De Smet Farm Mutual v. Busskohl , 834 N.W.2d 826 ( 2013 )

#26485-a-GAS
2013 S.D. 52
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
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DE SMET FARM MUTUAL INSURANCE
COMPANY OF SOUTH DAKOTA, Plaintiff and Appellee,
v.
DAVID BUSSKOHL, Defendant and Appellant.
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APPEAL FROM THE CIRCUIT COURT OF
THE SEVENTH JUDICIAL CIRCUIT
CUSTER COUNTY, SOUTH DAKOTA
****
THE HONORABLE MARY P. THORSTENSON
Judge
****
LARRY M. VON WALD of
Beardsley, Jensen &
Von Wald, Prof., LLC
Rapid City, South Dakota Attorneys for plaintiff
and appellee.
JOHN K. NOONEY
ROBERT J. GALBRAITH of
Nooney, Solay & Van Norman, LLP
Rapid City, South Dakota Attorneys for defendant
and appellant.
****
CONSIDERED ON BRIEFS
ON MARCH 18, 2013
OPINION FILED 07/10/13
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SEVERSON, Justice
[¶1.] De Smet Farm Mutual Insurance Company of South Dakota (De Smet)
initiated this action, claiming that it lawfully rescinded an insurance contract with
David Busskohl because Busskohl made a material misrepresentation on his
application for homeowner’s insurance. De Smet also sought recovery of all monies
it paid to Busskohl. De Smet moved for summary judgment. The circuit court
granted De Smet’s motion, determining, as a matter of law, that Busskohl made a
misrepresentation on his homeowner’s insurance application and that the
misrepresentation was material. Busskohl appeals. We affirm.
Background
[¶2.] On December 21, 2004, Busskohl applied for homeowner’s insurance
through De Smet. On the front page of the homeowner’s insurance application
appears the question: “Has any insurer cancelled, refused, restricted, or declined to
renew similar insurance?” Busskohl answered “No.”1 Busskohl represented on the
second page of the application that all statements in the application were true and
correct, and he signed the application. Delano Gross, an underwriting supervisor
for De Smet, reviewed the application and approved the issuance of a homeowner’s
policy with policy limits of $275,000 for Busskohl’s residence, $27,500 for related
private structures, $192,500 for personal property, and $55,000 for additional living
costs to Busskohl. On December 6, 2005, Busskohl’s home was destroyed by fire.
1. The application requires an applicant to check either a “Yes” or a “No” box. If
an applicant checks the “Yes” box, the applicant is required to provide an
explanation on the reverse side of the application.
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Pursuant to the homeowner’s insurance policy, De Smet made payments totaling
$476,350 to Busskohl.
[¶3.] In 2007, Busskohl initiated a suit against Dixie Kirk and the
Niederwerder Agency, Inc., the agent and agency through which Busskohl obtained
the De Smet homeowner’s insurance policy. Busskohl claimed that the coverage
limits provided by the policy were inadequate and that Kirk and the Niederwerder
Agency, Inc. were negligent in writing the policy. During the course of litigation, De
Smet discovered that, contrary to Busskohl’s representation in the insurance
application, Busskohl had previously been refused homeowner’s insurance by
American Family Insurance Company (American Family).
[¶4.] Busskohl’s alleged misrepresentation emerged through deposition
testimony of Grace Busskohl, Busskohl’s former wife,2 and Mark Koch, an American
Family agent in Custer, South Dakota. Grace testified that she and Busskohl went
to Koch’s office to obtain homeowner’s insurance on a house they had recently
built,3 but were informed by Koch that American Family would not insure their new
house. In his deposition, Koch confirmed that Busskohls came to his office following
the 1990 fire wishing to purchase homeowner’s insurance on their new house. Koch
testified that he had some doubts about whether American Family would insure
2. David Busskohl and Grace Busskohl divorced in 2002.
3. David and Grace built the house because their previous house had been
destroyed by a fire in 1990, which was the second fire to occur at that
location. Prior to the 1990 fire, Busskohl’s house, a mobile home owned by
his parents, was destroyed by fire. Busskohl’s parents used the insurance
proceeds from that fire to build a house for Busskohl at the same location as
the 1990 and 2005 fires.
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Busskohls’ house because of the 1990 fire. As a result, Koch contacted an American
Family underwriter located in Eden Prairie, Minnesota, who advised Koch that
American Family would not accept the risk due to Busskohls’ loss history. Koch
testified that he informed Busskohls that American Family would not insure them,
but he acknowledged that an application for insurance was never submitted to
American Family nor was Busskohls’ visit documented.
