Auto Liability Policy Voided for Arrest Record

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An auto liability policy is void because the applicant, a sole proprietor who applied as “Kitchens Unlimited LLC,” had a criminal record but denied he had ever been arrested; the Henrico Circuit Court grants judgment to plaintiff insurance carrier in this dec action filed by the applicant and the severely injured plaintiff with whom he collided.

The injured plaintiff presents two initial defenses. First, he argues Erie waived its rights by failing to satisfy Va. Code § 38.3-2226. Second, he argues Erie’s claim is barred by laches.

The injured plaintiff argues Erie waived any claim of rescission because it failed to give notice within 45 days. Without deciding whether the 45 days expired, this court rejects the injured plaintiff’s argument because the statute does not apply. Section 38.2-2226 applies when an insurer discovers a breach of the insurance contract by the insured. The evidence did not reveal any breach of contract by the applicant. Instead, the question at trial was whether a contract was formed in the first place. No statutory duty to notify was at issue.

With respect to the doctrine of laches, the injured plaintiff argues Erie’s delays were unreasonable and had the effect of reducing his chances to recover damages. During the months of January 2009 through June 2009 the injured plaintiff was preparing for a trial scheduled for December 2009. He contends that numerous expenses could have been avoided had he known that Erie would deny coverage.

When did Erie know of its claim? An Erie representative testified that after a policy is issued Erie does not seek information about criminal conduct of an insured. The only way for Erie to know it had a claim of rescission was from developments in the tort case filed by the injured plaintiff. It was the receipt of the deposition transcripts in December 2008 that gave Erie a reason to “assert” a “known” right. After putting the pieces together, Erie tried to obtain an examination under oath from the applicant, but he did not cooperate. After that it was only four or five weeks before Erie gave written notice on June 3, 2009. This is not an unreasonable or unexplained delay. Laches does not bar Erie’s claim.

It is undisputed that at the time the application was submitted, the applicant had been arrested several times. It is also undisputed that these arrests were not revealed at the time the applicant visited the agent. The only dispute is whether the applicant was required to disclose his prior arrests in an insurance application made by his sole proprietorship, Kitchens Unlimited.

The injured plaintiff argues the insured was the business organization, not the applicant. He argues Erie’s application was so ambiguous and confusing that the applicant’s answers could not have been intentionally false.

When the applicant completed the application, he was the only one there. Whatever name was typed into the box called “applicant,” he was the whole package. He was the owner, the sole employee and the agent.

The court must consider the issue presented in the case at bar and not what might have happened in a case where there was more than one employee or two owners who could have had criminal histories. On the evidence in this case, the only reasonable inference is that the applicant knew the underwriting question was being asked of him individually and he concealed his arrest record.

Further, the distinction drawn by the injured plaintiff – between the applicant and his business – was rejected in Recalde t/a A&R Sweeping & Cleaning v. ITT Hartford, 254 Va. 501 (1997). Because the applicant and Kitchens Unlimited are not separate legal entities, the applicant was required to disclose his prior arrests on the insurance application.

Erie has satisfied its burden to prove the answers in the application were untrue, and they were material. It is clear the applicant’s prior arrest and convictions would have been material to the risk under consideration, and his criminal history would have reasonably influenced the decision whether to insure.

Judgment for Erie.

Erie Ins. Exchange v. Outlaw (Hammond) No. CL 09-1918, Sept. 14, 2011; Henrico County Cir.Ct..; Stephen A. Horvath, Mahlon G. Funk Jr., John J. Rasmussen for the parties. VLW 011-8-194, 4 pp.