What is a material misrepresentation on an insurance contract?

On Behalf of | Nov 15, 2014 | Denied Insurance Claims

The Fifth Circuit recently handed down a case that addresses a basic element of contract law, that of material misrepresentation, in a context that may not be very uncommon in Louisiana after the real estate bubble.

When the real estate bubble burst and the market collapsed, numerous homeowners were subject to foreclosure. Because of numerous problems with loan documents and the courts becoming swamped with foreclosure filings, homeowners often remained in their properties long after they lost their ownership interest

As in this case from Mississippi, the homeowners may not inform their insurance company of this foreclosure. In this cases, they continued to pay the premiums on their homeowner’s insurance policy for two years after the foreclosure. However, as a basic element of insurance law, these “homeowners” were no longer were homeowners, having lost their ownership interest in the property during the foreclosure.

They then proceeded to make a series of property damage claims on fire and wind or hail damage, post-foreclosure. Eventually, the insurer discovered the foreclosure and sued to void the contract and recover prior damage claims they had already paid.

The Fifth Circuit upheld the district courts determination that their material misstatements of fact on their renewals allowed the insurer to rescind the contract. The policy stated that the home would be “owner occupied.”

This was a misstatement of a material fact, as they lost their ownership interest when the foreclosure was completed and were ineligible for renewal of their contract.

Given the significant number of homes that were foreclosed over the last few years, insurers should check all property records when claims are made to confirm the homeowners actually still “own” their home.

Findlaw.com, “Nationwide Mutual Insurance Company v. Fred L. Baptist,” No. 13-60726, United States Court of Appeals, Fifth Circuit, August 7, 2014