[¶5.] After discovering the misrepresentation in the application, De Smet
rescinded the homeowner’s insurance policy issued to Busskohl. De Smet also sent
a letter, dated October 14, 2009, to Mr. John Nooney, the attorney representing
Busskohl, reciting the basis for rescission. Enclosed in the October 14, 2009 letter
was a check from De Smet made payable to Busskohl in the amount of $1,066.40,
which represented the premium paid by Busskohl in connection with the issuance of
the policy. The letter demanded that Busskohl repay all monies paid to Busskohl
under the insurance contract ($476,350), along with interest at the statutory rate.
In response, Busskohl claimed that several facts set forth and conclusions reached
by De Smet were inaccurate. He also returned the $1,066.40 check from De Smet
(representing the premium paid by Busskohl), which had been marked “void.”
[¶6.] In the October 14, 2009 letter addressed to Busskohl’s counsel, De
Smet advised Busskohl that it would not have issued a homeowner’s insurance
policy had he disclosed that American Family previously refused him homeowner’s
insurance. De Smet asserted: “Had such disclosure been made, the application
further required that it be accompanied by an explanation. We have learned that
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the explanation for American Family’s refusal of homeowners insurance was the
January 31, 1990, house fire.”
[¶7.] Delano Gross, the underwriting supervisor at De Smet who approved
Busskohl’s application, submitted an affidavit stating, in relevant part, that:
6. The question [whether any insurer “cancelled, refused,
restricted or declined to renew similar insurance”] is on the
application for the purpose of obtaining risk information from
the applicant that is used in determining whether the risk that
is represented by the policy is acceptable to the Company. If
there is a disclosure on an application for insurance that another
insurer has earlier cancelled, refused, restricted or declined to
re-new [sic] similar insurance, it must be concluded that such
insurer has available certain, significant information that
provides the reason or reasons for its determination that the
risk is not acceptable and it will not issue a policy. The fact of a
cancellation, a refusal, a restriction or an insurer’s declining to
re-new [sic] similar insurance directly affects the opinion of the
Company in its underwriting process given that it is far more
likely than not that the Company, if it had access to all the
information available to the insurer involved in the earlier
cancellation, refusal, restriction or declination of a renewal,
would make the same decision as the other insurer and refuse to
issue a policy. This is because the existence of such information
on an application for insurance indicates to the Company that
there is an increased risk of loss associated with the issuance of
a policy.
7. Had the application of David L. Busskohl disclosed that
an insurer had refused similar insurance and had such refusal
been explained as required by the application and, if the true
facts had been made known to the Company, the Company, in
good faith, would not have issued the policy. This is for the
reason that had it been disclosed that American Family
Insurance Company or any other insurer had refused
homeowner’s insurance on the Busskohl residence and personal
property because of the January 31, 1990, fire that had
destroyed the earlier residence that existed at or near the same
location as the property described in the application, the
Company would have made further inquiry relative to that fire.
At the very least, the Company would have obtained a copy of
the South Dakota Fire Marshall’s Office Investigation Report[.]
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8. The Report discloses that Deputy State Fire Marshal Jim
Homes had investigated an earlier fire on January 26, 1983,
where David Busskohl was living at the same location; that the
Division of Criminal Investigation investigated the January 31,
1990, fire; and, it suggests that arson involving David Busskohl
was a possible cause of the fire. As Underwriting Supervisor, I
would never had approved the issuance of a homeowner’s policy
to David L. Busskohl under such circumstances.
[¶8.] Further, William Poppen, the general manager of De Smet, testified
that “had the company been provided with the true facts as our application
requires[,] . . . we would just never, never have issued that policy.” Poppen further
explained that:
in the underwriting process of course what we rely on is the
truthfulness of the representation with respect to any of those
items, whether it had been a cancellation, a refusal, or a non-
renewal, so that we can then look into those matters, and then
make a judgement [sic] to determine whether or not there are
issues and items that would materially affect the acceptance or
rejection of the risk.
According to Poppen, if the question whether “any insurer cancelled, refused,
restricted, or declined to renew similar insurance?” is answered truthfully, “it
[gives] [De Smet] an opportunity then to look into the matter, and then make a
determination.”
[¶9.] On February 13, 2012, De Smet initiated this action against Busskohl,
alleging that it lawfully rescinded the insurance contract with Busskohl. De Smet
also sought recovery of all monies paid to Busskohl under the insurance contract.
On May 11, 2012, De Smet filed a motion for summary judgment, contending that it
was entitled to judgment as a matter of law and recovery of all sums paid to
Busskohl under the policy plus interest at the statutory rate.
