Massachusetts Appeals Court holds that misrepresentation on bond application that insured had internal auditor does not void coverage

Massachusetts Appeals Court holds that misrepresentation on bond application that insured had internal auditor does not void coverage

In my last post I began discussing Hanover Ins. Co. v. Treasurer and Receiver General, 74 Mass. App. Ct. 725 (2009), in which the Massachusetts Appeals Court discussed when misrepresentations on a bond application can void coverage.

Hanover argued that coverage was voided because the Massachusetts Treasury Department stated on its application that an internal audit was conducted by the State Auditor, but that in fact there was no internal auditor.

The accounting firm of Deloitte & Touche conducted annual independent audits of the state government departments, and sent its reports to the State Auditor. The State Auditor also conducted reviews of the Department every three or four years. The Deloitte & Touche audits were "external" audits while the audits of the State Auditor were "internal" audits.

Hanover never inquired about the frequency of internal audits and never informed the department that they must be done annually.

The court held that the inaccurate representation that there was an internal auditor was not material.

Massachusetts Appeals Court holds that misrepresentation on bond application that insured had internal auditor does not void coverage

Massachusetts Appeals Court holds that de minimis departure from representation on bond application does not void coverage

Massachusetts Appeals Court holds that de minimis departure from representation on bond application does not void coverage

In Hanover Ins. Co. v. Treasurer and Receiver Gen., 74 Mass. App. Ct. 725 (2009) Hanover issued employee dishonesty bonds from 1993 to 1999 to the Massachusetts Treasurer's Department. The bonds covered losses caused by the dishonesty of any department employee.

In February, 1999, the Attorney General's office began an investigation that determined that a Treasury department employee, Trischitta, had stolen $6.5 million from the department's unpaid check fund ("UCF"). The department recovered the full amount of the stolen funds, plus interest.

With Trischitta's cooperation the department discovered that he was not the only department employee stealing money from the UCF. The department gave notice to Hanover of the claim on March 19, 1999. Hanover refused to make payment on the bonds, and filed a declaratory judgment action.

Hanover first argued that the department made misrepresentations in its bond applications that (1) there was independent reconciliation of bank accounts; (2) it had an internal auditor; and (3) there was a voucher system in place to prevent the unauthorized issuance of checks.

The court noted that pursuant to Mass. Gen. Laws ch. 175 § 186, an insurer may not refuse to pay a claim on the grounds of misrepresentation in a policy application unless the misrepresentation "is made with actual intent to deceive, or unless the matter misrepresented or made a warranty increased the risk of loss."

The court held that Hanover had the burden of proof on those issues.

In determining whether a misrepresentation increased a risk of loss, "a fact must be regarded as material, the knowledge or ignorance of which would naturally influence the judgment of the underwriter in making the contract at all, or in estimating the degree and character of the risk or in fixing the rate of the premium."

The department had stated on its application that bank accounts were reconciled monthly by someone not authorized to deposit or withdraw funds. The trial judge had found that the department's contract with a bank to provide bank reconciliations services satisfied the department's representation on the applications. Hanover argued that the reconciliation service did not include checks issued by the UCF, demonstrating lack of substantial compliance.

The Appeals Court disagreed with Hanover, noting that no one in the department with appropriate authority was aware that the UCF was not included in the bank's reconciliation services, and that the number of checks not reconciled was de minimis (one tenth of one percent) compared to the total number of checks. The court held that the representation was therefore substantially true and the department was in substantial compliance with its representation.

Massachusetts Appeals Court holds that de minimis departure from representation on bond application does not void coverage

Appeals court holds that nondisclosure of ownership of dogs on homeowners application voided coverage

Appeals court holds that nondisclosure of ownership of dogs on homeowners application voided coverage

In Vt. Mut. Ins. Co. v. Eldridge, 76 Mass. App. Ct. 1122, 2010 WL 1253170 (unpublished opinion), the Massachusetts Appeals Court held that nondisclosure of ownership of dogs on an application for homeowners insurance was a material misrepresentation that voided coverage under the policy.

In their application for homeowners insurance the Eldridges, defendants in the declaratory judgment action, had answered "no" to the question "are there any animals or exotic pets kept on the premises?" In fact, they were keeping two bull mastiffs on the premises.

The court held that the question on the application was not ambiguous. It overturned the holding of the trial court that the Eldridges could have reasonably concluded that it only asked for the disclosure of pets if they were exotic pets. The Appeals Court held that the failure of the Eldridges to disclose their ownership of the dogs constituted a misrepresentation.

The court then held that the misrepresentation was material and defeated coverage.

Misstatements shall be deemed material and "defeat or avoid the policy" only where such statements were "made with actual intent to deceive, or . . . increased the risk of loss" to the insurer. G.L. c. 175, § 186. "A material fact, measured by an objective standard, is one which would naturally influence the judgment of an underwriter in making the contract at all, or in estimating the degree and character of the risk."

The insurer received notice that the Eldridges owned the dogs before it received notice of the claim that the dogs had caused an injury. Upon receipt of the notice of ownership of the dogs the insurer informed the Eldridges that coverage would not have been forthcoming had the application disclosed the dogs. The insurer proceeded to terminate coverage. The court held that was proof that the nondisclosure was material.

Appeals court holds that nondisclosure of ownership of dogs on homeowners application voided coverage