American States Ins. Co. v. Ehrlich

• Decision Date: 21 June 1985
• Docket Number: No. 56824,56824
• Parties: AMERICAN STATES INSURANCE COMPANY, A Foreign Corporation, Plaintiff/Appellant, v. Lavern E. EHRLICH, Arthur W. McCorkle, Margaret L. Sporleder, David A. McCorkle, Beverly J. Kindler, Esther E. Haynes and Josephine A. Melray, Defendants/Appellees.
• Court: Kansas Supreme Court

Page 676

701 P.2d 676

237 Kan. 449

AMERICAN STATES INSURANCE COMPANY, A Foreign Corporation Plaintiff/Appellant, v. Lavern E. EHRLICH, Arthur W. McCorkle, Margaret L Sporleder, David A. McCorkle, Beverly J. Kindler Esther E. Haynes and Josephine A Melray, Defendants/Appellees.

No. 56824.

Supreme Court of Kansas.

June 21, 1985.

Syllabus by the Court

1. Actionable fraud includes an untrue statement of fact, known to be untrue by the party making it, made with the intent to deceive or recklessly made with disregard for the truth, where another party justifiably relies on the statement and acts to his injury and damage.

2. The test generally applied as to whether a misrepresentation is material, so as to permit an insurer to avoid its obligation under an insurance contract, is whether the knowledge of the truth would have reasonably influenced the insurer in accepting the risk or fixing the premium.

Thomas C. Boone of Law Offices of Thomas C. Boone, of Hays, argued the cause, and Charles F. Steele, of the same firm, was with him on brief for appellant.

Russell E. Grant, Mulvane, argued the cause, and Daniel D. Metz of Metz & Metz, Lincoln, was with him on brief for appellees.

PRAGER, Justice:

This is an action brought by American States Insurance Company for a declaratory judgment and for rescission of an automobile liability insurance policy relying on a claimed fraudulent misrepresentation by the coinsureds, Lavern E. Ehrlich and Esther McCorkle, that they were husband and wife. The defendants are Lavern E. Ehrlich and the heirs of Esther McCorkle, now deceased.

The facts in the case are not disputed and essentially are as follows: On July 18, 1979, at approximately 6:20 p.m., defendant/appellee, Lavern Ehrlich, lost control of his motor vehicle while traveling at a high rate of speed and Esther Ehrlich a/k/a Esther McCorkle, a passenger in the vehicle, was fatally injured as a result of the accident. An action for damages against the defendant, Lavern Ehrlich, brought by the heirs of Esther McCorkle, is the subject of a companion case in the District Court of Russell County, Kansas.

At the time of this accident, Lavern Ehrlich and Esther McCorkle were residents of Hoisington, Kansas. They were not married, although they were living together. Esther McCorkle was not divorced from her husband, Allan W. McCorkle, who is still living. The automobile driven by Lavern Ehrlich on the date of this fatal accident was owned by Lavern Ehrlich and was insured by plaintiff, American States Insurance Co., under an automobile liability policy.

The insurance policy, insofar as the same covered the automobile in question, a 1972 Ford Fairlane, became effective on June 11, 1979, and was in effect on the date of the accident, July 18, 1979. This policy was issued by virtue of two applications prepared by the Mawhiney Insurance Agency, Hoisington, Kansas. One is dated April 5, 1977. The second application form admitted into evidence is dated March 13, 1978, and is virtually identical in form and substance to the application dated April 5, 1977, except that different automobiles are shown thereon. Both applications indicated Esther Ehrlich was "married-living with spouse." Further, both applications indicated that Esther did not drive an automobile.

This action was tried to the court without a jury. At the trial, American States called as a witness Bill Mawhiney, an independent insurance agent representing numerous insurance companies including American States. He testified that the deceased, Esther McCorkle, told him that she was Esther Ehrlich and married to Lavern E. Ehrlich. He further testified that he did not know or talk to Lavern E. Ehrlich at the time the applications for automobile insurance were prepared. Mr. Mawhiney testified that, if each of the applications had stated that Esther and Lavern Ehrlich were not married and living together, then the decision to issue the policy would have been up to the underwriters at American States. Under cross-examination, Mawhiney testified that motor vehicle reports were the most important criteria for issuing the policy. The application in this case was submitted to the company based on the fact that Esther Ehrlich was not a driver. Mawhiney testified that it would have made no difference in the premium had the company known that Lavern and Esther were not married.

American States also called as a witness James L. Fieler, its branch claims manager. He testified that he first discovered Esther was not divorced from her first husband, and thus not married to Lavern Ehrlich, on January 1, 1981, when he received a letter from Esther McCorkle's heirs. Fieler then informed Mawhiney that Esther and Lavern Ehrlich were not married. At no place in his testimony did James Fieler testify that the company would not have issued the insurance policy or that the premium would have been different had the company known that Lavern E. Ehrlich and Esther McCorkle were not married.

The only other witness called at the trial was Lavern E. Ehrlich, who testified that he lived with Esther McCorkle for nine years and that they were not married. He further testified that he was not present when Esther McCorkle made the application for the insurance. He relied on Esther's taking care of his business, he trusted her, and he told Esther to secure the automobile liability insurance for him. He felt that she was a good and trustworthy woman.

Based upon this evidence the trial court held that the policy of insurance issued by American States was in force at the time the accident occurred. The court found that Lavern E. Ehrlich and Esther McCorkle were not husband and wife at the time the application for insurance was completed, nor at the time of the accident. The court held that the insurance policy should not be cancelled or rescinded as a result of any fraudulent misrepresentation made by either Lavern or Esther at the time the application for insurance was submitted. The court further held that, because Kansas law now has compulsory automobile liability insurance for licensees, the policy in this case provided coverage and could not be rescinded ab initio.

On this appeal, American States essentially presents two basic issues for determination: (1) Were the findings of the trial court supported by the evidence that American States had failed to show justification for cancellation of the insurance contract on the basis of a fraudulent misrepresentation; and (2) May an insurer rescind ab initio an automobile liability insurance policy under a compulsory insurance law for fraudulent misrepresentation. We have concluded that this case may be determined on the basis of the first issue and that it is not necessary in this case to decide the second issue presented.

Simply stated, we must determine whether the evidence supported the trial court's finding that there was no fraudulent misrepresentation sufficient to justify cancellation of the insurance policy. The rule is well established that where the trial court has made findings of fact and conclusions of law, the function of an appellate court is to determine whether the findings are supported by substantial competent evidence and whether the findings are sufficient to support the trial court's conclusions of law. Iola State Bank v. Bolan, 235 Kan. 175, 187, 679 P.2d 720 (1984).

Upon appellate review, this court accepts as true the evidence and all inferences to be drawn therefrom which support or tend to support the findings of the trial court, and disregards any conflicting evidence or other inferences which might be drawn therefrom. Marcotte Realty & Auction, Inc. v. Schumacher, 229 Kan. 252, 624 P.2d 420 (1981).

At the outset, we should consider what evidence is necessary to sustain an action to rescind a contract of insurance on the grounds of fraudulent misrepresentation. In Nordstrom v. Miller, 227 Kan. 59, 65, 605 P.2d 545 (1980), it was held that actionable fraud includes an untrue statement of fact, known to be untrue by the party making it, made with the intent to deceive or recklessly made...