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[¶10.] The circuit court issued a memorandum decision on July 10, 2012,
ruling that De Smet was entitled to rescind the insurance contract with Busskohl
and to recover all monies paid to Busskohl, plus interest. The court determined, as
a matter of law, that Busskohl made a misrepresentation in his homeowner’s
insurance application and that the misrepresentation was material. On August 3,
2012, the court authored a second memorandum decision concerning the amount of
monies owed to De Smet by Busskohl. The court then filed an order granting
summary judgment to De Smet and entered judgment in favor of De Smet in the
amount of $786,621.18, plus interest. Busskohl appeals, arguing that the court
erred in granting summary judgment in favor of De Smet because a material
question of fact exists regarding whether Busskohl made a material
misrepresentation on his application for homeowner’s insurance.
Standard of Review
[¶11.] This Court’s standard of review of a circuit court’s grant or denial of a
motion for summary judgment is well-settled:
We must determine whether the moving party demonstrated the
absence of any genuine issue of material fact and showed
entitlement to judgment on the merits as a matter of law. The
evidence must be viewed most favorably to the nonmoving party
and reasonable doubts should be resolved against the moving
party. The nonmoving party, however, must present specific
facts showing that a genuine, material issue for trial exists. Our
task on appeal is to determine only whether a genuine issue of
material fact exists and whether the law was correctly applied.
If there exists any basis which supports the ruling of the trial
court, affirmance of a summary judgment is proper.
Brandt v. Cnty. of Pennington, 2013 S.D. 22, ¶ 7, 827 N.W.2d 871, 874 (quoting
Jacobson v. Leisinger, 2008 S.D. 19, ¶ 24, 746 N.W.2d 739, 745).
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Analysis
[¶12.] De Smet claims it was entitled to rescind the homeowner’s insurance
contract with Busskohl under the provisions of SDCL 58-11-44, which provide, in
relevant part:
All statements and descriptions in any application for an
insurance policy, certificate, or annuity contract, by or on behalf
of the insured or annuitant, shall be deemed to be
representations and not warranties. No misrepresentation,
omission, concealment of fact, or incorrect statement prevents a
recovery under the policy or contract unless:
(1) Fraudulent or an intentional misrepresentation of a material
fact; or
(2) Material either to the acceptance of the risk, or to the hazard
assumed by the insurer; or
(3) The insurer in good faith would either not have issued the
policy or contract, or would not have issued it at the same
premium rate, or would not have issued a policy or contract
in as large an amount, or would not have provided coverage
with respect to the hazard resulting in the loss, if the true
facts had been made known to the insurer as required either
by the application for the policy or contract or otherwise.
“It is settled law in this jurisdiction that a [misrepresentation] as to a material
matter in an application for insurance, even absent a showing of an intent to
deceive, renders the policy voidable, because an insurer is entitled to rely on the
truthfulness of the answers given.” Braaten v. Minn. Mut. Life Ins. Co., 302 N.W.2d
48, 50 (S.D. 1981) (citations omitted).
Busskohl’s Application Response Constituted a Misrepresentation
[¶13.] Our first task on appeal is to determine whether Busskohl’s
application response was false or misleading so as to qualify as a misrepresentation
under SDCL 58-11-44. “Generally, the question of whether an applicant’s
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statements were false or misleading is a jury question[,] [b]ut when the facts are not
in dispute . . . courts can decide this question as a matter of law.” Bennett v.
Hedglin, 995 P.2d 668, 671 (Alaska 2000) (citing Spellmeyer v. Tenn. Farmers Mut.
Ins. Co., 879 S.W.2d 843, 846 (Tenn. Ct. App. 1993)). The circuit court held, as a
matter of law, that Busskohl misrepresented he was never refused similar
insurance in the past. The court found there was undisputed evidence that
Busskohls were denied a verbal application by American Family, and, relying on
Strong v. State Farm Mut. Ins. Co., 76 S.D. 367, 78 N.W.2d 828 (1956), the court
determined that American Family’s denial was a refusal to provide insurance.
[¶14.] In Strong, the insurance application contained the following question:
“Has any insurer cancelled or refused to renew any kind of automobile insurance for
any driver?” Id. at 368, 78 N.W.2d at 829. The insured answered in the negative
even though he had received a letter from a prior insurer notifying him that the
insurer would not renew his insurance. Id. This Court determined the insured
made a misrepresentation in the application for insurance, explaining that “[a]
refusal to renew a policy of insurance need not be in any particular form. Nor do
the reasons for the refusal have to be stated. It is sufficient when the insurer
clearly and unequivocally indicates to the insured its unwillingness to continue
upon the risk.” Id. at 370, 78 N.W.2d at 829-30.
