Never Lie on an Application for Insurance

Post 4768

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Allied World issued general liability policies to Clint Lovette (“Lovette”) and his companies. (collectively “Lovette Defendants”) for the policy periods of March 16, 2018 to March 16, 2019 and March 16, 2019 to March 16, 2020. Allied World sought a judicial determination in its favor that it does not owe the Lovette Defendants a defense or indemnity regarding two cases.

In Allied World Surplus Lines Insurance Company v. Lovette Properties, LLC, et al., No. 2:22-cv-00738-RDP, United States District Court, N.D. Alabama, Southern Division (March 15, 2024) the USDC resolved the disputes.

Contents

FACTS

In early September 2017, the Wheelers threatened to sue Lovette Properties to recover all sums paid if the Wheeler project was not completed by the end of 2017. The Wheelers informed Lovette Properties that they were considering all available options for remedying the situation and asserted that their letter “does not constitute a waiver of any of our rights or remedies, all of which are expressly reserved.”

The 2018/2019 Policy

On April 16, 2018, Clint Lovette, on behalf of Lovette Properties, signed and submitted a “Contractor’s Supplemental Application” requesting general liability insurance coverage from Allied World. In the Contractor’s Supplemental Application, Lovette falsely represented: (1) that the Lovette Defendants had no losses, claims, or suits against them in the past 8 years; (2) that no claims or legal actions were pending; (3) that the Lovette Defendants had no knowledge of any pre-existing act, omission, event, condition, or damage to any person or property that might reasonably be expected to give rise to any future claim or legal action against any person or entity identified in the application; (4) that the Lovette Defendants had not been accused of faulty construction in the past 8 years; and (5) that the Lovette Defendants had not been accused of breaching a contract in the past 8 years.

The Wheelers filed an Arbitration Complaint against Lovette seeking recovery of the costs associated with completing the renovation of their house; consequential damages for the cost of repairs to the house; the costs for maintaining another household during construction; damages for mental anguish and emotional distress; and “exemplary damages to the extent permitted by law [and] … the costs of this action, attorneys’ fees, expenses, and interest on the judgment as allowed by law.”

The Adams Case

On April 15, 2020, Allison and Carl Adams (“the Adamses”) sued Lovette. In the Complaint, the Adamses alleged that Lovette Properties abandoned the project before completion and left the house in a manner that did not comply with the applicable building codes and industry standards. The Adams case was tried as a bench trial that entered a judgment for $149,214.23 in favor of the Adamses only on the contractual and negligence claims.

DISCUSSION

Allied World asserted that summary judgment in its favor was proper because the Policies must be rescinded and thus Allied World is relieved of its obligation to defend or indemnify the Lovette Defendants in both the Wheeler arbitration and the Adams case.

Rescission under Alabama Code § 27-14-7

Because of the Lovette Defendants’ misrepresentations, omissions, concealment of facts, and incorrect statements in the 2018 and 2019 Contractor’s Supplemental Applications Alabama statutes prevent recovery under the Policies and an insurer can rescind a policy or deny coverage if, in the application or in negotiations therefor, the insured made misstatements that either (1) were fraudulent (i.e., made intentionally with knowledge); (2) were material to the risk (although innocently made); or (3) affected the insurer’s good faith decision to issue the policy for which the insured applied.

In Alabama, misrepresentation of a material fact made willfully to deceive, or recklessly without knowledge, and acted on by the opposite party, or if made by mistake and innocently and acted on by the opposite party, constitutes legal fraud.

Under the language of Allied World’s policies, even if Lovette’s misrepresentations were innocently made, Allied World has a right to void the policy so long as the misrepresentations were (1) material and (2) relied upon. Based on the record, it is readily apparent that the applications contain misrepresentations.

ALLIED WORLD IS ENTITLED TO RESCIND THE INSURANCE POLICIES

An insurer may void a policy if it can show that:

The insurer in good faith would either not have issued the policy or contract or would not have issued a policy or contract at the premium rate as applied for or would not have issued a policy or contract in as large an amount or would not have provided coverage with respect to the hazard resulting in the loss if the true facts had been made known to the insurer as required either by the application for the policy or contract or otherwise.
The key question is the good faith of the insurer in refusing to issue the policy.
To meet its burden, Allied World offers the affidavit of Preston Starr. In his affidavit, Starr states that, had Lovette given a “YES” answer to any of the questions at issue in this matter, it would have charged a higher premium for the Policy and would never have issued a Policy that provided coverage for any claims out of Lovette’s work done for the Wheelers.
In addition, Starr affirmed that, whenever an applicant discloses a known incident that could arise into a future claim, C&S consistently and repeatedly attaches a “Known Claimant/Incident Exclusion” Form to the policy that documents “the name of the party alleging potential wrongdoing, the date of the alleged loss, and as many specific details as possible, so that if a claim shows up in the future on the policy, Allied World have an exclusion specifically excluding coverage for that claim.

Under Alabama law testimony from an insurance company’s underwriter that is “supported by other uncontradicted evidence in the record” – such as the company’s underwriting guidelines – can be sufficient to establish materiality or that a company in good faith would not have issued the policy as written as a matter of law.

For these reasons, summary judgment in Allied World’s favor is due to be granted, and both Policies are due to be rescinded.

Alabama law, like that in most states, allows for rescission of a policy when the insured obtains a policy by concealment or misrepresentation about a material fact. Lovette did not advise Allied World of the pending claims which were material to the decision of Allied World to insure or not insure Lovette. Equity required the policies to be declared void from their inception.

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Never Lie on an Application for Insurance