By Catherine O'Donnell
On Jan. 4, the Appeals Court added to the evolving body of caselaw on an insured's disclosure obligations when applying for insurance coverage. See, Hingham Mutual Fire Ins. Co. v. Mercurio, 71 Mass. App. Ct. 21 (2008).
Generally, in Massachusetts, as in most jurisdictions, a policyholder has no obligation to provide information that has not been requested by the insurer or to supplement prior disclosures after the policy issues. Id. at 26 citing Quincy Mut. Fire Ins. Co. v. Quisset Properties, Inc., 69 Mass. App. Ct. 147, 154-156 (2007) (holding an insured's silence is not a misrepresentation within the meaning of the rescission statute absent an obligation in the policy or a request from the insurer at renewal).
In Mercurio, the insurer (Hingham) unsuccessfully sought to have the court either rescind or reform a personal umbrella policy on the basis of a material misrepresentation because the insureds failed to list all members of the household.
A misrepresentation is "material" if the insurer would have charged a higher premium or altered the coverage had the information been provided. A material misrepresentation in an insurance application will give the insurer the right to rescind or deny coverage.
If the insureds had listed their son as an operator on the application, the policy premium would have increased by $25 (an 18 percent increase). Id. at 22.
The Rescission Statute is silent as to whether the burden is one of inquiry by the insurer or disclosure by the insured but "nothing argues in favor of imposing an obligation of unsolicited disclosure on the insured, the failure of which is to be deemed a misrepresentation that could defeat coverage under the policy." See, Quincy Mut. Fire Ins. Co. v. Quisset Properties, Inc., 69 Mass. App. Ct. at 155.
The Mercurio insureds explained that they did not list their 19-year-old son as a family member because, although he lived at home, he did not drive his parents' car and he had a separate truck and automobile policy. 71 Mass. App. Ct. at 22. Hingham did not dispute these facts.
The Appeals Court concluded that the insureds gave an honest answer to an ambiguous application question.
Hingham's application form contained a section labeled in boldface capitalized print: "OPERATOR INFORMATION." Hingham requested, in smaller capitalized non-boldface letters, that the applicants list: "ALL MEMBERS OF HOUSEHOLD AND ALL OPERATORS OF VEHICLES/WATERCRAFT AS REQUIRED BY COMPANY." Id.
The insureds added their daughter's name to the application but did not list their son. During the policy period, the son was involved in a serious two-car accident involving a fatality while driving a friend's car. Hingham learned of the accident some months later when counsel for the deceased's estate sought insurance information from the Mercurio household. Subsequently, Hingham filed a declaratory judgment action seeking to rescind or reform the policy to exclude the son from the definition of "Insured."
The Appeals Court applied the general rule that exclusions from insurance coverage and ambiguities in an insurance policy are to be strictly construed against an insurer to insurance applications and questionnaires.
"Where a question on an application lends itself to more than one reasonable interpretation, an honest answer to one of those reasonable interpretations cannot be labeled a misrepresentation." Id. at 24.
It was unclear whether the application called for the names of all household members or just those who were the operators of the listed vehicles. Characterizing the application question as "unclear" and "confusing," the court concluded that there was more than one rational interpretation of the question. Id. at 25.
In light of the question's ambiguities, the insureds' response to the question was honest and not a misrepresentation.
Is there an ongoing disclosure obligation?
It is well established in Massachusetts that an insured is obliged to inform the insurer of changes that render the initial representations untrue during the period between the application submission and inception of the policy. See, Chicago Ins. Co. v. Lappin, 58 Mass. App. Ct. 769, 780 (2003).
The question arises as to whether the insured has an ongoing obligation to disclose a material change in circumstances during the policy period. Recent Massachusetts caselaw indicates that the obligation may turn on whether the insured is an individual or a business.
In Quincy Mut. Fire Ins. Co. v. Quisset Properties, Inc., the Appeals Court held as a matter of first impression that an individual insured's failure to notify the insurer of its corporate dissolution, in the absence of a specific policy provision or renewal application inquiry, did not amount to a misrepresentation.