[¶15.] Although Strong dealt with a refusal to renew, rather than a refusal to
issue a policy, as in this case, the circuit court reasoned that Strong’s holding was
still applicable. The court stated, “like with a refusal to renew, insurers are not
required to issue their rejections in any particular form.” The court also concluded
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that a written application was not necessary because “the De Smet application did
not inquire as to whether Busskohl’s prior written application had been rejected,
only whether he had been denied similar coverage in the past.” Moreover,
“American Family was not required to memorialize [its] rejection in any particular
form.”
[¶16.] Busskohl argues that the circuit court erred in finding, as a matter of
law, that he made a misrepresentation on his application for homeowner’s
insurance. Busskohl maintains he was truthful and accurate when he represented
that he had not been denied similar insurance coverage. Further, Busskohl
contends that he withdrew his offer to purchase insurance from American Family
prior to submitting an application because he and Grace decided to inquire
elsewhere for insurance. Busskohl also argues that Strong is distinguishable
because there was no previous relationship between American Family and Busskohl
like there was between the parties in Strong.
[¶17.] The circuit court correctly determined that the evidence of American
Family’s verbal denial was undisputed. Busskohl did not present evidence to
contradict the deposition testimony of Grace Busskohl and Mark Koch, which
indicated Busskohls were denied a verbal application by American Family. And,
contrary to Busskohl’s assertion, Busskohls did not voluntarily withdraw their
application. Instead, Busskohls were required to seek homeowner’s insurance
elsewhere because of American Family’s verbal denial. Further, American Family’s
verbal refusal was sufficient because Strong does not require the refusal to be in
any particular form nor does De Smet’s application for insurance ask whether a
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written application had been denied. It is immaterial whether a previous
relationship existed between the parties because the clear import of Strong is that
the insurer’s refusal be clear and unequivocal. Here, like in Strong where the
insured, upon receiving the refusal letter, immediately applied for insurance in the
defendant company, Busskohls evidently understood the significance of American
Family’s denial because they subsequently applied for insurance from another
insurance company.
[¶18.] Nevertheless, relying on Adams v. Royal Exchange Assurance, 62 So. 2d
591 (Fla. 1952), S.E.A., Inc. v. Dunning-Lathrop & Assoc., Inc., Nos. ooAP-165,
ooAP-178, 2000 WL 1863392 (Ohio Ct. App. Dec. 21, 2000), and Getsinger v. Union
Mutual Life Insurance Co. of Iowa, 247 N.W. 260 (Iowa 1933), Busskohl claims he
could not have been refused insurance without submitting an application to
American Family. However, as De Smet correctly points out, these cases are
distinguishable from the present case, and thus, do not support Busskohl’s position.
[¶19.] For example, in Adams, the insured sought to recover on a policy of
marine insurance issued by the insurer. 62 So. 2d at 592. The insurer denied
liability on the basis that the insured misrepresented he had never been refused
insurance by any other underwriter. Id. at 592-93. Two witnesses, both insurance
agents, were allowed to testify that they had previously refused insurance to the
insured. Id. at 593. Because neither of the witnesses were underwriters, the court
found that the witnesses’ testimony did not establish that the insured made a
misrepresentation in his application for insurance. Id. at 594-95. The court
concluded that their testimony should have been stricken. Id. at 594. The court
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also concluded that an instruction given by the court based on the witnesses’
testimony was prejudicial error. Id. Here, unlike in Adams, the question in the De
Smet insurance application did not ask whether an “underwriter” refused similar
insurance. Even if it had, Koch’s undisputed testimony established that he called
an underwriter in Eden Prairie who indicated American Family would not issue a
policy to Busskohl based on Busskohl’s claims history.
[¶20.] In S.E.A., the court held that summary judgment was improper
because a material issue of fact remained regarding the meaning of certain terms in
the insurance application. 2000 WL 1863392, at *9. The court found that “if a term
within a policy of insurance is not defined by the contract and the term has a special
meaning within the particular trade or industry concerned, the court may resort to
extrinsic evidence to establish that meaning.” Id. at *7. The court stated, “prior to
establishing the meaning of [the terms at issue], summary judgment in favor of the
insurer constitutes error inasmuch as a question of fact exists as to the meaning of
the material contract term.” Id. In that case, both parties submitted conflicting
evidence as to the meaning of the terms at issue, which raised a material issue of
fact for the jury to determine. Id at *9. Here, unlike in S.E.A., there was no issue
of interpretation. Further, no genuine issue of material fact existed because
Busskohl did not submit evidence to contradict De Smet’s evidence establishing that
Busskohls were refused insurance by American Family.
[¶21.] In Getsinger, local agents submitted “trial applications” to the home
office before securing the prospect and before the prospect submitted an application.
