(Article from Insurance Law Alert, November 2019)
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A Michigan appellate court ruled that an insurer was entitled to rescind a policy based on a material misrepresentation in the application but remanded the matter to determine whether the policy should be reformed to provide coverage for an additional insured. Doa Doa, Inc. v. PrimeOne Ins. Co., 2019 WL 5680994 (Mich. Ct. App. Oct. 31, 2019).
PrimeOne issued general liability and property insurance to Doa Doa (“DDI”), the owner of a bar. Garden City Real Estate (“GCRE”), the owner of the building in which the bar was located, was listed as an additional insured in the general liability section of the policy, but not the property section. When a fire destroyed the bar, DDI and GCRE sought coverage from PrimeOne. During its claim investigation, PrimeOne discovered that the bar had called the police several times during the prior few years in response to various incidents of criminal activity. This contradicted a statement made by DDI in the policy application, which asked: “Number of police calls within the past year (If any describe in detail).” In response, DDI stated that one call relating to a fight had been placed. PrimeOne sought to rescind the policy based on this misrepresentation.
A trial court denied PrimeOne’s summary judgment motion, finding that issues of fact existed as to whether the alleged misstatement was material. The trial court reasoned that materiality turned on credibility determinations regarding the testimony of PrimeOne’s President and underwriter, both of whom stated that the policy would not have been issued had they known about the bar’s history of police activity.
The appellate court reversed, deeming the misrepresentation material as a matter of law. The appellate court emphasized that the application asked not only about the number of police calls, but also the nature of those calls. The bar’s failure to provide that information was material, the court reasoned, because PrimeOne’s underwriting guidelines provided that it would not insure any business with two or more assault or battery incidents within the past three years. Had the bar answered the application question fully and honestly, PrimeOne would have rejected the application as a matter of course. As such, the contested testimony and subsequent credibility determination were unnecessary to prove materiality.
The court rejected DDI’s contention that PrimeOne’s failure to ask about police call activity in most of its other policy applications evidenced a lack of materiality. The court stated: “differently worded questions designed to collect information about risk do not bear upon the question of whether, if presented with the information about the multiple prior police calls to Bar 153, defendant would have chosen to issue the particular insurance policy to DDI.”
With respect to GCRE’s coverage claim, the court noted that the remedy of rescission as to “innocent third parties” uninvolved in making any misrepresentations is a matter of equity within the court’s discretion. Here, there was no indication in the record that GCRE was involved in filling out the insurance application. Therefore, the court remanded the matter to determine whether rescission as to GCRE would be equitable or whether reformation was warranted.