The insurer produced uncontroverted evidence that the change in corporate status increased its risk of loss.
Irrespective of the "material" nature of the change in status, the court concluded that "the onus is on the insurer to identify the information it considers material and request from the insured updated information concerning any changes. Absent such obligation or request, the insured's silence is not a misrepresentation within the meaning of the statute." Id. at 155.
The Appeals Court cited with approval the analogous case of Patrons Mut. Ins. Co. v. Rideout, 411 A.2d 673, 678-79 (Me. 1980).
In Rideout, the insureds' daughter became a household member eight months after the automobile policy's inception. After the daughter was involved in a car accident, the insurer unsuccessfully sought to rescind the policy on the basis of a material misrepresentation.
The Supreme Judicial Court of Maine held that "the insured who makes particular representations in the application for insurance is not obligated to inform the insurer of changes in circumstances occurring after issuance of the policy that are inconsistent with the representations in the application." Id. at 678.
The Massachusetts Appeals Court concurred with Rideout that "where the insurer makes no attempt to update its information prior to renewal and ... relies on its agents to forward such information of changed circumstances, it would be inconsistent with our conclusion that the insured has no duty to report changed circumstances to hold that such a duty existed with regard to pro forma renewals of an already issued, valid policy." Id. at 155 (internal citations omitted).
The outcome may differ in the business context. In a decision issued two weeks prior to Quincy Mut. Fire Ins. Co. v. Quisset Properties, Inc., the U.S. District Court cited Rideout with approval in the individual insurance policy context but appeared to impose a continuing duty to disclose on the insured (after inception of the policy) in the commercial arena. See, Central Mut. Ins. Co. v. Boston Telephone, Inc., 486 F. Supp.2d 180 (D. Mass. 2007).
The insured utility company was performing pole work when a detail police officer on the project was struck and seriously injured by a motorist.
At issue in Boston Telephone was whether the insurer could rescind the policy because the insured represented during the application period that it only engaged in "inside work" and did not perform "pole" or "line" work. The insured argued that its description of work performed was correct when provided and that it was not obliged to correct its application after the policy incepted.
The federal District Court expanded the duty of a commercial insured to provide information to the insurer when, after the policy incepts, there is a material change in business circumstance. "Where the insured [in the business context] has knowledge of a fact material to the risk which honesty, good faith, and fair dealing require that he should communicate to the insurer but which he designedly and intentionally withholds," bad faith nondisclosure occurs. Id. citing Compagnie De Reassurance D'Ile De France v. New England Reinsurance Corp., 57 F.3d 56, 73 (1st Cir. 1995) (recognizing that simple negligence in not disclosing a material fact does not constitute bad faith so as to avoid a policy of reinsurance).
The court explained that a good-faith failure to disclose a change in business practices without the insured's appreciation of the effect on underwriting would not subject the policy to rescission while a bad-faith omission would result in the rescission of the policy.
The court denied the insurer's summary judgment on the basis that "a more developed record was necessary to warrant a conclusive finding" as to whether there was bad-faith nondisclosure.
Conclusion
If adopted by other courts, the Boston Telephone holding would signal a major shift from the prevailing view that the insured is not required to disclose information not specifically requested in the application form or provide supplemental information post-policy inception.
Even if Boston Telephone remains an isolated decision confined to its facts, these recent decisions underscore the need for insurers to formulate a comprehensive risk assessment and submit specific questions to the insured at each renewal period.
Insurers may want to expressly request in the policy that the insured provide updated information to the insurer if there is a material change in business operations.
Even if deemed beneficial to insurers, it would be unrealistic to attempt to impose a broader obligation to disclose a change in circumstances after the policy incepts. Absent such targeted requests, the insured's silence generally does not constitute a misrepresentation or omission permitting an insurer to rescind coverage.
Catherine O'Donnell practices in the insurance coverage litigation group at Robinson & Cole in Boston. She can be contacted at codonnell@rc.com.
March 3, 2008