247 N.W. at 263. This practice allowed agents to submit their doubts about the
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prospect to the company before trying to secure the prospect. Id. Unlike the
prospects in Getsinger, Busskohl sought insurance from American Family.
Therefore, Getsinger is distinguishable.
[¶22.] Finally, Busskohl contends that even if American Family refused him
similar insurance, he did not make a misrepresentation because he had no intent to
deceive. To support his position, Busskohl asserts that American Family’s denial
was not clearly and unequivocally indicated to Busskohl as required by Strong, 76
S.D. at 370, 78 N.W.2d at 829-30. De Smet claims Busskohl’s argument is incorrect
under our prior case law and that Busskohl’s intent is immaterial. We agree. “[A]
false representation as to a material matter in an application for insurance, even
absent a showing of an intent to deceive, renders the policy voidable[.]” Braaten, 302
N.W.2d at 50 (emphasis added). Therefore, Busskohl’s argument is without merit.
Because the evidence was undisputed that Busskohl was previously refused
insurance, no genuine issue of material fact existed. The circuit court did not err in
finding, as a matter of law, that Busskohl’s response in the application for De Smet
homeowner’s insurance was a misrepresentation.4
Busskohl’s Misrepresentation Was Material to De Smet’s Acceptance of the Risk
[¶23.] To rescind the insurance contract under SDCL 58-11-44, De Smet
argued that Busskohl’s misrepresentation was material to its acceptance of the risk,
4. The dissent proposes that Busskohl’s “no” answer on the insurance
application should not be considered a misrepresentation and references the
word “refusal” as used in SDCL 58-11-45.3. That statute addresses
notification of refusal to issue an automobile policy in reliance on information
from an agency or person other than information from the insurance
producer. It does not apply to the situation in the present case.
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and that it, in good faith, would not have issued the policy had the true facts been
disclosed.5 The circuit court found, as a matter of law, that Busskohl’s
misrepresentation was material to De Smet’s acceptance of the risk under SDCL 58-
11-44(2), stating, “[g]iven the nature of Busskohl’s loss history, and the fact that the
omitted application information would have at least provided De Smet an
opportunity to investigate into that history, reasonable minds could not dispute that
this information was material to the insurer’s assumption of risk.” Because an
insurer is only required to prove one of the subparts enumerated in SDCL 58-11-44,
the court did not determine whether Busskohl’s misrepresentation permitted De
Smet to rescind the contract under SDCL 58-11-44(3).
[¶24.] Busskohl argues that the circuit court erred in determining, as a
matter of law, that Busskohl’s misrepresentation was material to De Smet’s
acceptance of the risk. Busskohl contends his misrepresentation would not have
reasonably influenced De Smet’s decision to issue a policy. According to Busskohl,
De Smet issued policies to 90% of applicants answering “Yes” to the question: “Has
any insurer cancelled, refused, restricted or declined to renew similar insurance?”
Thus, based on De Smet’s past practices, Busskohl contends no evidence exists to
suggest that De Smet would not have issued a policy to Busskohl had he answered
“Yes.” De Smet, on the other hand, contends Busskohl’s misrepresentation was
material because it failed to apprise De Smet of critical information that would have
prompted an investigation and revealed facts relating to Busskohl’s prior loss
history.
5. De Smet made no claim that fraud was an issue in the case.
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[¶25.] Materiality is a question of law for the court:
[w]here the application for an insurance policy is made the basis
of the insurance contract, is attached to and made a part of the
contract, and there are misrepresentations in the answers of the
applicant to the questions in such application, and it appears
from the record that reasonable minds could not differ on the
question as to whether the matter misrepresented increased the
risk of loss[.]
Herdman v. Nat’l Life Ins. Co., 87 S.D. 389, 397-98, 209 N.W.2d 364, 368 (1973). A
misrepresentation “in an application for insurance is material to the risk if it is
such as would reasonably influence the decision of the insurer as to whether it
would accept or reject the risk.” Id. (quoting Ivory v. Reserve Life Ins. Co., 78 S.D.
296, 301, 101 N.W.2d 517, 519). “The materiality of a [misrepresentation] . . . must
be determined by its probable and reasonable influence upon the insurer.” Ivory, 98
S.D. at 301, 101 N.W.2d at 519.
[¶26.] We found no South Dakota authority holding that a refusal of similar
insurance is material to the insurer’s acceptance of the risk. However, it is
generally recognized that in an application for insurance, a representation that an
applicant has not been refused similar insurance by any other insurer is material to
the risk because the insurer may rely upon it when acting on the application. See
6A Couch on Insurance 3d § 89:9 (2012) (“A statement that the applicant has not
been rejected for insurance by any other insurer is material to the risk in that any
action taken by the insurer may depend upon it.”). See S. Farm Bureau Cas. Ins.
