Voiding Policies for Misrepresentations

I like this case. Lobsters, boats, New England in the summer, insurance coverage - what's not to like? Beyond that, this decision this month from the First Circuit is a nice textbook example of when a misrepresentation in an insurance application will void a policy. We all know that obtaining insurance requires applying for insurance, and this means filling out an insurance policy application. Misrepresentations by an insured in such an application can justify an insurer's denial of coverage for a claim made after the policy was issued, but in many jurisdictions the fact that the insured made a misrepresentation isn't enough to bring this about; instead, the insured has to have made a material misrepresentation, meaning that the misstatement by the insured must have truly affected the insurer and its decision to sell the insurance to the insured or the pricing of that insurance.

In Commercial Union Insurance Company v. Pesante, the insured applied for coverage for a gill net fishing boat, warranting that it (the boat, not the guy who filled out the application) was instead used for lobstering. The very fact that this scenario ended up before the First Circuit telegraphs what is coming next, that the boat was used for gill net fishing, not lobstering, and was damaged during its use for that type of fishing. Reflecting a general sense against voiding policies that one can gather from much of the case law concerning whether a policy can be voided for these types of misrepresentations, the United States District Court found that there was an insufficient causal relationship between the accident that the boat was involved in and the type of fishing being done, and that the misrepresentation did not preclude coverage as a result. The trial court "based its decision on a finding that there was no causal relationship between [the insured's] breaches and the losses suffered. The court reasoned that, since [the insured boat] was steaming home when the accident occurred, [the insured] technically was not gill netting and therefore was not in breach of the warranty at the time of the loss."

Seems kind of silly, if the insured can misrepresent in an insurance application the very nature of the risk being insured yet avoid any consequences by the sheer good fortune - if you can call it that - of having the loss occur on the way home rather than while out to sea fishing. It appears that the First Circuit saw it the same way, finding that the misstatement of the character of the boat justified a loss of coverage for the accident. The First Circuit noted that under Rhode Island law, a material misrepresentation voids coverage regardless of whether or not the misrepresentation was deliberate, and that a misrepresentation is material if it affected the insurer's decision to insure the risk. The First Circuit found that under this standard the policy was void and the insured was not entitled to coverage for the accident because:

had the underwriter known that the Oceana was used for gill netting and not lobstering, [the insured] would have been charged a premium twenty-five percent higher than the $1,550 that was quoted. It is therefore clear that [the insurer] would not have insured [the boat] at the quoted price had it known the true nature of the vessel's use. We therefore find that the misrepresentation was material.

Perhaps the only unanswered question from this decision is why lobster costs more than fish at the market, given that the fixed costs of insurance are lower for the lobsterman than for the fisherman.