Richard v. Fliflet, 10814

• Decision Date: 27 June 1985
• Docket Number: No. 10814,10814
• Citation: 370 N.W.2d 528
• Parties: Steven R. RICHARD, Plaintiff, v. Norval K. FLIFLET and Daniel Bye, Defendants. and Norval K. FLIFLET, Defendant, Third-Party Plaintiff and Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Third-Party Defendant and Appellee. Civ.
• Court: North Dakota Supreme Court

Page 528

370 N.W.2d 528

Steven R. RICHARD, Plaintiff, v. Norval K. FLIFLET and Daniel Bye, Defendants. and Norval K. FLIFLET, Defendant, Third-Party Plaintiff and Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Third-Party

Defendant and Appellee.

Civ. No. 10814.

Supreme Court of North Dakota.

June 27, 1985.

O'Grady, Morley & Morley, Grand Forks, for defendant, third-party plaintiff and appellant Norval K. Fliflet; argued by Michael J. Morley, Grand Forks.

Vogel, Brantner, Kelly, Knutson, Weir & Bye, Fargo, for third-party defendant and appellee State Farm Mut. Auto. Ins. Co.; argued by Harlan G. Fuglesten, Fargo.

ERICKSTAD, Chief Justice.

The defendant and third-party plaintiff, Norval K. Fliflet, appeals from a district court judgment dismissing his action against the third-party defendant, State Farm Mutual Automobile Insurance Company (State Farm), and ordering him to pay the plaintiff, Steven R. Richard, $1,100 in damages. We reverse.

State Farm and Fliflet stipulated to the following facts:

"1. On January 7, 1983, Norval Fliflet, of Hannaford, North Dakota, was driving a 1974 Plymouth Fury III automobile owned by his brother-in-law, Daniel Bye, also of Hannaford, when it was involved in an accident in Fargo, North Dakota with a vehicle owned and driven by Steven Richard of Mapleton, North Dakota.

"2. At the time of the accident there existed an insurance policy issued by State Farm to Merlin Lende of Cooperstown, for the 1974 Plymouth Fury III. A true and correct copy of this policy and the application for this policy are attached hereto marked Exhibit 1 and 2 respectively. This policy was purchased by Mr. Lende for a coverage period from November 15, 1982 to May 15, 1983. A premium of $62.42 was paid for this insurance.

"3. At the time Merlin Lende made application for this insurance he represented that he owned the vehicle. However, the true owner of the vehicle at all times material to this lawsuit was Daniel Bye.

"4. When the accident in question occurred on January 7, 1983, State Farm was unaware that Merlin Lende had no ownership interest in the vehicle. When State Farm first learned of this fact following the accident, it immediately rescinded Mr. Lende's insurance policy, returned his entire premium, and denied liability coverage for the accident.

"5. In February, 1983, Steven Richard instituted a lawsuit for damages in the amount of Two Thousand and no/100 Dollars ($2,000.00) against Norval Fliflet and Daniel Bye.

"6. At the time of the accident in question, Norval Fliflet had in force and effect an automobile insurance policy with Dairyland Insurance Company covering and insuring a 1970 Plymouth two door automobile owned by Norval Fliflet. That car insured by Dairyland Insurance Company was not involved in the accident of January 7, 1983. Dairyland Insurance Company is providing a defense to Norval Fliflet under that policy, because State Farm has refused to provide him a defense. A true and correct copy of this insurance policy is attached hereto and marked Exhibit 3.

"7. On June 7, 1983, Norval Fliflet served a Third Party Summons and Complaint on State Farm claiming a right to indemnification by virtue of State Farm's obligations under the insurance policy issued to Mr. Lende. State Farm filed an Answer denying liability on the basis that the contract of insurance on the 1974 Plymouth Fury III was rescinded on the basis of Mr. Lende's misrepresentation of ownership and/or concealment of a material fact."

Richard's action against Fliflet and Bye was settled for $1,100, with an agreement that the insurance company obligated to provide coverage for the accident, either State Farm or Dairyland, would pay Richard. Fliflet's third-party action was submitted to the district court on the stipulated facts. The district court concluded that State Farm properly rescinded the insurance policy issued to Lende on the Plymouth Fury III because he misrepresented a fact material to the risk and because the policy was not issued pursuant to the requirements of Chapter 39-16.1, N.D.C.C. The court concluded that Dairyland was obligated to pay the $1,100 settlement to Richard. A judgment dismissing Fliflet's third-party complaint against State Farm was entered, and he appealed.

The basic issue presented by this appeal is whether or not State Farm could rescind the insurance policy issued to Lende on the 1974 Plymouth Fury III after the accident on the basis of his material misrepresentation of ownership of the automobile. We conclude that it could not so rescind.

