John M. Kirby June 3, 2014

In Burch v. Lititz Mutual Insurance Co. (November 19, 2013; EDNC), the Court addressed the insured's misrepresentations in a homeowners policy of insurance. In this case, the insured filled out an application for homeowners (HO) insurance, for a home they purchased.

The female owner filled out an application stating that she was single (which was not true), that the market value and purchase price were $475,000 (when in fact they bought it for about $200K), and that the insured had no other losses in the last three years (which was not true). The policy contained the standard language stating that the insured declares that the inforamtion in the application is true. The policy states that it does not provide coverage if "an insured has 1. Intentionally concealed or misrepresented any material fact or circumstance; 2. Engaged in fraudulent conduct; or 3. Made false statements, relating to this insuarnce."

The home was thereafter destroyed by fire. The insurer made some payments, but then denied the claim. The insurer conducted an Examination Under Oath (EUO), at which the insured clarified many of the facts in connection with the policy application. She had no explanation as to why she reported that she was single. Other evidence suggested that her husband had a negative credit history. She also had no explanation as to the error in the purchase price. She explained the error in the form for prior claims on the basis that those claims were made under renters policy (and not a HO policy). The insured seemed to also attempt to implicate the insurance agent in some of the errors (e.g. the error as to the purchase price).

The court first ruled (on the motion for summary judgment) that there were knowing and willful misrepresentations. The court essentially rejected the insured's attempts to show that these were innocent mistakes. The court also noted the general rule that the law presumes that a person signing an insurance application has read it, in the absence of proof of fraud or mistake. The court did hold that the error as to the claims history could constitute a "mistake," thus creating a jury issue as to that misrepresentation. The other errors on the application were deemed knowing and willful as a matter of law.

The court then addressed the issue of whether the misrepresentations were "material." Pursuant to case law, a misrepresentation is material when "the knowledge or ignorance of it would naturally influence the judgment of the insurer in making teh contract, or in estimating teh degree and character of the risk, or in fixing the rate of premium." The insurer presented testimony (underwriter) that the insurer would not issue policies where the replacement cost ($807K in this case) exceeds the purchase price by more than 30%. He also testified, however, that underwriting decisions are made on a case-by-case basis. The court ultimatelyd determined that whether the misrepresentations were material created an issue of fact, thereby precluding summary judgment.

The court also rejected claims by the insured for Bad Faith and Unfair and Deceptive Practices, by basically reasoning that the insurer's denial was reasonable (even if it was not necessarily correct).

Of some interest also is that the insured brought various claims for recovery of consequential damages. In particular, the insureds argued that the denial caused damage to their creditworthiness (credit rating) and that it forced one insured to accept early retirement. The court rejected these under basic common law principles, finding that these damages were not in the contemplation of the parties. The court wrote, "Nor does the nature of the contract -- an insurance policy upon a home -- suggest that the parties contemplated compensation for losses such as emotional distress, adverse credit effects or loss of employment."

John Kirby has represented many parties in insurance cases, including those involving the issues of material misrepresentation. He has represented insurance companies and insureds in Examinations Under Oath, and has taught courses on insurance coverage in North Carolina.