Update: On May 6, 2020, the Supreme Court of Ohio handed down a merit decision in this case. Read the analysis here.
On September 11, 2019, the Supreme Court of Ohio heard oral argument in Nationwide Mutual Fire Insurance Company v. Pusser et al., 2018-1137. At issue in this case is whether the words “may” and “could” clearly and unambiguously warn the insured that a misstatement will void the insurance policy ab initio, as required by Allstate Ins. Co. v. Boggs.
Case Background
On March 17, 2011, Diane Lapaze signed an application (“the Application”) with Nationwide Mutual Fire Insurance Company (“Nationwide”) for automobile insurance. The Application contained a statement indicating that, by signing, the applicant understood that “misrepresentation of information on this application, including failure to disclose a driver or member of the household, could void some or all of [the] coverages.” The Application included a section for the applicant to list “all household members of driving age and non-resident operators.” Although Lapaze’s sister, Barbara Pusser, was of driving age and had begun living with Lapaze in December of 2009, Lapaze listed only herself as a household member of driving age on the Application. Nationwide issued the automobile insurance policy (“the Policy”) to Lapaze.
On August 13, 2012, Pusser was operating Lapaze’s vehicle when she struck and killed Robert Boak as he was walking on the side of the road. A third party, Dennis Lehman, was the driver of another car also involved in the accident. Pusser gave the police a false name at the accident scene. She later pled guilty to aggravated vehicular homicide, tampering with records and forgery.
The Policy was in effect at the time of the accident.
Nationwide filed a declaratory judgment action against Pusser, Lapaze through her legal guardian (Lapaze was diagnosed with Alzheimer’s in 2012), Lehman, and the Administrator of the Estate of Robert Boak (“the Estate”) seeking a declaration that it does not owe liability coverage to any of the defendants. Nationwide filed a motion for summary judgment, which was granted by the trial court. Only the Estate appealed.
The Appeal
In a unanimous decision, the Seventh District Court of Appeals reversed the trial court’s judgment and entered summary judgment in favor of the Estate. Relying on the two-pronged test set forth in Allstate Ins. Co. v. Boggs, the Seventh District found that Lapaze’s misstatement did not void the insurance policy ab initio because the language employed by Nationwide in both the Application and the Policy did not constitute a plain warning that a misstatement as to the warranty would render the policy void from its inception. The Seventh District explained that Nationwide’s use of the words “may” and “could” in the Application and the Policy spoke merely of possibilities, not certainties, and, thus, did not clearly and unambiguously put Lapaze on notice that a misstatement would render the policy void ab initio. The Seventh District also found Nationwide never declared the Policy void nor returned Lapaze’s premium.
Read the oral argument preview of the case here.
Key Precedential Case in this Appeal
Allstate Ins. Co. v. Boggs, 27 Ohio St.2d 216, 271 N.E.2d 855 (1971) (Opinion clarified the difference between a representation and a warranty. In order for an applicant’s misstatement in an insurance application to be a warranty that voids the policy ab initio, (1) the representation must plainly appear on the policy or must be plainly incorporated into the policy and (2) there must be a plain warning that a misstatement as to the warranty will render the policy void from its inception. If the statement is a representation, a misstatement will render the policy voidable.)
Other Key Precedent
Am. Family Ins. Co. v. Johnson, 2010-Ohio-1855 (8th Dist.) (Courts apply the two-pronged test set forth in Boggs to determine whether an applicant’s misstatement in an insurance application voids the insurance policy.)
James v. Safeco Ins. Co. of Illinois, 2011-Ohio-4241 (8th Dist.) (“[T]he policy language ‘we may void this policy’ is not a clear warning to the insured that a misstatement shall render the policy void.”)
