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This marks our 1,900th post since 2006. You can search all of these posts by word, phrase, judge’s name, etc. on the Blog’s search function. We also have tens and tens of categories with case links organizing the cases by topic, which are one click away.

This is our second New Jersey fraud in the application/rescission case summary posted this week.

In this case, two people purchased an investment rental property. In purchasing insurance, the application represented only one of the two owned the entire property. Subsequently, the two individuals formed an LLC and transferred all interest in the property to the LLC. The insurer was never informed of the second individual or transfer to the LLC.

The applications states: “I have read the above application and any attachments. I declare that the information provided in them is true, complete[,] and correct to the best of my knowledge and belief. This information is being offered to the company as an inducement to issue the policy for which I am applying.” Further, the insurer put on evidence that its underwriting guidelines only permitted dwelling ownership by individuals, not business entities. Again, the policy was issued solely to the one individual representing herself as the 100% owner.

The policy was renewed twice, and the insurer was never informed that the interest in the property had been transferred. Moreover, the lease on the rentals at the properties solely named the individual as the landlord. There was a fire and the owners sought coverage for over $200,000 in damages.

The carrier denied the claim, and rescinded the policy. First, the policy could not be assigned to the LLC without the carrier’s permission. There was no such permission and the assigned was prohibited. Second, the insurer never would have accepted the risk of a corporate owned property and would not have issued or renewed the policy if the true ownership was disclosed. Third, once the property was transferred, the named insured no longer had an ownership interest in the property identified in the policy. Finally, the insurer took the position that the named insured had “a continuing obligation to ‘fully disclose all relevant information regarding … ownership of the subject property,’ [and] her failure to do so was a ‘material misrepresentation,’ and [the insurer] would provide no coverage for the fire loss.”

The insured sued for breach of contract and bad faith. The insurer moved to dismiss. The court permitted discovery on the transfer of title issue before ruling on the motions as motions for summary judgment.

The trial judge ruled the property was properly rescinded for violating the anti-assignment clause. Further, transferring ownership to the LLC without notice was a material misrepresentation warranting rescission. Finally, the trial judge found the named insured actually had no interest in the property after the transfer.

The Appellate Division affirmed.

First, the court observed there was a statutory requirement that fire insurance could not be transferred without the carrier receiving notice and giving written consent. As stated, there was no such notice of transfer, and moreover, the named individual insured had agreed in obtaining coverage that the property was not owned by a business entity.

  1. “A misrepresentation, made in connection with an insurance policy, is material if, when made, ‘a reasonable insurer would have considered the misrepresented fact relevant to its concerns and important in determining its course of action.”
  2. “When the omission ‘naturally and reasonably influence[s] the judgment of the underwriter in making the contract at all, or in estimating the degree or character of the risk, or in fixing the rate of the premium,’ the omission is material.”
  3. “Simply put, [the insurer] could not have issued this policy to [the LLC] because it indisputably would have violated its own underwriting guidelines.”
  4. The court was “likewise not persuaded by the assertion that [the individual] was relieved of her continuing obligation upon renewal to advise defendant of the transfer …, [as none of the renewals] permitted [the individual] to transfer title to the property to a business entity.”
  5. The individual never told the insurer about the transfer to the LLC at the time of renewal.
  6. “Moreover, the general rule is that in the absence of a contrary renewal application, ‘underwriters may, in making renewal decisions, rely on the contents of the original application.’”
  7. “Since [the individual] was the only insured on the policy and its renewals, if the deed transfer was an assignment, defendant was entitled to rescind, because it has long been accepted that ‘insurance is a contract of indemnity, personal to the party to whom it is issued.’”
  8. “Therefore, when the language in the policy requires consent, courts typically uphold the contractual clause and determine the policy is void, and not merely a breach of contract when an assignment is made without consent.”

Lastly, the court observed there was no evidence in the record of mutual mistake or that the insurer acted in bad faith.

Date of Decision: April 19, 2022

SHEN v. HYUNDAI MARINE & FIRE INSURANCE COMPANY, LTD., Superior Court of New Jersey Appellate Division No. A-1731-20, 2022 WL 1150954 (N.J. Super. Ct. App. Div. Apr. 19, 2022) (Enright, Messano, JJ.)