Titan Insurance not allowed to escape the consequences of its own sloppy work
Nicole Falls called the KC Insurance Agency to obtain insurance on her car. She spoke to an agent for several minutes to make appropriate application, and then stopped at the agency to pay the initial payment. She was handed and signed a one-page application, prepared by the agency, which disclosed that she was married. She was not given the second page which would have identified her husband as a secondary driver in the household. Thirty minutes later, her husband was involved in a fatal collision.
Titan immediately claimed fraud and material misrepresentation. It attempted to avoid paying the Falls' expenses and attempted to reduce the couple's liability coverage (payable to the family of the decedent in the motor vehicle collision) from the $100,000/$300,000 purchased, to the state minimum of $20,000/$40,000. Titan claimed that if Nicole had properly disclosed her husband's name as a household driver, it would have charged an additional annual premium of $57.00 more ($1,095 rather than $1,038).
While Michigan courts have allowed insurers to reduce liability coverage in this manner, after-the-fact, when there is proof of actual fraud or material misrepresentation, this rule is not applied by the courts where the insurer could have "easily ascertained" the fraud or mistake. Since by the time such a material misrepresentation becomes an issue, an innocent third party (the liability victim) has a stake in the outcome, Michigan courts have historically ruled that an insurer which fails to make a reasonable investigation of insurability cannot reduce coverage at the expense of an innocent victim. In the instant case, the Court of Appeals unanimously ruled that since Nicole disclosed that she was married, denied receiving the second page of the application, and explained to the agent that her husband was allowed to operate her car, Titan could easily have determined that Nicole's husband would be an insured driver. On that basis, Titan was not allowed to reduce the coverage Nicole had purchased.The Court also refused to allow Titan to "reform" the policy to decrease the liability limits to the statutory minimum. The Court noted that the latter right is available to an insurer only when it has been mis-led into underwriting an "unacceptable" risk: in this case, even Titan did not argue that Nicole's husband would be an unacceptable risk that it would not have insured.
Lastly, the Court of Appeals rejected Titan's argument that it owed no duty to confirm the accuracy of an insured's application. The Court noted longstanding Michigan law documenting the insurer's duty, owed to innocent third-parties, to investigate insurance applications.