At Oral Argument
Arguing Counsel
Michael H. Carpenter, Carpenter Lipps & Leland LLP, Columbus, for Appellant Nationwide Mutual Fire Insurance Company
Timothy J. Cunning, Scullin & Cunning LLC, Boardman, for Appellee Estate of Robert Boak
Nationwide’s Argument
The specific issue in this case is whether Nationwide’s policy of insurance with Diane Lapaze should be declared void ab initio due to the material misrepresentations made by Ms. Lapaze in her insurance application. The policy should be declared void ab initio because Ms. Lapaze failed to reveal on her insurance policy that her sister Barbara Pusser was living in the household with her, driving her Dodge Neon, and driving it with a suspended license. Nationwide learned at the time of the accident that Ms. Pusser was and had been living in the household, was repeatedly and regularly using the car, and had a suspended license.
Nationwide’s counsel quoted extensively from specific provisions in the policy application, particularly the one initialed by Ms. Lapaze asking for all household members of driving age and non-resident operators. And he emphasized that just above Ms. Lapaze’s signature on the application, it says in all bold, all capital type, “if an incorrect answer is given to a question listed as a warranty, in either the application or the policy contract, such a misstatement may void the policy.”
Mr. Carpenter continued to read from paragraph 13, which says “the application is incorporated herein and made a part of this policy” and further says that “the policyholder agrees that the statements in the declaration and application for this policy are his or her agreements, representations, and warranties. The policyholder agrees that this policy is issued in reliance on upon the truth of such representations and warranties. If it is determined that any warranty made by the policyholder is incorrect, this policy may be held void ab initio or void back to the date of inception upon return of the policyholders’ premium.”
The critical reason why this policy is written in terms of “may” versus “shall” and is not mandatory is that Boggs instructed that the facts that must be relied upon to void the policy ab initio must be material facts. Giving flexibility to the insurance company inures to the benefit of the insureds. If this court establishes a bright line test that every single technical violation of a warranty constitutes a breach which must be met with a mandatory termination of the insurance policy, then the insurer no longer has the ability to look at the underlying material facts, to look at what is unique to that particular situation. For example, if Ms. Lapaze had been driving when Mr. Boak was struck, there would still be a technical violation, namely the failure to list Ms. Pusser as a driving household member, and Nationwide would have no flexibility to say that is not a material fact here. That flexibility, that ability to do good by the company’s insured, should not be limited by the court today.
As for the declaratory judgment action, Nationwide was absolutely entitled to bring that action. It was the right and honorable thing to do. While seeking a declaratory judgment, Nationwide also provided a defense to both Ms. Pusser and Ms. Lapaze. At its own expense, Nationwide engaged independent counsel to represent them in the claims brought by Mr. Boak’s estate, while the declaratory judgment action was going forward. Until Nationwide has a ruling from this court as to what its obligations are, the company is doing what it is obligated to do under the policy. If this court declares the policy void ab initio, all premiums will be returned.
Estate’s Argument
Almost 50 years ago in Boggs this court established a 2-prong test to determine if an insurance policy contains warranties or representations. The first prong of that test requires that the insurance company specifically designate a category of statements as a warranty and then incorporate that statement as a warranty into the policy. The second prong of that test requires that the policy clearly and unambiguously warn that a misstatement shall render the policy void. If both elements are satisfied, the policy is void ab initio. A warranty is irrebuttably presumed to be material. If a policy is void, there is no ability to choose whether to cancel the policy.
What Nationwide is arguing for here is a voidable policy, but it doesn’t want the drawback of a voidable policy which requires the insurer to cover any loss that arises prior to cancelling the policy. The materiality analysis is a red herring. If the statement is truly a warranty, it is irrebuttably deemed material whether in fact it is or is not.
The misstatement about the make-up of the Lapaze household is not a warranty. Nationwide, the drafting party here, specifically designated 9 categories of statements as warranties in its policy. Household members of driving age is not listed there. On that basis alone it is not a warranty because it fails to satisfy the first prong of Boggs. Boggs says that “if it is an insurer’s purpose to provide that a misstatement shall render the policy void such facts must appear clearly and unambiguously from the terms of the policy.” While that doesn’t necessarily require the word “shall,” there must be some functional equivalent of “shall”-enough to put the insured on notice of the effect of a misstatement. It would appear from the case law in Ohio that the vast majority of other insurance companies have had no problem complying with Boggs.
