(Article from Insurance Law Alert, November 2018)
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The Eighth Circuit affirmed a district court decision holding that a property insurer acted in bad faith by refusing to pay claims, rejecting the insurer’s assertion that the insurance contract was void based on misrepresentations in the policy application. Hayes v. Metropolitan Prop. & Cas. Ins. Co., 2018 WL 5852740 (8th Cir. Nov. 9, 2018).
Hayes sought coverage under a homeowner’s policy for fire-related damage. Metropolitan denied the claim, asserting that the policy was void because Hayes made material misrepresentations in his insurance application. In particular, Metropolitan argued that Hayes indicated on the application that his property was not used for business or rental purposes, when in fact, Hayes used his garage in connection with his plumbing business and rented the upper levels of his residence to a tenant and her two children.
Hayes sued Metropolitan for breach of contract and bad faith. The contract claim was dismissed as time-barred, and the bad faith claim proceeded to a bench trial. A Nebraska district court ruled in Hayes’ favor, finding that the application was ambiguous and therefore that Metropolitan could not establish that Hayes knowingly provided false information with the intent to deceive. Finding no basis for rescission, the district court concluded that Hayes had met his burden of establishing Metropolitan’s bad faith refusal to pay. The Eighth Circuit affirmed.
The Eighth Circuit rejected Metropolitan’s assertion that Hayes lacked standing and the court had no jurisdiction to hear the bad faith claim because the contract was rescinded at the time of trial. The court also held that rescission was improper because Metropolitan failed to establish deception and reliance, requisite elements of misrepresentation. In addition, the Eighth Circuit agreed with the district court’s finding that the application was “not a model of clarity” with respect to the issues of rental or business usage because those questions were answered with pre-printed “x” notations rather than manually filled out by Hayes himself.
Finally, the court upheld the district court’s bad faith ruling, finding that Hayes met his burden of demonstrating that Metropolitan had no reasonable basis for denying his claim and acted with reckless disregard of that fact. In so ruling, the court emphasized that Metropolitan learned of Hayes’ use of the garage for business purposes and of the rental tenants shortly after the fire, but did not seek to rescind the policy on those bases until eighteen months later. The court also noted that a finding of reckless disregard was supported by the fact that Metropolitan tried to secure a release of the bad faith claim in exchange for paying off Hayes’ mortgage.