De Smet Farm Mutual Insurance Co. of South Dakota v. Busskohl
2013 SD 52, 2013 S.D. LEXIS 76, 834 N.W.2d 826 (2013)
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Rule of Law:
An incorrect statement on an insurance application regarding a prior refusal of coverage is a material misrepresentation that allows the insurer to rescind the policy, even if the applicant had no intent to deceive. Such a misrepresentation is material as a matter of law because it prevents the insurer from investigating facts that would reasonably influence its decision to accept the risk.
Facts:
- In 1990, a fire destroyed David Busskohl's home, and the fire was investigated by law enforcement.
- After rebuilding, Busskohl and his then-wife sought homeowner's insurance from an American Family Insurance Company agent, Mark Koch.
- Koch contacted an American Family underwriter, who advised that the company would not accept the risk due to Busskohl's loss history.
- Koch verbally informed Busskohl that American Family would not insure his new house; no written application was submitted or formal denial letter issued.
- On December 21, 2004, Busskohl applied for homeowner's insurance with De Smet Farm Mutual Insurance Company.
- On the application, in response to the question 'Has any insurer cancelled, refused, restricted, or declined to renew similar insurance?', Busskohl answered 'No'.
- De Smet issued a homeowner's policy to Busskohl based on his application.
- On December 6, 2005, Busskohl's home was destroyed by another fire, and De Smet paid his claim for $476,350.
Procedural Posture:
- In 2007, Busskohl sued his insurance agent in state court for providing inadequate coverage limits.
- During discovery in that case, De Smet learned that American Family had previously refused to insure Busskohl.
- De Smet rescinded Busskohl's policy and demanded repayment of the claim money.
- De Smet initiated an action against Busskohl in the circuit court, seeking a declaratory judgment that the rescission was lawful and demanding recovery of the money paid.
- De Smet filed a motion for summary judgment.
- The circuit court granted summary judgment in favor of De Smet, finding as a matter of law that Busskohl made a material misrepresentation.
- Busskohl, as appellant, appealed the circuit court's decision to the Supreme Court of South Dakota.
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Issue:
Does an applicant's failure to disclose a prior verbal refusal of insurance constitute a material misrepresentation that allows the insurer to rescind the policy after a loss has occurred?
Opinions:
Majority - Severson, Justice
Yes, an applicant's failure to disclose a prior verbal refusal of insurance constitutes a material misrepresentation that allows the insurer to rescind the policy. A false representation as to a material matter in an insurance application renders the policy voidable, even without an intent to deceive. The court reasoned that American Family's verbal denial was a clear and unequivocal refusal, and the specific form of the refusal is irrelevant. The misrepresentation was material as a matter of law because knowledge of a prior refusal would reasonably influence an insurer's decision to accept the risk by prompting a more thorough investigation. Busskohl's 'No' answer deprived De Smet of the opportunity to investigate his loss history, which included prior fires and a suspected arson.
Dissenting - Stoltenburg, Circuit Court Judge
No, the applicant's failure to disclose the prior verbal discussion should not be deemed a material misrepresentation allowing rescission. The dissent argues that a 14-year-old verbal conversation without a formal application or written denial should not be considered a 'refusal' in the legal or industry sense. It contends that the majority's decision allows De Smet to 'backward underwrite' the policy by using the refusal question to discover old claims history that its own application limited to only the last three years. This places an unfair burden on applicants, turning application questions into a 'landmine field' and contravening the principle of construing insurance contracts in favor of the insured.
Concurring - Zinter, Justice
Yes, this was a material misrepresentation. The concurring opinion was written to rebut the dissent's characterization of the prior refusal as a 'casual conversation.' The record shows it was a significant and memorable event: Busskohl, whose previous home had just burned down amidst an arson investigation, was actively seeking new insurance and was explicitly told by an agent, after the agent consulted an underwriter, that the company was denying coverage due to his claims history. This was not a minor interaction but a clear, remarkable refusal that should have been disclosed.
Analysis:
This decision reinforces the insurer-centric view of materiality in insurance contract formation in South Dakota. It establishes that a misrepresentation is material if it denies the insurer the opportunity to investigate facts that would influence its underwriting decision, regardless of the applicant's intent. The ruling sets a broad definition for 'refusal,' confirming that a verbal denial is sufficient to trigger a duty to disclose. This places a significant burden on applicants to have a perfect recollection of their insurance history, as even unintentional omissions about remote events can lead to the voiding of their policy years later.
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