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Fool Me Once: Recent Decision Upends Application Of Misrepresentation Clause Of Insurance Policies

July 02, 2010 BY Benson Ward

A recent decision from the Southern District of Georgia casts uncertainty on seemingly well-settled legal principles concerning the preclusion of coverage resulting from an insured’s material misrepresentations.  InScott v. Allstate Prop. & Cas. Ins. Co., 2010 U.S. Dist. LEXIS 30417 (S.D. Ga. 2010), reconsideration denied byScott v. Allstate Prop. & Cas. Ins. Co., 2010 U.S. Dist. LEXIS 37629 (S.D. Ga. 2010), the insured’s Georgia home was damaged in a fire on 4/25/07.  Scott was not present at the time of the fire, as she was incarcerated in Florida on federal charges for fraud and conspiracy in January 2007, although her daughters and grandchildren remained at the insured property.  At no time prior to the loss had Scott notified her insurer, Allstate, that she was being incarcerated and would not occupy the home for eleven months.

Scott’s daughter reported the fire to Allstate, and represented that she was the named insured (i.e., her mother).  The daughter was an “insured person” under the insurance policy, as she was a relative of the named insured who resided at the home.  While posing as Scott, the daughter received and endorsed a check from Allstate for $2,000 for additional living expenses.  Upon her release from the Federal Correctional Complex in Florida, Scott submitted a sworn statement and proof of loss, which claimed personal property of $15,000. Allstate denied Scott’s claim in light of the daughter’s misrepresentations, and paid the mortgagee.  Scott demanded payment for $100,000 for structural damage and $30,000 for combined personal property and additional living expenses, and brought suit.

After denying Allstate’s motion in limine to exclude any evidence of the insured’s non-prosecution for fraud or arson, the Court then directed its attention to Allstate’s motion for summary judgment, on grounds that the insured’s incarceration constituted a change of residence and that Scott’s daughter’s misrepresentations breached the Concealment and Fraud provision of the policy.

With respect to its change of residence argument, Allstate argued that the policy required Scott to notify the insurer of any change in occupancy of the residence premises, and Scott’s incarceration constituted a change of residence such that her failure to notify of this change violated the policy. The Court first considered whether the insured’s residency was impacted by her incarceration.  The Court cited decisions from other Circuits holding that an “inmate’s technical legal residence does not necessarily change during a period of incarceration,” then harmonized this with an old case from the Northern District of Georgia holding that a prisoner “retains the domicile he had prior to incarceration,” to hold that residency is a voluntary status that is not altered by a forcible change in a state of residence.  The Court then approvingly discussed an Illinois case where an insured’s involuntary absence from the premises because of incarceration was held not to trigger an exclusion under the policy.  Stating that Georgia courts strictly construe “residence premises” language against insurers, the Court held that the “incarceration was temporary and did not constitute a change of residence.”  The Court implicitly concluded that, with respect to the clear policy language requiring the insured to notify the insurer “of any change in … occupancy,” a change in occupancy referred only to a vacancy:  “There was no change in occupancy because the Property was never vacant.”  Therefore, the Court held that Scott in no way breached the policy by not informing Allstate of her incarceration in another state.

The Court next addressed Allstate’s contention that material misrepresentations precluded coverage. Allstate argued that Scott’s daughter, who was an insured under the policy, breached the Concealment or Fraud provision through posing as the named insured and accepting and endorsing (in Scott’s name) a $2,000 advance for additional living expenses.  The Court agreed that the daughter misrepresented herself to be Scott, and that the misrepresentation was material.  However, the Court then severed and segregated Scott’s claim into discrete claims for structural damage, personal property loss, and additional living expenses.  In so doing, the Court limited the application of this breach of the policy, and held that while summary judgment was proper as to the insured’s claim for additional living expenses, the misrepresentation was not material to the claims for personal property loss or structure damage.  Because the Court found a factual issue to exist regarding the alleged misrepresentations concerning the personal property loss and a dispute to exist regarding the structural damage, summary judgment was not proper as to those issues.

The Court disposed of Scott’s motion for summary judgment on various grounds, but it granted her motion to compel arbitration as to the amount of structural damage.  Because it found that no misrepresentations were made regarding the structural damage component of the claimed loss, the Court ordered the parties to participate in appraisal to settle what it deemed a dispute over the value of the structural damage.

Allstate filed a Motion to Reconsider following the Court’s Order on its motion for summary judgment, stressing the error in allowing the misrepresentation or fraud to preclude only a part of the claim, as opposed to the entire claim.  The Court denied the motion and ruled that reconsideration was unnecessary, noting that the case law did not address the question of whether a misrepresentation that is material “only to a single and distinct facet of coverage (e.g., coverage for additional living expenses, contents, or structural damage) necessarily voids coverage in its entirety.”

This decision is noteworthy for several reasons, including the treatment of residence premises and change in occupancy, but it demands attention for the Court’s unprecedented decision to split the claim and the application of the breach of the policy.  The Court cites Pierce v. Allstate Ins. Co., 2008 U.S. Dist. LEXIS 71957 (N.D. Ga. 2008), to support this bifurcation of the materiality of the misrepresentation, however in Pierce the Northern District found that summary judgment against the insured was proper on independent grounds of application misrepresentation and material misrepresentations in the claim.  While the Court in Pierce analyzed claim misrepresentation with respect to the additional living expenses and to the claimed contents, the Court did not advance a theory that a court may divide application of the materiality of a misrepresentation among claimed coverages.

In its Order denying Allstate’s motion for reconsideration, the Court places a burden on the insurer to present case law affirmatively holding that a misrepresentation only material to one component or type of coverage necessarily voids all coverage.  It appears that such a burden would be a new requirement, as previous decisions from Georgia courts and federal courts applying Georgia law have held that an insurer properly invoked the “concealment, misrepresentation or fraud” provision to preclude coverage where the insured intentionally misrepresented a material fact that might affect the insurer’s actions in adjusting or settling the claim.  Goldberg v. Provident Washington Ins. Co., 144 Ga. 783, (1916); Clemons v. Allstate Ins. Co., 193 Ga. App. 489 (1989);Woods v. Independent Fire Ins. Co., 749 F.2d 1493 (11th Cir. 1985); Perspolis, Inc. v. Federated Mut. Ins. Co., 2006 U.S. Dist. LEXIS 20801 (N.D. Ga. 2006).  Historically, the inquiry has concerned whether a misrepresentation was made by any insured, and if so whether the misrepresentation was material, and there was no third step to the inquiry that scrutinized which particular parts of the claim may or may not relate to the misrepresentation.

We are unaware of language in a typical homeowners policy, nor prior Georgia case law, that allows an insured to proceed with some facets or components of a claim while other components are barred because of misrepresentations relating only to those specific components; the coverage under the policy applies to the loss event itself.  The recent decision in Scott, however, allows the insured to proceed with some “parts” of the claim while removing other parts for proven fraud relating to that specific aspect of the claim.  As the Supreme Court of the United States stated more than a century ago in dealing with fraud in an insurance claim, “[a] false answer as to any matter of fact material to the inquiry, knowingly and wilfully made, with intent to deceive the insurer, would be fraudulent. If it accomplished its result, it would be a fraud effected; if it failed, it would be a fraud attempted.”  Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 95, 3 S. Ct. 507, 28 L. Ed. 76 (1884).

Insurance companies must now remain cognizant of this case law on the books which seems to support (partial) recovery by an insured who commits material misrepresentations in a claim.  Though somewhat anomalous from the case law and terms of the standard policy, insurers will likely see this decision cited by insurers for some time to come.

The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved. 

Editorial Board:

H. Michael Bagley