, the Tennessee Court of Appeals issued yet another opinion on the topic of misrepresentations on insurance applications. The case is Tennessee Farmers Mut. Ins. Co. v. Farrar (view slip opinion here).
First, it should be noted that T.C.A. 56-7-103 provides that a misrepresentation on an application voids the policy if (1) the misrepresentation was made with actual intent to deceive, or (2) the misrepresentation increases the insurance company's risk of loss. Over the years, Tennessee courts have applied this statute on numerous occasions, and have held that a misrepresentation increases the insurance company's risk of loss when it is of such importance that it "naturally and reasonably influences the judgment of the insurer in making the contract."
In Farrar, the insured indicated on his application for insurance that he was the only person with an ownership interest in the property. It turns out that another individual (who happened to be a disabled person with a history of alcoholism and mental illness) had a life estate in the insured property and lived with the insured. Relying on prior case law holding that misrepresentations as to the title of the property are sufficient to void a policy and the fact that the insurer "never had an opportunity to ask [the insured] questions so it might evaluate the risk associated with the dual ownership interests," the court held that the misrepresentation increased the insurer's risk of loss and affirmed the trial court's ruling that the policy was void.
The result in Farrar was really no surprise. However, what would have happened if there were no misrepresentations on the application and the life estate had been granted after the application was submitted? We will find out soon - I presently have a case on appeal in which the insured lived at his Chester County home for 20 years, but conveyed it to his son before a fire. Despite the conveyance to his son, he continued to live at the house, maintained it, and treated it as his own in all respects. There was no provision in the policy that required the insured to notify the insurance company if title to the property changed. My client (the insured) won at the trial court level, and the case is presently on appeal. The issue there will be one of insurable interest, which is another topic altogether. Look for an opinion toward the first of next year.