Kentner v. Gulf Ins. Co.

• Decision Date: 23 October 1984
• Docket Number: No. TC,TC
• Citation: 297 Or. 470,686 P.2d 339
• Parties: Lester J. KENTNER and Linda J. Kentner, Respondents on Review, v. GULF INSURANCE COMPANY, Petitioner on Review, Lumbermens Insurance Agency and Tug Bailey, Defendants. Lester J. KENTNER and Linda J. Kentner, Plaintiffs, v. NEW ZEALAND INSURANCE COMPANY LIMITED and Lumbermens Insurance Agency, Inc., Defendants. 25403; 30999; CA A26069; SC S30307.
• Court: Oregon Supreme Court

Page 339

686 P.2d 339

297 Or. 470

Lester J. KENTNER and Linda J. Kentner, Respondents on Review, v. GULF INSURANCE COMPANY, Petitioner on Review, Lumbermens Insurance Agency and Tug Bailey, Defendants.

Lester J. KENTNER and Linda J. Kentner, Plaintiffs, v. NEW ZEALAND INSURANCE COMPANY LIMITED and Lumbermens

Insurance Agency, Inc., Defendants.

No. TC 25403; 30999; CA A26069; SC S30307.

Supreme Court of Oregon In Banc.

Argued and Submitted April 4, 1984.

Decided July 24, 1984.

Rehearing Allowed and Decision

Modified Oct. 23, 1984.

Robert L. Nash, Bend, argued the cause and filed the petition for petitioner on review. With him on the petition was Johnson, Marceau, Karnopp & Petersen, Bend.

Lawrence W. Erwin, Bend, argued the cause and filed the response for respondents on review.

CAMPBELL, Justice.

We allowed review of this case primarily to determine whether proof of reckless indifference is sufficient to establish the scienter element for statutory insurance fraud. We hold that it is but nevertheless affirm the reversal and remand entered by the Court of Appeals for a different reason.

While the principal question is not complex, this case presents several other questions. For this reason, we must recite some of the lengthy history of this case.

Plaintiffs Kentners, husband and wife, purchased a homeowners insurance policy, which included fire insurance coverage, from defendant Gulf Insurance Company in July 1977. Lumbermens Insurance Agency was the broker for this policy. Lumbermens' employee, Bailey, completed the application for the Kentners. This application stated that Kentners' house, which they built themselves, was approximately 2400 square feet and of high quality construction. After the annual renewal of this policy, Gulf received a report of a routine inspection of plaintiffs' house. The inspection revealed that the house was only 1484 square feet and created doubt concerning the quality of construction. When Gulf received this report, it decided it wanted to discontinue the insurance policy because it dealt only in the "deviated" homeowners' insurance market. ¹ Gulf wrote to Lumbermens asking it to get a voluntary cancellation of the policy from the plaintiffs or to send a cancellation notice. ²

Following several unsuccessful attempts to obtain voluntary cancellation from plaintiffs, two of Lumbermens' employees signed plaintiffs' names to a cancellation request and sent it to Gulf in September 1978. Lumbermens then procured a substitute policy for the Kentners from New Zealand Insurance Company Limited. ³ Although an employee of Lumbermens testified that Kentners knew of this substitution of policies and approved, Kentners testified that they did not know about it.

In March of 1979 a fire occurred in the Kentners' six car garage. They filed proof of loss for personal property destroyed in the fire with both Gulf and New Zealand. Gulf denied the claim, stating that any insurance coverage they might have provided for the Kentners ended before the fire. New Zealand made two different payments to the Kentners.

In July 1979 plaintiffs brought this action against Gulf, Lumbermens and Lumbermens' employee, Bailey, for the claim on the insurance. Gulf responded with numerous affirmative defenses.

The case against Gulf came to trial on Kentners' sixth amended complaint. Shortly before trial both Lumbermens and Bailey were dismissed as defendants. The trial was on the limited issue of insurance coverage and did not extend to the amount of damage suffered. Kentners' basic theory was that the attempted cancellation of their insurance policy with Gulf, by means of the forged cancellation request, was ineffective and Gulf was liable for the claim. The trial court held as a matter of law that Kentners should prevail unless Gulf proved one of its affirmative defenses, and it allowed four of Gulf's affirmative defenses to go to the jury out of the ten asserted in Gulf's final answer.