Fliflet contends that Section 39-16.1-11(6)(a), N.D.C.C., applies to all motor vehicle liability policies and prevents State Farm from rescinding the policy issued to Lende on the Fury III after the accident. That section provides:

"6. Every motor vehicle liability policy shall be subject to the following provisions which need not be contained therein:

a. The liability of the insurance carrier with respect to the insurance required by this chapter shall become absolute whenever injury or damage covered by said motor vehicle liability policy occurs; said policy may not be canceled or annulled as to such liability by any agreement between the insurance carrier and the insured after the occurrence of the injury or damage; no statement made by the insured or on his behalf and no violation of said policy shall defeat or void said policy."

State Farm contends that Section 39-16.1-11(6) applies only to motor vehicle liability policies certified as proof of future financial responsibility under Chapter 39-16.1, N.D.C.C., ¹ and does not apply to the facts of this case because the policy was voluntarily purchased to avoid the sanctions of Section 39-16-05, N.D.C.C., ² and was not certified as proof of future financial responsibility.

State Farm also asserts that the application of Chapter 39-16.1, N.D.C.C., is limited by Section 39-16.1-01, N.D.C.C., ³ to those individuals who have been previously convicted of, or forfeited bail for, violating certain motor vehicle laws or who have failed to pay judgments upon causes of action arising from the ownership, maintenance, or use of registered motor vehicles. State Farm contends that those individuals manifest a greater likelihood of committing fraud than non-members of the class, and consequently, the Legislature reasonably determined that it was appropriate to not allow rescission if the insurance policy was purchased as proof of financial responsibility for the future. State Farm also asserts that insurance companies are on notice to carefully check the background of individuals seeking proof of financial responsibility for the future because those individuals have previously demonstrated questionable reliability.

The resolution of the arguments raised by the parties requires a brief discussion of North Dakota's Financial Responsibility Laws contained in Chapters 39-16 [Financial Responsibility of Owners and Operators] and 39-16.1 [Proof of Financial Responsibility for the Future], N.D.C.C. ⁴ In Hughes v. State Farm Mutual Automobile Insurance Company, 236 N.W.2d 870, 880 (N.D.1975), we discussed the distinction between Chapters 39-16 and 39-16.1, N.D.C.C.:

"Standing alone, Chapter 39-16 is intended to impose penalties against a motor vehicle owner or operator who is involved in an accident and does not subsequently establish that he is financially capable of responding in damages if he should thereafter be found liable for bodily injury or property damage sustained by any person in such accident. The principal sanctions imposed by Sec. 39-16-05, N.D.C.C., however, will not apply, by the very terms of the statute itself, to an owner or operator having in effect an acceptable policy of liability insurance at the time of the person's first accident. Chapter 39-16.1, N.D.C.C., is designed to require a motor vehicle owner or operator who has already had an accident, or who has been convicted of certain traffic offenses, to establish proof of financial ability to respond in damages for any bodily injury or property damage which may occur as the result of future accidents. Chapter 39-16.1 sets out specific procedural requirements which an owner or operator must follow in establishing proof of financial responsibility, and also defines, in Sec. 39-16.1-11, N.D.C.C., the type of insurance coverage which must be carried by the owner or operator to comply with the requirements of Chapter 39-16.1." [Emphasis in original.]

In Hughes, the insured's wife was injured while riding on a snowmobile with the insured. The dispositive issue in that case was whether a "household or family exclusion clause" ⁵ in a policy of liability insurance purchased to avoid the sanctions of Section 39-16-05, N.D.C.C., was valid. We held that the "household or family exclusion clause" violated public policy as expressed in our financial responsibility laws. Hughes, supra, 236 N.W.2d at 884.

Our decision in Hughes was based on several factors. We acknowledged that the Legislature's purpose in enacting our financial responsibility laws was to protect innocent victims of motor vehicle accidents from financial disaster. We specifically noted that the language of Section 39-16-05, N.D.C.C., required a motor vehicle owner or operator to have an automobile liability insurance policy in effect on the automobile involved in a driver's first accident which afforded "substantially the same coverage" as policies issued in conformity with the mandatory requirements of Chapter 39-16.1, N.D.C.C. Finally, we noted that a "Conformity Clause" ⁶ in the insurance policy provided a sufficient basis to hold that the policy complied with any applicable financial responsibility laws and that Section 39-16-05, N.D.C.C., was the applicable financial responsibility law.

We concluded that the "substantially the same coverage" language of Section 39-16-05, N.D.C.C., required an insurance company to include the same minimum limits of...