Co. v. Ausborn, 155 S.E.2d 902, 910 (S.C. 1967); Inter-Ocean Ins. Co. v. Harkrader,
67 S.E.2d 894, 897-98 (Va. 1951); Ky. Home Mut. Life Ins. Co. v. Suttles, 156 S.W.2d
862, 864-65 (Ky. 1941); Greber v. Equitable Life Assur. Soc. of U.S., 28 P.2d 817,
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818-19 (Ariz. 1934); Applebaum v. Empire State Life Assur. Soc., 166 A. 768, 769
(Pa. 1933); Wilson v. State Farm Fire & Cas. Co., 761 So. 2d 913, 920 (Miss. Ct. App.
2000); Pruitt v. Allstate Ins. Co., 234 N.E.2d 576, 577 (Ill. App. Ct. 1968). This rule:
rests upon a sound basis because disclosure of the fact that one
applying for a policy has been rejected by another company
immediately suggests that he is probably not a good risk and
undoubtedly leads to a more careful and thorough examination
than would be true in the case of one whose application had not
been rejected. It not only informs the company whether other
insurers have regarded him as unsafe, and places it, so to speak,
on inquiry, but may advise it as to any anxiety for insurance the
applicant might have.
Greber, 28 P.2d at 818-19 (citations omitted).
[¶27.] Busskohl’s misrepresentation was material to De Smet’s acceptance of
the risk. Gross’s affidavit indicated that De Smet asks applicants whether any
insurer refused similar insurance to obtain risk information, which is used to
determine whether the risk represented in the application is acceptable to De Smet.
Gross also stated that a prior refusal directly affects De Smet’s underwriting
process because it is far more likely than not that De Smet would make the same
decision as the prior insurer. Moreover, Poppen testified that De Smet relies on the
truthfulness of the representations in the application to determine whether there
are “issues or items that would materially affect the acceptance or rejection of the
risk.”
[¶28.] Busskohl failed to present evidence demonstrating that his application
response was not material to the risk of insuring his home. Instead, Busskohl
contends no evidence exists to suggest that De Smet would not have issued a policy
to Busskohl had he answered “Yes.” This argument overlooks the fact that
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Busskohl’s misrepresentation failed to put De Smet on notice and prevented De
Smet from conducting an investigation that would have revealed facts material to
De Smet’s acceptance of the risk. Based upon the record before us, we cannot
conclude that reasonable minds would differ on the question as to whether
Busskohl’s misrepresentation increased the risk of loss. Accordingly, the circuit
court properly found, as a matter of law, that Busskohl’s misrepresentation in his
application for homeowner’s insurance was material to De Smet’s acceptance of the
risk, and this Court need not look to SDCL 58-11-44(3).
Conclusion
[¶29.] Because no material question of fact exists regarding whether
Busskohl made a material misrepresentation on his application for homeowner’s
insurance, the circuit court did not err in granting summary judgment in favor of
De Smet.
[¶30.] Affirmed.
[¶31.] GILBERTSON, Chief Justice, and ZINTER and WILBUR, Justices,
concur.
[¶32.] STOLTENBURG, Circuit Court Judge, dissents.
[¶33.] STOLTENBURG, Circuit Court Judge, sitting for KONENKAMP,
Justice, disqualified.
ZINTER, Justice (concurring specially).
[¶34.] I join the opinion of the Court. I write to point out that the dissent is
based on an incorrect description of American Family’s prior refusal to insure the
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Busskohls. The only evidence on this issue came from the deposition testimony of
American Family Insurance Agent Mark Koch and Grace Busskohl, David’s wife at
the time they were refused homeowner’s insurance by American Family. This
testimony was not disputed by David. And it clearly reflects that the prior refusal
to insure was not, as the dissent describes it, an ancient casual conversation
regarding an unremarkable attempt to obtain insurance. See Dissenting Opinion,
infra ¶¶ 39, 45.
[¶35.] On the contrary, the record reflects that after the 1990 fire that
destroyed Busskohls’ prior home, David and Grace rebuilt and were calling
insurance agencies, attempting to insure their new home. David and Grace went to
Agent Koch’s office seeking homeowner’s insurance. They discussed the
construction plans for the new home. They even visited the home itself “to see if we
could insure it.” Deposition of Agent Koch, 7. Agent Koch expressed his doubts to
the Busskohls because their prior home had been recently destroyed by fire.