A representation renders the policy voidable, not void ab initio. Nationwide cannot retain discretion to void something if it is void ab initio. Boggs specifically stated that if the policy is voidable, the insurer must cover the loss. That cannot be done retroactively. What Nationwide wants here is the discretion to decide after a loss occurs whether it makes more financial sense to return the premiums and cover the loss, or not cover the loss.
To the extent there is some materiality requirement here, there is no evidence in the record that the failure to list Barbara Pusser as a household member of driving age was material to the risk, the premiums charged, or anything along those lines.
All the issues before this court today could have been avoided had Nationwide just chosen to draft its policy differently. The law in Ohio going back hundreds of years is that insurance policies are strictly construed against the drafters, warranties are disfavored because of how harsh they are, and that any reasonable interpretation of an insurance policy that provides coverage is to be adopted.
It is safe to assume that the court in Boggs was well aware and appreciated the legal distinctions between the words “shall” and “must” and “will” “may” and “could.” There is mandatory and discretionary language, and this court enforces this distinction in statutes and contracts all the time. It should enforce this distinction here.
Nationwide is attempting to have its cake and eat it too. It didn’t return the policyholder’s premium even after it had a judgment in its favor, and despite the fact that there is a statute that specifically says if a refund of a premium is due, no matter what the reason, it must occur prior to cancellation. Nationwide’s decision to provide a defense here is probably to potentially avoid a bad faith claim because its policy does not comply with Boggs.
The bottom line here is that a breach of a warranty renders the policy void ab initio. A breach of a representation renders the policy voidable, but not after a loss has already occurred. The underlying purpose of Boggs was to delineate these two categories of statements and explain the difference in consequences between the two.
What Was On Their Minds
The Insurance Application
Was Ms. Pusser using the vehicle when Ms. Lapaze filled out the application, asked Chief Justice O’Connor?
At the time of the application Ms. Pusser was living in the household, noted Justice Stewart. What aspect of Ms. Lapaze’s answer was misrepresented? Was there any indication that Ms. Lapaze was planning for her sister to drive the vehicle? Was Ms. Lapaze required to list anybody that lived in the house who was 16 or over? If you are 16 and living in the home and you have never driven a car before and you’ve never even taken a driver’s test, you’re still required to be listed by the applicant of the insurance?
Isn’t it important to know every driver that will be using the covered automobile regularly so the insurance company can assess the proper premium and risk, asked Justice Donnelly?
Pusser’s Use of her Sister’s Car
What was the evidence to show when Ms. Pusser used the vehicle, asked Chief Justice O’Connor? Was this known at the time of the application? And she didn’t have a valid driver’s license? (answer: she did not).
Does it matter whether Ms.Pusser had her sister’s permission to drive her car, asked Justice Stewart? Would Ms. Pusser be covered if she weren’t living in her sister’s household? Could Nationwide have disallowed her as a driver if the insurer had done a license check and saw that she had gotten DUI’s? How could she have been excluded if she had never been listed?
“May” versus “Shall”
Is it the Estate’s position that the use of the word “may” instead of “shall” did not put the insured on notice that any of her statements contained in the application that were then part of the warranty of the policy itself, were not material, asked Chief Justice O’Connor? What happens if the policy said “will, at the discretion of Nationwide, void this policy”?
What’s the purpose in asking the questions in the application and then saying any misrepresentation may or any language you want to use, render the contract void, whatever the language is, asked Justice Stewart? What legal purpose does it serve in having that language if it can’t render the policy void ab initio because it is just a qualifier?
