Case Issue The issue in this fact pattern is whether an insurance company was justified in relying on the misrepresentation made by the insurance applicant in their application for insurance that their forty-eight-room lodging house in Worcester, MASS was protected by sprinklers, despite an earlier report in the insurer’s file indicating the absence of sprinklers. Rule of Law: The Massachusetts General Laws Chapter 175, §186 (Mass. Gen. Laws ch. 175, §186) states in relevant part:
No oral or written misrepresentation or warranty made in the negotiation of a policy of insurance by the insured or on his behalf shall be deemed material or defeat or avoid the policy or prevent its attaching unless such misrepresentation or warranty is made with actual intent to deceive, or unless the matter misrepresented or made a warranty increased the risk of loss. Clarkson, Miller, and Cross (2012) clarified the MASS statute by pointing out that “…an insurance applicant is bound by any false statements that appear in the application… ” (p. 1002). the authors go further to note that “…
Because the insurance company evaluates the risk based on the information included in the insurance application, misstatements or misrepresentation can void a policy, especially if the insurance company can show that it would not have extended insurance if it had known the facts… ” (p. 1002).
The fact pattern suggested that the Duffys in applying to General Star Indemnity Co.for insurance coverage indicated on the 1994 insurance application that the premises of which the insurance was to cover, had sprinkler systems. General Star issued an insurance policy in reliance on this application that the Duffys submitted to them. Additionally during an inspection of the premises by a General Star agent/representative (inspector), the inspector inserted a hyphen in the area on the insurance application representing/acknowledging the existence of a sprinkle systems by inserting a hyphen.
It was only 11 years after the first declaration that and only after the premises sustained more than $100,000 in fire damages that the insurance company “… learned that was no sprinkler system… ” in the complex (p. 1016). The insurance company in learning of this misrepresentation of a contractual material fact, filed suit in federal district court seeking to void/rescind the insurance policy. The Duffys filed a counter claim.
Where the Duffys neither challenged that they (a) unintentionally made misrepresentations in their initial 1995 insurance application to General Star nor (b) that they misrepresented that the nonexistence of an automatic sprinkler system increased the General Star’s risk of loss as a matter of law; they did make the argument that during the renewal of the insurance contract, General Star had knowledge that the premises did not have sprinkle systems – based on the 1994 inspection report and that General Star therefore, waived its right to rescind the insurance contract on the basis of that misrepresentation.
Thus the Duffys forwarded the argument that in General Star “… having renewed the policy with knowledge that the Premises was not sprinklered… ” (General Star Indemnity Co. v. Duffy, 1999, p. 3) “… General Star waived its right to rescind on the basis of a misrepresentation about the presence of sprinklers… ” (p. 3). In applying Mass. Gen. Laws ch. 175, §186, the federal district court ruled and the 1st Circuit Court affirmed that General Star reliance on the Duffys’ misrepresentation was grounded and thus justified that they had sprinklers in the buildings in 1995.
Further, the courts used the language of Appleman & Appleman, 16B Insurance Law and Practice §? 9086 (2d ed. , 1967) to further clarify their position that the insurance company’s reliance on the insurer – who is in a better position than the insurance company to make the safety determination of their facilities was a material element of the insurance’s company decision to insure the party’s premises. The Appleman & Appleman document stressed that “…
[A]n insurer is entitled to rely on the representations of an insured without checking all of its files to determine if such insured is guilty of fraud… ” (p. ). Under North American Specialty Ins. Co. v. Savage, 977 F. Supp. 725, 731 (D. Md. 1997) of which the court drew on, the courts reasoned that “… Generally, insurers do not have a duty to investigate insurance applicants and are entitled to believe what an applicant claims to be true… ” (p. 75).
Foster v. Auto-Owners Ins. Co. , 703 N. E. 2d 657, 660 (Ind.1998) was another case whose ruling language was on point with the General Star Indemnity Co. courts’ decision. The Foster case maintained that by “Imposing this obligation [to cross-check the accuracy of an application against others submitted by the same applicant] would create the opportunity to play a catch-me-if-you-can game that would ultimately generate additional costs to insurers and no legitimate benefits to insureds. ”). Case Conclusion The case ultimately turned on the court’s position that the “…
Duffys were in the best position to know the truthfulness of their statement about the sprinklers, and Massachusetts law does not impose an affirmative obligation on an insurer to investigate and verify the accuracy of an insured’s representations… ” (General Star Indemnity Co. v. Duffy, 1999). The courts further reasoned that the Duffys has a legal obligation to ensure the building had sprinklers. This legal obligation, according to the courts had been enacted by the City of Worcester on September 25, 1990 as a provision of the Massachusetts General Laws chapter 148, Section 26H.
This legal enactment was within the window of Duffys‘ first and second applications for insurance coverage. ? The insurance company’s reliance on the Duffys’ warrants that their premises were protected by sprinklers convinced the insurance company to make this part of the insurance contract; further General Star was justified in believing Duffys’ affirmation that they had sprinklers during the policy renewal without conducting an inspection of the facilities. The Duffys did not lead them to reason otherwise.
The Courts’ reliance on the Mass. Gen. Laws ch. 175, §186; the existence of Massachusetts General Laws chapter 148, Section 26H and; supporting case law guided the Courts in correctly making the judgement for voiding the insurance contract and coverage for the Duffys’ facilities. Moreover, the Courts were also correct in dismissing the Duffys’ counterclaims.
Reference Clarkson, K. W. , Miller, R. L. , Cross, F. B. (2012). Business law: Legal, ethical, global, and corporate environment. (12th ed. ).
Mason, OH: Cengage. Foster v. Auto-Owners Ins. Co. , 703 N. E. 2d 657, 660 (Ind. 1998) Insurance, Mass. Gen. Laws ch. 175, §186 (2012). Retrieved 2 September 2013 from, https://malegislature. gov/Laws/GeneralLaws/PartI/TitleXXII/Chapter175/Section186. Lodging or boarding houses; automatic sprinkler systems, Mass. Gen. Laws ch. 148, § 26H (2012)https://malegislature. gov/Laws/GeneralLaws/PartI/TitleXX/Chapter148/Section26h. North American Specialty Ins. Co. v. Savage, 977 F. Supp. 725, 731 (D. Md. 1997).