Material Misrepresentation: Must It Be Material To The Risk Or Material To The Loss?

You know the answer to the question above, and so does every court in this country.  And yet in a few cases we can still see a court fail to void a policy, even though the applications contained obvious falsehoods designed to produce a lower premium or qualify for insurance in the first place.  A small minority of courts occasionally find that, because the loss caused by the insured would have produced the same payment from the insurer regardless of whether the insured told the truth or not, the misrepresentation was not material.

Most states have statutes, however, that define a misrepresentation as material if it affects the risk, not if it affects the payment of indemnity.  Most courts interpret "risk" in its true sense, including the fact that the insurer would have charged higher premiums had it known the truth.  An illustration is Commercial Union Insurance Co. v. Dean Pesante, 2006 WL 2276951 (1st Cir. August 9, 2006).  A Rhode Island fisherman, Pesante, apparently falsely claimed on his policy application that his boat was used for lobstering, when it really was used for gill-net fishing, a more risky proposition.   While returning from gill-net fishing, he collided with another boat, some people on board were injured, and sued.  In the insurer’s later declaratory action on coverage issues, the district court denied the insurer’s summary judgment motion because Pesante was not engaged in gill-fishing at the time.  The court reasoned that his breach of warranty therefore was immaterial at the time of the loss.

The First Circuit reversed, granted summary judgment for the insurer and rescinded the policy.  The court pointed out that whether the breach of warranty caused the accident was not the issue.  Because the policy contained a misrepresentation material to the risk, it was voidable from the beginning, before the accident happened.  That’s the result you’ll see most of the time.

UPDATE:  Thanks to a reader for pointing out a typo in the last sentence of the second paragraph.  The sentence originally said the breach of warranty was material, not immaterial as it should be, which completely changes the meaning of the sentence.  Things like that are why you will almost always see a newspaper say someone was found "innocent," when the technically accurate term is "not guilty."  Too many papers have gotten sued when someone was in a hurry and forgot to put the "not" before "guilty."

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