Void versus Voidable
If this court agrees that the contract was void ab initio because of the misstatement in the application, would that mean that Ms. Lapaze is entitled to a refund, asked Justice Stewart? If the misstatement renders the whole contract voidable, why can’t Nationwide say this is a misstatement, we’re voiding the contract, here’s your premium back, we’re not covering the loss?
Insurer Discretion
Is the decision to void the policy because of a misstatement at the total discretion of Nationwide, asked Justice Stewart?
In a situation where the applicant did not disclose an occupant of the house that was of driving age, is it up to Nationwide to determine if that’s a material omission, asked Chief Justice O’Connor?
Didn’t Nationwide’s decision to provide a defense work in the insured’s favor, asked Justice French?
Does the insured really want the kind of rule where in this case if it had been Ms. Lapaze who had been driving the car, Nationwide could have voided the policy for that, asked Justice DeWine? If the insured makes a mistaken misstatement, the policy is void? Would that kind of rule make insureds better off? He commented that he thought that in this case it would make the insured worse off.
Status of this Policy
Since Nationwide did not return the premium and provided the defense for both women, was the policy in essence in effect, asked Chief Justice O’Connor? The policy was paid for up to a certain date and was never cancelled? During this time, was Nationwide picking and choosing what elements of the policy it wished to honor and what elements of the policy it wanted to chuck?
Representations Versus Warranties
How is an insurance company supposed to know when misrepresentations or outright omissions or even lies are part of the list of warranties, the representations –how do they learn about that, asked Chief Justice O’Connor? Are they still obligated to cover the loss when the language says if you misrepresent a warranty, it’s void, from the beginning?
Is it the Estate’s position that no representation can be material because the warranties are listed separately, asked Justice Fischer? Could a misrepresentation make the policy void ab initio? Or just a warranty?
How it Looks From the Bleachers
To Professor Emerita Bettman
Like a win for Nationwide, although I don’t think it should be, except the company certainly was entitled to bring a declaratory judgment action. So, its second proposed proposition of law (An insurer is not required to void a policy and return an insured’s premium before bringing a declaratory judgment action regarding whether the insurance policy is void ab initio) will most certainly be adopted.
This was a very very wordy argument. Mr. Cunning’s argument on behalf of the estate never seemed to get traction, while Mr. Carpenter smoothly seemed to persuade the court that Nationwide kindly and gently used its discretion in this situation to help its insured by providing a defense. (It’s worth a reminder that the insured is not even involved in this appeal, just the accident victim). But granting the insurance company discretion makes me uneasy. The Chief hinted at that when she asked Nationwide’s counsel if the company could pick and choose the parts of the policy it wanted to enforce and chuck the rest.
If the Court does find for Nationwide, I would at least expect some language from someone that the use of “shall” when something is mandatory is much preferred over “may” or “could.”
To Student Contributor Madeline Pinto
I think the Court will most likely rule in Nationwide’s favor. Overall, the Court appeared most concerned with the harsh consequences that would be imposed on insureds if the Court adopted the Estate’s interpretation of Boggs which eliminates insurers’ flexibility to determine whether a misstatement was material and, thus, should result in the policy being void ab initio. During the Estate’s argument, several of the Justices questioned why the bright-line rule proposed by the Estate would benefit insureds. I think the Estate made a fairly persuasive argument in its briefs that allowing insurers to determine when a misstatement voids the policy ab initio is actually worse for insureds than a bright-line rule because it allows insurance companies to selectively enforce the policy depending on whether returning the premiums or paying the claim is most financially advantageous. However, the Estate’s counsel did not do a good job of articulating this argument in front of the bench and I don’t think he was successful in convincing the Court that a bright-line rule would make insureds better off. In fact, only Chief Justice O’Connor mentioned that Nationwide’s interpretation of Boggs essentially permits it to pick and choose which aspects of the policy to enforce and the rest of the bench never seemed to jump on board with this argument. Therefore, because the Court appeared convinced that the bright-line rule advocated by the Estate would work a harsher result for insureds, I think the Court will ultimately rule in favor of Nationwide.