Nevertheless, Agent Koch “contacted an underwriter from the company and [the
underwriter] said absolutely we couldn’t [insure the new home] because of the loss
history.” Id. Shortly thereafter, Agent Koch notified Busskohls: “American
[F]amily had refused to write insurance [on their new house.]” Id. at 9. Agent Koch
specifically told them that the refusal was because of their claims history.
[¶36.] Grace confirmed that American Family’s refusal to insure was a
significant event. In her deposition, Grace acknowledged that the South Dakota
Division of Criminal Investigation investigated the 1990 fire and David was
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arrested for arson.6 She then indicated that she and David knew their insurer at
the time of the 1990 fire (Allstate) would not insure their new home. Consequently,
she testified that she and David went to Agent Koch’s office to obtain insurance, but
American Family would not insure them. She specifically confirmed that she and
David were both in Agent Koch’s office when he informed them: “You have been
denied.” Deposition of Grace Busskohl, 61. She even testified that she and David
understood they had to find another agency.
[¶37.] These facts were undisputed. They clearly indicate that American
Family’s refusal to insure the Busskohls was a remarkable event. It certainly was
not some remote casual conversation. Cf. Dissenting Opinion, infra ¶¶ 39, 45.
Therefore, under the facts of this case, I agree that David made a material
misrepresentation on the insurance application with De Smet.
STOLTENBURG, Circuit Court Judge (dissenting).
[¶38.] I respectfully dissent.
[¶39.] The majority opinion holds that an insured’s conversation with an
insurance agent 14 years prior to submitting an application for insurance creates a
duty to disclose the content of that conversation. According to the Court, this duty
to disclose, although done with no intent to deceive, creates a legal basis for
voidance of the insurance policy.
[¶40.] Here, David Busskohl suffered a fire loss approximately one year after
De Smet Farm Mutual insured his property. De Smet paid the loss in the sum of
6. The charges were later dismissed.
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$476,350. When Busskohl contended that his agent had underinsured the property,
De Smet reviewed the application for insurance and determined that Busskohl was
refused similar insurance 14 years prior to applying for insurance with De Smet,
and thus, made a misrepresentation entitling De Smet to void the policy.
[¶41.] The question at issue on the De Smet insurance application is as
follows: “Has an insurer cancelled, refused, restricted or declined to renew
similar insurance?” Busskohl answered “no”. De Smet does not contend that an
insurer “cancelled”, “restricted”, or “declined to renew” similar insurance for
Busskohl. However, it does contend that Busskohl was “refused similar
insurance[,]” and thus, made a misrepresentation in his application. So how was
Busskohl refused similar insurance? The refusal stems from a verbal conversation
held by Busskohl and his wife with an insurance agent 14 plus years prior to his
application to De Smet. Busskohl made no written application for insurance, nor
was he ever notified in writing that he was refused. Yet, it is this conversation that
forms the legal basis to deny financial compensation for the total loss of Busskohl’s
home and its contents.
[¶42.] Furthermore, although the majority deems Busskohl’s answer to be a
misrepresentation as a matter of law, no intent to deceive or defraud is present in
this case. Consequently, without any intent to deceive requirement for a
misrepresentation, Busskohl is held to a mere negligence standard.
[¶43.] SDCL 58-11-44 states in pertinent part:
All statements and descriptions in any application for an
insurance policy, certificate, or annuity contract, by or on behalf
of the insured or annuitant, shall be deemed to be
representations and not warranties. No misrepresentation,
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omission, concealment of fact, or incorrect statement prevents a
recovery under the policy or contract unless:
(1) Fraudulent or an intentional misrepresentation of a
material fact; or
(2) Material either to the acceptance of the risk, or to the
hazard assumed by the insurer; or
(3) The insurer in good faith would either not have issued the
policy or contract, or would not have issued it at the same
premium rate, or would not have issued a policy or contract in as
large an amount, or would not have provided coverage with
respect to the hazard resulting in the loss, if the true facts had
been made known to the insurer as required either by the
application for the policy or contract or otherwise.
[¶44.] Although De Smet contends that it would not have issued the policy to
Busskohl because he was refused similar insurance in the past, it is clear from the
record that it is not the fact that Busskohl was “refused similar insurance,” but the
fact that Busskohl had prior insurance claims.7 Consequently, De Smet, now armed
with this prior loss information, asserts that it would not have issued the policy and
such information was material to their acceptance of the risk. Importantly, De
Smet’s application for insurance specifically requests information about past claims,
but only for the past 3 years.8 Busskohl’s fire loss claims were 21 and 14 years prior
to his application to De Smet! De Smet has now successfully brought these two
prior claims into this litigation through the proverbial back door. If De Smet
7. Busskohl made and collected insurance proceeds on two prior fire loss claims
dating back to 1983 and 1990: 21 and 14 years respectively, prior to applying
for insurance with De Smet.
