Brock v. State Farm: When Can an Oregon Insurer Deny Coverage Based on Misrepresentations in the Insurance Policy Application?
September, 2004
According to the Oregon Court of Appeals' recent decision in Brock v. State Farm Mut. Auto. Ins. Co., 195 Or App 519, 98 P3d 759 (Oct. 6, 2004), an insurer can deny coverage based on the insured's misrepresentations in the application only if the insurer (1) reproduced the material information from the application on the policy issued, or (2) attached a copy of the application to the policy.
As a practical matter, the court's ruling limits the use of the misrepresentation in the application defense to situations where the application is attached to the policy.
Factual and Procedural Background
In Brock, the insured alleged, in relevant part, a claim for breach of an insurance contract because the insurer denied his claim after an automobile accident. The insurer responded that the insured lacked coverage under the policy because the insured had made false statements in his insurance application concerning his driving and insurance history and the insurer had relied on those statements in issuing the policy. The insurer moved for summary judgment on its "fraud in the application" defense.
In response, the insured admitted making misrepresentations in the application, but argued that the insurer could not rely on the misrepresentations to avoid coverage because a copy of his application was not "indorsed upon or attached to his insurance policy," as required by Oregon statute. The trial judge disagreed, concluding that the insurer could deny coverage because (1) signing the application satisfied the "indorsed upon" condition; or, alternatively, (2) the application contained a "binder" and, therefore, the application was "attached to" the insurance policy. The trial court granted the insurer summary judgment.
The Court of Appeals' Opinion
The Court of Appeals held that the insurer was precluded from denying coverage based on the insured's misrepresentations pursuant to ORS 742.013(1)(a), which provides, in relevant part:
"Misrepresentations, omissions, concealments of facts and incorrect statements shall not prevent a recovery under the policy unless the misrepresentations, omissions, concealments of fact and incorrect statements:
Are contained in a written application for the insurance policy, and a copy of the application is indorsed upon or attached to the insurance policy when issued."
ORS 742.013(1) (emphasis added).
The Court of Appeals rejected the insurer's argument that the term "indorsed upon" meant only that the insured needed to sign the application. The court stated:
"The use of the phrase ‘indorsed upon' clearly indicates that the indorsement is to be placed on something else. Thus, regardless of whether the indorsement consists merely of a signature or is rather an inscription of a memorandum, that indorsement must be ‘upon' something referred to in the sentence. Grammatically, there are only two possibilities: (1) ‘a copy of the application' (emphasis added); or (2) ‘the insurance policy when issued.'
* * *
‘[I]ndorsement,' * * * requires the insurer, in issuing the policy, to reproduce information concurrently with the issuance of the policy so that the policyholder is fully and precisely apprised of the information ‘that the insurer relies on in issuing the policy.'"
Brock, 195 Or App at 528 - 529 (citations omitted).
With respect to the "attached to" method, the insurer argued that: (1) the application language contained a binder; (2) which is an "insurance policy;" and, therefore, (3) it was "attached to" the policy. The court disagreed and concluded:
"[T]he application here did not constitute or embody an insurance binder. A ‘binder' is ‘a contract for temporary insurance until such time as issuance of permanent insurance is approved or disapproved or some other temporary impediment is removed.'
* * *
Nothing in [the application] language suggests that the application form itself is a binder. To the contrary, it indicates that it is not a binder, or any other type of contract for insurance, because it states that no insurance is effective based on the application until the application is accepted * * *."
Id. at 531-32.
The Court of Appeals therefore held that the insurer was precluded from denying coverage based on the insured's admitted misrepresentations because the insurer did not provide written notice of what representations in the application it relied upon in issuing the insurance policy.
Conclusion
The court has effectively merged the two methods provided under ORS 742.013(1)(a) to establish the admissibility of misrepresentations in an insurance policy application – indorsement of the application by the insured or attachment of a copy of the application to the policy by the insurer – into solely the latter, which certainly does not appear to have been the intention of the legislature in prescribing seemingly alternative methods. An equally reasonable interpretation would allow insurers to rely on the policyholder's signature in satisfaction of the "indorsed upon" method because, by signing, the policyholder has essentially attested to the accuracy of and acknowledged that the insurer would rely upon the information provided in the application. The court effectively rejected this alternative.
There are some safeguards that insurers should consider in order to effectively protect themselves against "fraud in the application." The primary one is to adopt a procedure in which applications are attached to the insurance policy booklets issued. Given the vast amount of policies issued each day, we recognize that this suggestion presents logistical problems and additional financial costs. Insurers should also document in the underwriting file that the application was attached to the policy. Finally, to the extent an insurer wants to rely on "binder" language in the application, where the application is not attached to the policy, the insurer needs to be certain that the language unambiguously constitutes a binder.