Insurer not entitled to rescind home insurance policy

The failure to disclose true value in a real estate insurance context doesn’t give rise to a rescission claim, the Indiana Court of Appeals held in a case of first impression.

In Jerry French, et al. v. State Farm Fire & Casualty Company, No. 18A02-1005-PL-489, both parties appealed the denial of their motions for summary judgment in a dispute over whether State Farm Fire & Casualty Co. would have to pay for the Frenches’ stick-built home under the insurance policy that covers the “reasonable and necessary cost” of replacing their home with one of “similar construction” after their manufactured home burned.

When Jerry French obtained insurance on the manufactured home, the independent insurance agent never asked if the home was manufactured or how much the home cost. The agent assumed it was a stick-built home because French said the home was “under construction.” The replacement cost of the home under the policy was $173,200; the Frenches’ manufactured home cost nearly $77,000.

The home was destroyed by a fire and the Frenches decided to build a stick-built home on the site at a cost of more than $180,000. State Farm only offered to pay the cost of replacing the manufactured home with the same model. The Frenches sued for breach of insurance policy, and the trial court denied both parties’ motions for summary judgment.

The appellate judges found the policy was ambiguous when it came to the use of the terms “similar construction” and “reasonable and necessary cost,” and affirmed the denial of summary judgment for both parties on the question of whether the policy terms covered the cost of replacing the manufactured home with a stick-built one.

State Farm argued that it’s entitled to reformation of the policy based on a mutual mistake of fact, and rescission of the policy based on concealment of material facts by the Frenches. On the reformation issue, the judges remanded with instructions to enter summary judgment in favor the Frenches, because there’s no evidence that the Frenches were mistaken regarding the true value or nature of the manufactured home. Regarding the rescission of the insurance contract based on the concealment of the purchase price, or the fact it was a manufactured home, the judges noted that no Indiana case has squarely addressed the question of whether failure to disclose a material fact leads to the same result as a misrepresentation.

The appellate court looked at foreign cases involving the failure to disclose the value of insured real estate and cases involving the failure to disclose the value of insured property. In the real estate cases, those courts held that failure to disclose true value in a real estate insurance context doesn’t give rise to a rescission claim. Courts have held that not disclosing the value of insured property – such as art objects – is grounds for voiding the policy.

Judge Cale Bradford pointed out that in the real estate cases, the insurance company didn’t inspect the property in question before issuing coverage, which is what happened in the instant case.  

“… it would have been a simple matter for a State Farm agent to visit the Frenches’ home, at which point it would have been immediately apparent that it was a manufactured home, even without going inside. In contrast, the true value of personal property, such as an art collection, would be much more difficult for the insurer to ascertain,” he wrote. “We do not think it is an unreasonable rule that insurance companies fail to ascertain the true value of insured real property at their peril, as they are in a far better position to accurately ascertain that value than most homeowners.”

The judges ordered summary judgment be entered in favor of the Frenches on this claim. They also denied awarding attorney fees and prejudgment interest to the Frenches. At trial, they may argue that additional living expenses pursuant to their insurance policy were reasonable and necessary costs of replacing their original home with one of similar construction.