8. Busskohl answered “no” to the question on De Smet’s application asking
whether Busskohl had any “[c]laims or losses during past three years which
were or would have been covered by similar insurance?” There is no
assertion that Busskohl misrepresented his answer to this question.
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wanted to underwrite its risk based upon past claims, it should be required to do so
in a straightforward question on its application form.
[¶45.] The circuit court and now this Court incongruously permits De Smet to
circumvent its own underwriting process to the detriment of Mr. Busskohl. The
effect of the majority opinion seemingly opens the door for insurers to backward
underwrite its issued policies and deny otherwise valid claims based upon
subsequent investigations to answers on its application forms going back untold
years. Is any casual conversation with an insurance agent, however long ago, now
going to be the basis for possible denial of otherwise insured losses? More should be
required.
Busskohl’s Application Response Did Not Constitute a Misrepresentation.
[¶46.] Busskohl’s “no” answer on the application should not be considered a
misrepresentation. The well-established principle is that “a contract of insurance is
to be construed liberally in favor of the insured and strictly against the insurer.
Strong, 76 S.D. at 369, 78 N.W.2d at 829 (citing Ehrke v. N. Am. Life & Cas. Co., 71
S.D. 376, 24 N.W.2d 640 (1946)).
[¶47.] The rule of liberal construction in favor of the insured and strict
construction against the insurer applies only where the
language of the contract is ambiguous and susceptible of more
than one interpretation and is also subject to the further
limitation that such language ordinarily cannot be construed
otherwise than according to its plain and ordinary meaning.
Id. at 369, 78 N.W.2d at 829 (quoting 44 C.J.S. Insurance, § 297(2)). “Construction
which distorts the plainly revealed sense in which parties have understood words
cannot be justified in the name of liberal interpretation.” Id. (quoting Life Benefit,
Inc., v. Elfring, 69 S.D. 85, 90, 7 N.W.2d 133, 135 (1942)).
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[¶48.] The words used by De Smet in its application are terms of art in the
insurance industry and under our state statutes. See SDCL 58-11-46, -47, -49, -50
(“cancelled”); SDCL 58-15-11, -69 (“restricted”); SDCL 58-11-51, -52, -53
(“nonrenewal”). “Refusal” is a term of art used in the insurance context and has a
very specific meaning. Specifically, as it relates to the facts of this case, SDCL 58-
11-45.3 requires an insurer to provide notice to the applicant on its “refusal” to
insure, but this “refusal” only occurs if the applicant has tendered a premium with
the application. A violation of this statute by an insurer constitutes a Class 2
misdemeanor.
[¶49.] Here, the evidence is undisputed that when the Busskohls had a
conversation with an American Family agent in 1990, no premium was tendered,
nor was any formal application submitted to the insurer. How was Busskohl
“refused similar insurance” under our state statutes? As a matter of law, Busskohl
was not refused similar insurance and there was no misrepresentation made by him
to De Smet. Our laws requires very specific actions by insurers to “cancel,”
“restrict,” “nonrenew,” and “refuse to insure” individuals to whom they deal with
and subjects insurers to criminal penalties if the rules are not complied with. The
circuit court and the majority are in error in leaping to the legal conclusion that a
misrepresentation was made by Busskohl on the insurance application.
[¶50.] Furthermore, public policy dictates a different result under the
circumstances of this case. Good faith and fair dealing are at the heart of the
relationship between an insurer and its insured. Good faith is required by SDCL
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58-11-44. This Court has approved language reflecting the realities of this
relationship:
The insurer’s obligations are . . . rooted in their status as
purveyors of a vital service labeled quasi-public in nature.
Suppliers of services affected with a public interest must take
the public’s interest seriously, where necessary placing it before
their interest in maximizing gains and limiting disbursements.
. . . [A]s a supplier of a public service rather than a
manufactured product, the obligations of insurers go beyond
meeting reasonable expectations of coverage. The obligations of
good faith and fair dealing encompass qualities of decency and
humanity inherent in the responsibilities of a fiduciary. Insurers
hold themselves out as fiduciaries, and with the public’s trust
must go private responsibility consonant with that trust.
Trouten v. Heritage Mutual Ins. Co., 2001 S.D. 106, ¶ 31, 632 N.W.2d 856, 863
(quoting Egan v. Mut. of Omaha Ins. Co., 620 P.2d 141, 146 (Cal. 1979)) (internal
citation omitted) (alterations in original). Simply stated, insurer questions posed on
an application for insurance should not become a landmine field for an insured to
traverse.
[¶51.] For these reasons, I respectfully dissent.
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