Gulf argued that it was relieved of any obligation to pay, because Kentners committed fraud in the inducement in that Kentners were at least reckless in giving false information in their application. Gulf argued that had it known the true size and condition of Kentners' house it would have refused to issue the insurance policy. It also argued that plaintiffs made fraudulent misrepresentations in their claim following the fire. It alleged that Kentners listed property that belonged to their renter on the proof of loss form. For a third affirmative defense Gulf argued that even if Lumbermens were not acting as Kentners' agent in cancelling the Gulf policy and substituting the New Zealand policy, plaintiffs ratified these actions by requesting and receiving payment from New Zealand. It also argued that these actions constituted waiver.

During trial, over plaintiffs' objections, the trial court allowed the application for the Gulf insurance policy into evidence, although it had not been made part of the policy. Plaintiffs also excepted to an instruction which essentially held that Gulf only needed to prove a reckless misrepresentation to prevail on its fraud defenses.

The jury returned a general verdict for Gulf. Plaintiffs appealed, assigning many errors. Gulf cross-appealed, contending that the trial court erred in awarding less costs than were appropriate.

The Court of Appeals reversed and remanded for a new trial. Kentner v. Gulf Ins. Co., 66 Or.App. 15, 673 P.2d 1354 (1983). It held that it was unnecessary to address all 20 of plaintiffs' assigned errors because most did not warrant discussion. The court held that proof of reckless indifference was insufficient as a matter of law to prove the scienter element and prevail on a fraud defense under ORS 743.612, and reversed and remanded for a new trial. It also noted that an insurance company is not required to prove reliance on the misrepresentation and that the trial court did not err in admitting the insurance application notwithstanding ORS 743.045(1).

We allowed Gulf's petition for review. It alleged four errors in its petition. Of these four, we chose to address only the questions whether the Court of Appeals used an incorrect standard for the scienter element of fraud and whether it construed an inapplicable statute. Plaintiffs' response argues that proof of reckless indifference is insufficient under the statute, that the policy should control over the statute, and that the policy only allowed cancellation following intentional misrepresentations and that the Court of Appeals construed the correct statute. Plaintiffs also renewed their objection to the introduction into evidence of the application itself.

There are two statutes that refer to fraud in connection with insurance policies. ORS 743.042(1) refers to fraud specifically in an application:

"(1) All statements and descriptions in any application for an insurance policy by or in behalf of the insured, shall be deemed to be representations and not warranties. Misrepresentations, omissions, concealment of facts, and incorrect statements shall not prevent a recovery under the policy unless either:

"(a) Fraudulent; or

"(b) Material either to the acceptance of the risk, or to the hazard assumed by the insurer."

ORS 743.612 refers to fraud specifically in a fire insurance policy:

"A fire insurance policy shall contain a provision as follows: 'This entire policy shall be void if, whether before or after a loss, the insured has wilfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein, or in case of any fraud or false swearing by the insured relating thereto.' " ⁴

In this case, we have two different allegations of fraud: one, that plaintiffs made misrepresentations in their application for insurance concerning the condition and value of their house, and the other that plaintiffs made misrepresentations on their proof of loss form. All parties are agreed that as a general rule a specific statute controls over a general statute. If there were a statute referring to fraud in a homeowners' insurance policy, we would have no problem finding that to be the controlling statute. However, we find no statute directed specifically to this sort of insurance. ⁵

The homeowners' insurance policy in the present case provides protection against loss from fire. The Court of Appeals held that the statute concerning fraud in a fire insurance policy, ORS 743.612, was the controlling statute for both allegations of fraud. On the matter of alleged fraud in the proof of loss, we agree that this is correct. After examination of the two statutes we hold that both statutes require the same scienter element, so if there was error in holding that ORS 743.612 controls on the question of fraud in the application for an insurance policy it was without effect.

We do not read these statutes as requiring that the misrepresentation be wilful in order for an insurance company to avoid a contract. In Walker v. Fireman's Fund Ins. Co., 114 Or. 545, 234 P. 542 (1925), we discussed the necessary scienter requirement for insurance...