Docket No. INS 05-2023 Decision : Bureau of Insurance

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George Weldon dba Action Limo Service v. Northland Insurance Company
Docket No. INS-05-2023, Decision Issued October 13, 2005.

The insured requested a hearing following receipt of a notice of cancellation of commercial automobile insurance coverage citing material misrepresentation and substantial change in the risk as the reasons for cancellation. At hearing, the company argued that the insured’s failure to disclose on the insurance application ownership an additional vehicle and his subsequent operation of that vehicle without adding it to the policy constituted material misrepresentation. The company further maintained that the operation of an unscheduled vehicle increased the company’s risk of loss due to filings that require it to pay claims for any vehicle owned or operated by the insured. The insured argued that his retail agent knew that the vehicle in question was under repair at the time of application and that he subsequently called the agency to obtain insurance documentation for both of his vehicles.

Held: For the insured. Title 24-A M.R.S.A. § 2908(2)(B) permits cancellation of the subject policy for “fraud or material misrepresentation made by or with the knowledge of the named insured in obtaining the policy, continuing the policy or in presenting a claim under the policy.” Section 2908(2)(C) permits cancellation for a “[s]ubstantial change in the risk which increases the risk of loss after insurance coverage has been issued or renewed, including, but not limited to, an increase in exposure due to rules, legislation or court decision.”

The insured testified that he informed the retail agent that the vehicle in question was under repair, and the agent admitted to knowing that the vehicle was in the insured’s possession to be repaired. Pursuant to 24-A M.R.S.A. § 2422(2) “[o]missions and misdescriptions known to the agent shall be regarded as known to the insurer and waived by it as if noted in the policy.” Thus, the insured’s continued ownership of the vehicle was known to the company through the agent and accordingly, the failure of the insured to disclose the vehicle on the application does not constitute material misrepresentation.

Even if no agency relationship existed between the retail agent and the company sufficient to invoke § 2422(2), the evidence indicates that the retail agent sent the general agent several certificates of insurance listing the vehicle and no one at the general agent or the company detected the discrepancy between the information contained on the certificates and the coverage in effect. The company had imputed knowledge of the existence of the vehicle only weeks after policy inception and thus, had ample opportunity to investigate whether the vehicle should have been added to the policy with a corresponding charge for premium.

The statute further requires that a misrepresentation be material in order to effect cancellation. A misrepresentation is material “if it could reasonably be considered as affecting the insurer’s decision to enter into the contract, or its evaluation of the degree of character of the risk, or its calculation of the premium to be charged.” York Mutual Insurance Company v. Bowman, 2000 ME 27, ¶ 10, 746 A.2d 906, 909. The vehicle was under repair and not being used at the time of application, and even if the insured’s ownership of it had been disclosed to the company, the company reasonably may have deferred charging any premium until the vehicle was ready for use. Therefore, the company has not demonstrated that any misrepresentation of the insured’s ownership of the vehicle was material to the company’s risk at the time of application.

The company further maintained that the operation of the vehicle fell under the charge of material misrepresentation. Rather than a misrepresentation, however, the situation was the result of a series of unfortunate errors on both sides. The retail agent failed to remove the vehicle from its computer system when the vehicle was deleted from the prior policy. The situation was compounded by the insured’s admittedly insufficient request to the retail agent for coverage on the vehicle. Both agents’ failure to realize that the vehicle was not insured under the policy despite the continued issuance of certificates showing the vehicle as insured further worsened the problem. There is insufficient evidence to conclude that the requirements of § 2908(2)(B) have been met.

The company also argued that it faced a substantial increased risk because of the filings. The statute upon which the company appears to apply, 24-A M.R.S.A. § 2908(2)(C), is two-pronged: both a substantial change and an increased risk must be established. The operation of a second vehicle increases the possibility of a loss as the exposure is potentially doubled. Likewise, the existence of the filings arguably imposes an obligation that the company would not otherwise have. However, there is no substantial change in the risk. The insured’s business was a limousine service on the earliest date we can establish a policy with the company, and it remains a limousine service today. The operation of two vehicles rather than one is not a substantial change in the exposure. In addition, the insured has maintained the same second vehicle intermittently on two prior policies with the company.

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