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Encompass Home & Auto, Inc. v. Harris

August 5, 2020

In Encompass Home & Auto, Ins. v. Harris, Encompass, a property insurer, instituted a declaratory judgment action seeking declaration that the policy it had issued to Defendants was void ab initio because of material misrepresentations made to the insurance agent and on the application of insurance regarding the property value and the property’s occupancy.   The Defendants sought insurance coverage for a home that they had purchased in a foreclosure sale for $7,500.  In applying for that insurance, the Defendants represented to the insurance agent that the property had been recently renovated and repaired, and that the Defendants intended to move into the property shortly and make it their primary residence.  On the application and in their conversations with the agent, the Defendants did not disclose the purchase price of the property and simply advised that they had “gotten a good deal.”  Based on the application and its reliance on the agent to obtain/provide accurate information, Encompass issued Defendants a policy with $180,000 in coverage for replacement cost value.

Two weeks after obtaining insurance coverage, the Defendants’ property was destroyed by a fire.  Encompass investigated the reported loss and determined, in the course of the investigation, that: (1) that the property was never occupied, nor was it Defendants’ primary residence; (2) no utilities, no kitchen fixtures or appliances, or personal items were inside or connected to the property at the time of the fire; (3) that the property had never been renovated; and (4) it was very likely that the fire was started intentionally.  It was also uncovered that, at the time of the fire, the purchase price of the property was $7,500.  Based on these findings, Encompass denied coverage and issued a “material misrepresentation” notice to the Defendants.   Encompass then filed a declaratory judgment action seeking a determination as to whether the policy for property insurance was void ab initio.

In the declaratory judgment action, Encompass asserted that the policy was void because the Defendants misrepresented the purchase price of the property and that it was an owner-occupied, primary residence.  The District Court began by conducting a two-prong inquiry to determine whether Encompass could validly rescind the policy.  The Court first needed to determine whether a misrepresentation had occurred, and second whether “the misrepresentation was material to the risk assumed by [Encompass].”  As to the first prong, the Court found that Defendants had misrepresented that the property was in “move-in” condition, that Defendants had completed a number of renovations, and that the property was Defendants’ primary residence.  Defendants had also misrepresented the property value.  The Court then held that these misrepresentations were material because: (1) the failure to disclose the purchase price had caused Encompass to overvalue coverage; and (2) Encompass would not have issued the policy had it known that the property was not owner-occupied or the Defendants’ primary residence.  Finally, the Court held that Encompass had not waived its right to void the policy as their duty to investigate had not been triggered because it did not appear that the information provided both by the agent and the Defendants was suspicious.  For those reasons, the Court held that Encompass could validly void the policy.

Encompass Home & Auto, Ins. v. Harris, 2015 U.S. Dist. LEXIS 32351 (D. Md. Mar. 17, 2015).