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.
Insurers often assert the doctrine of judicial estoppel as a defense to first party claims when the insured filed bankrupcty within a few years prior to an insured loss. The most common scenario is a homeowner files bankruptcy, and utilizes the amount exempted by bankruptcy law as the value of his or her personal property when completing the bankruptcy petition (which is signed under oath). Then, when the homeowner has a total fire loss and submits a personal property claim for multiple times the amount previously sworn to in bankruptcy court, the insurer screams foul and the battle ensues. Here is an outline for analyzing the judicial estoppel doctrine as it applies to these types of cases:
First, know that judicial estoppel is not favored under Tennessee law. Layhew v. Dixon, 527 S.W.2d 739, 741 (Tenn. 1975). "Judicial estoppel only applies where a statement of fact is willfully false in the sense of knowing, deliberate perjury." See e.g. Prince v. Allstate, 2002 U.S. Dist. LEXIS 26889 (E.D. Tenn. 2002) (numerous citations to Tennessee cases omitted).
Second, be familiar with a pair of United States Supreme Court cases that discuss judicial estoppel. New Hampshire v. Maine, 532 U.S. 742 (2001); Zedner v. United States, 547 U.S. 489 (2006). These cases set forth three factors to be used in determining whether the doctrine of judicial estoppel applies to a particular case.
Third, don't forget about the good faith exception for "mere mistakes or inadventent conduct." See e.g., Browning v. Levy, 283 F.3d 761 (6th Cir. 2001); State v. Brown, 937 S.W.2d 934 (Tenn. Ct. App. 1996); Gerber v. Segal, 2003 Tenn. App. LEXIS 120 (Tenn. Ct. App. 2003). Finally, be aware of the fact that the valuation methods are different in bankruptcy court and in the insurance realm. That alone often goes a long way in providing a very legitimate reason for discrepancies in value.
A common question around my office is, “How do I know what values to claim for my personal goods?” Fortunately, a 1958 Tennessee Court of Appeals opinion provides the answer, but it is not one that is widely disseminated by adjusters to policyholders. In Tennessee, household goods, furniture, clothing and other articles acquired for personal use in the home are valued by the “value to the owner” standard, not by their market value.
In Clift v. Fulton Fire Ins. Co., 315 S.W.2d 9 (Tenn. Ct. App. 1958), the court held:
The phrase ‘the actual cash value’ . . . may mean ‘market value’, or the more elastic standard of ‘value to the owner’.
. . .
‘This doctrine [of ‘value to the owner’] is most frequently and conveniently resorted to in cases of, or damage to, articles which the plaintiff has acquired for personal or domestic use and not for business purposes, such as household goods, clothing, pictures, books, and the like. While usually these things have some slight value for sale at secondhand, this market value would be a very inadequate compensation to the plaintiff who acquired them for use, not for sale. The fact that the property was of this character, that is, used clothing or household goods intended for the owner’s use, is a sufficient showing that market value as secondhand goods is an inappropriate standard, and casual holdings that proof must be made that there is no market value can hardly be supported. (citation omitted)
. . .
In ascertaining the value of goods under this more elastic standard of ‘value to the owner’, evidence of the original cost, of the cost of replacement, the condition of the goods, the use to which they were being put, and all other relevant facts, are to be taken into consideration.
. . .
The goods covered by this policy were household goods, furniture, wearing apparel, and numerous other articles which had been acquired by plaintiffs for personal use of themselves and their children in their home; and the value of such goods is to be estimated not by the market value, not by what they could be sold for in the market as secondhand goods, but by the more elastic standard of ‘value to the owner'.
Clift, 315 S.W.2d at 11-12. This standard is certainly fair to the policyholder. However, actually applying the standard in the real world when reviewing personal property inventory forms is a difficult task indeed. The standard is particularly helpful when defending an insurer’s claim of fraud through alleged overvaluation.