State Farm Mutual Automobile Insurance Company v. Lee

• Decision Date: 16 March 1965
• Docket Number: No. 21560.,21560.
• Citation: 343 F.2d 55
• Court: U.S. Court of Appeals — Fifth Circuit
• Parties: STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Appellant, v. Homer H. LEE, Brook J. Jones and J. Fred Jones, her husband, Appellees. Brook J. JONES and J. Fred Jones, her husband, Appellants, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Appellee.

343 F.2d 55 (1965)

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Appellant, v. Homer H. LEE, Brook J. Jones and J. Fred Jones, her husband, Appellees.

Brook J. JONES and J. Fred Jones, her husband, Appellants, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Appellee.

No. 21560.

United States Court of Appeals Fifth Circuit.

March 16, 1965.

Marion R. Shepard, Raymond Ehrlich, Mathews, Osborne & Ehrlich, Jacksonville, Fla., for appellant.

Dean Boggs, Jacksonville, Fla., W. H. Wilson, Jr., Milo I. Thomas, Jr., Lake City, Fla., Boggs, Blalock & Holbrook, Jacksonville, Fla., for appellees.

Before TUTTLE, Chief Judge, RIVES, Circuit Judge, and DYER, District Judge.

DYER, District Judge:

In this appeal, we are called upon to decide whether an insurer is precluded from rescinding a liability policy for a false and fraudulent representation, material to the risk, knowingly made in an application which was not attached to or made a part of the policy, because of the so-called integration clause and statements contained in the policy. The district court held against the insurer. We disagree and reverse.

Plaintiff State Farm's complaint for declaratory relief alleged that in his application the insured, defendant Lee, was asked if he had any physical defect and he answered "no," when in fact he had suffered from birth with epilepsy. It was alleged that this representation was false and fraudulent; that this was known to the insured, but unknown to the plaintiff; that the representation was relied upon by the plaintiff and was material to the risk; and if plaintiff had known the facts it would not have issued the policy to Lee, or would not have issued it at the same rate.

It was further alleged that while Lee was driving his automobile he collided with an automobile being driven by defendant Brook J. Jones, as a result of which both drivers were seriously injured.

Plaintiff sought a declaration that its policy issued to defendant Lee had been properly rescinded; that it owed no obligation to Lee and was not obligated to pay any judgment that might be obtained against him.

Defendant Lee defaulted. Defendants Brook J. Jones and J. Fred Jones, her husband, answered admitting the issuance of the policy, but otherwise alleged that they were without knowledge. With their answer, they moved for judgment on the pleadings, which was granted.

In the introductory paragraph of the policy, it is stated:

"In consideration of the premium paid, and in reliance upon the declarations made a part hereof, the company agrees," etc.

The policy also contained the following integration clause:

"10. DECLARATIONS. By acceptance of this policy the insured named in the declarations agrees that the statements in the declarations are his agreements and representations, that this policy is issued in reliance upon the truth of such representations and that this policy embodies all agreements existing between himself and the company or any of its agents relating to this insurance."

Do these provisions of the policy preclude the plaintiff from relying upon fraud and the concealment of a material fact knowingly made in the application not made a part of the policy which induced the plaintiff to make the contract? We think not.

We are not here dealing with representations which entered into and became a part of the contract, but with those representations which formed the inducement to contract and did not enter into it.

It has long been a well settled general rule that an intentional misrepresentation of a material fact by the applicant for a policy, relied upon by an insurer, is a ground for rescission. Apperson v. United States Fidelity and Guaranty Co., 5 Cir. 1963, 318 F.2d 438.

We found this to be the Florida rule in New York Life Insurance Co. v. Strudel, 5 Cir. 1957, 243 F.2d 90. Later in Metropolitan Life Insurance Company v. Fugate, 5 Cir. 1963, 313 F.2d 788, after reviewing our decisions in the Madden cases, Metropolitan Life Insurance Co. v. Madden et al., 5 Cir. 1941, 117 F.2d 446, and Madden v. Metropolitan Life Insurance Co., 5 Cir. 1943, 138 F.2d 708, 151 A.L.R. 984, and Prudential Insurance Co. v. Whittington, Fla.App. 2, 1957, 98 So.2d 382, we concluded that a false representation material to the risk made with a conscious intent to deceive voided the policy. The corollary that such misrepresentations need not be expressed but may be by way of fraudulent concealment of a material fact was settled in Massachusetts Bonding and Insurance Co. v. Hoxie, 1937, 129 Fla. 332, 176 So. 480.

The defendants counter with the assertion that the application relied upon does not provide that the statements made therein are made as an inducement to the company to issue the policy. This argument loses force when it is observed that above Lee's signature on the application the following appears:

"The undersigned hereby applies for the insurance indicated and represents that the statements on both sides of this application are correct. * * *"

Leaning heavily on Prudential Insurance Company of America v. Prescott, 1937, 130 Fla. 11, 176 So. 875; Thompson et al. v. N. Y. Life Insurance Company, 1940, 143 Fla. 534, 197 So. 111 and Sovereign Camp, W.O.W. v. MacDonald, 1919, 76 Fla. 599, 80 So. 566, the defendants argue that the statements in the application are unavailable to the plaintiff. In Prudential there was a clause in the policy which provided:

"This policy contains and constitutes the entire Contract between the parties hereto, and all statements made by the insured shall in the absence of fraud be deemed representations and not warranties, and no statement shall avoid the policy or be used as a defense to a claim thereunder unless it be contained in the application for the policy and unless a copy of such application be endorsed upon or attached to the policy when issued."

The application was not attached to the policy and the court held that the company was bound by its agreement that it would not rely upon statements in the application to avoid the policy.

In Thompson and Sovereign Camp, W.O.W., there was an explicit statement in the policy that the application was made a part thereof.

In these cases, unlike the one sub judice, no difficulty of interpretation was presented. They, however, do not stand for the proposition that absent an express agreement in the policy that representations in the application will be relied upon, the insurer is precluded from doing so.

Defendants argue, however, that the integration clause means that the insurer is precluded from premising a rescission on false and fraudulent representations in the application. It seems clear to us that this clause simply designated what factual statements (the declarations) the insured was willing to agree should be treated as warranties and nothing more.¹ In view of Sec. 627.01081, Florida Statutes, F.S.A.,² enacted in 1959, this probably can no longer be accomplished in Florida, but this does not change the fact that the clause was never meant to reach out and obliterate the representations made in the application which formed the inducement to the insurer to issue its contract.³

In Harris v. State Farm Mutual Automobile Insurance Co., 6 Cir. 1956, 232 F.2d 532, relied upon by the defendants, the insured had a scar on his brain, of which he was not aware, and as a result thereof suffered from epilepsy. In a suit by judgment creditors, it was held that the insurer was not entitled to rescind the policy because of an innocent representation by the insured in the application that he had no physical defects.

The court, after noting that the policy contained an integration clause identical to the one here in suit, said:

"Of course, a fraudulent representation in the application inducing the execution of a policy of insurance can generally be availed of to avoid the policy, just as any contract can be avoided for fraud ab initio. And it

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