Tempelis v. Aetna Cas. and Sur. Co., 90-2525

• Decision Date: 23 July 1991
• Docket Number: No. 90-2525,90-2525
• Citation: 164 Wis.2d 17,473 N.W.2d 549
• Parties: Zoe TEMPELIS, a/k/a Zoe Tempeli and his wife, Sally Tempelis, Plaintiffs-Appellants, v. AETNA CASUALTY AND SURETY COMPANY, Defendant-Respondent. d
• Court: Wisconsin Court of Appeals

Page 549

473 N.W.2d 549

164 Wis.2d 17

Zoe TEMPELIS, a/k/a Zoe Tempeli and his wife, Sally Tempelis, Plaintiffs-Appellants, v. AETNA CASUALTY AND SURETY COMPANY, Defendant-Respondent.^d

No. 90-2525.

Court of Appeals of Wisconsin.

Submitted on Briefs June 10, 1991.

Opinion Released July 23, 1991.

Opinion Filed July 23, 1991.

Robert Terhaar of Cosgrove, Flynn, Gaskins & Haskell, Minneapolis, Minn., for defendant-respondent.

James L. Cirilli of Peterson, Cirilli, Gondik & Moldenhauer, Superior, for plaintiffs-appellants.

Before CANE, P.J., and LaROCQUE and MYSE, JJ.

CANE, Presiding Judge.

Zoe and Sally Tempelis appeal a judgment dismissing their claim against Aetna Casualty & Surety Company for fire insurance coverage. The trial court dismissed the claim after a jury finding that the Tempelises made a material misrepresentation on the proof of loss form they filed with Aetna after fire damaged their home and its contents.

The Tempelises contend that the trial court erred by eliminating the element of reliance from its jury instruction on the material misrepresentation. Their argument is predicated on language in Northwestern Nat'l Ins. Co. v. Nemetz, 135 Wis.2d 245, 262, 400 N.W.2d 33, 40 (Ct.App.1986). Because we conclude that the dicta in Nemetz incorrectly adds the element of reliance to the insurer's burden of proof with respect to a material misrepresentation in a proof of loss form, we reject the Tempelises' claim. We reverse the trial court's dismissal, however, on another ground: The insurance policy purchased by the Tempelises does not provide for denial of coverage upon a material misrepresentation in the proof of loss form.

MISREPRESENTATIONS IN THE PROOF OF LOSS: IS RELIANCE AN ELEMENT?

In Nemetz, 135 Wis.2d at 262, 400 N.W.2d at 40, we stated:

Auto-Owners argues that Hazel Nemetz voided its policy because she made a material misrepresentation on a proof of loss form. The record shows that Hazel witnessed her husband's hospital room statement where he admitted pouring gasoline in the tavern immediately before the explosion and fire. Auto-Owners argues that when Hazel later signed a proof of loss form on which she stated the origin of the fire was unknown, she violated the policy term prohibiting an insured person from intentionally concealing or misrepresenting any material fact relating to the insurance. We disagree.

An insurer must show materiality in order to avoid coverage because of misrepresentation. See Nolden v. Mutual Benefit Life Insurance Co., 80 Wis.2d 353, 360, 259 N.W.2d 75, 78 (1977); sec. 631.11(2), Stats. A misrepresentation is not material if it did not invoke the insurer's reliance. See sec. 631.11(2), Stats. The materiality of a misrepresentation is a question of fact that must be presented to the jury. Nolden, 80 Wis.2d at 360, 259 N.W.2d at 78. Auto-Owners did not argue that it relied on Hazel's statement. The insurer knew of Walter's admission as well as the investigators' theories as to the cause of the blaze.

In Nolden, the supreme court addressed a misrepresentation in an application for insurance. The Nolden court held that such a misrepresentation was not material if it did not invoke the insurer's reliance, based on the language in the predecessor statute to sec. 631.11(2).

In Nemetz, the real ground of our holding was that Hazel's statement on the proof of loss that the cause of the fire was "unknown" could not have been material where "[t]he insurer knew of Walter's admission as well as the investigators' theories as to the cause of the blaze." Id. at 262, 400 N.W.2d at 40. Other courts have similarly ruled that a misrepresentation as to the cause of a fire where all parties are aware of the same facts with respect to causation is not material as a matter of law. See Hyland v. Millers Nat'l Ins. Co., 58 F.2d 1003, 1005-06 (N.D.Cal.1932), aff'd, 91 F.2d 735 (9th Cir.1937) (where evidence of arson was equally well known to both the insured and the insurer, and the insured stated on the proof of loss form that the cause of the fire was "unknown," a material misrepresentation had not been established); see also Miller & Dobrin Furniture Co. v. Camden Fire Ins. Co., 55 N.J.Super. 205, 150 A.2d 276, 286 (Law Div.1959) (where corporation did not state on its proof of loss form that one of its officers had been charged with arson, but insurer's agent was at the store on the day of the fire and had the opportunity to review the facts with police and fire officials, the use of the term "undetermined" on the proof of loss form to describe causation "cannot be considered as an attempt to conceal or misrepresent.").

The discussion of the element of reliance in Nemetz was dicta, and never addressed whether the statute interpreted in Nolden, now sec. 631.11(2), Stats., applied to both material misrepresentations in the application and material misrepresentations in the proof of loss. Aetna now poses this interpretive question and asks us to determine whether the "misrepresentation or breach of ... affirmative warranty" requiring proof of an insurer's reliance referenced in sec. 631.11(2) ¹ applies to statements made in the proof of loss.

Prior to the enactment of sec. 631.11(2), Stats., the general rule in Wisconsin where there was an allegation that proofs of loss were false and fraudulent was that reliance was not an element of the defense. Stebane Nash Co. v. Campbellsport Mut. Ins. Co., 27 Wis.2d 112, 124, 133 N.W.2d 737, 745 (1965) ("Actual damage to the insurer is not required."). If sec. 631.11(2) was not intended to apply to proofs of loss, but only to applications, that general rule still applies.

The threshold question to be addressed when construing statutes is whether the language of the statute is ambiguous. Standard Theatres v. DOT, 118 Wis.2d 730, 740, 349 N.W.2d 661, 667 (1984). A statute is ambiguous if reasonable persons could disagree as to its meaning. Id. We conclude that sec. 631.11(2), Stats., is ambiguous, in that its language could be understood to apply to any misrepresentation made to an insurer, or only to misrepresentations made in the negotiation and/or application for insurance.

When a statute is ambiguous, we must determine the intent of the legislature by examining the statute's scope, history, context, subject matter and objective. Sheely v. DHSS, 150 Wis.2d 320, 335, 442 N.W.2d 1, 8 (1989). The comments of legislative advisory committees are relevant to the construction of a statute. State v. Stanfield, 105 Wis.2d 553, 561, 314 N.W.2d 339, 343 (1982).

The legislative committee comment ² is a helpful guide to the legislative intent in adopting sec. 631.11(2), Stats.

Sub. (2) carefully balances insurer's and insured's interests. Contribution to the loss is sufficient for avoidance. Insurer reliance plus either materiality or fraud is also sufficient. Nothing else will do.... It may also be argued that a fraudulent misrepresentation should be no defense if it is not material, i.e., would not have affected the underwriting decision of the insurer (or of a "reasonable" insurer, if that is the test of materiality).

....

This draft seeks a better balance, protecting the insurer against fraud and violations of conditions that would preclude acceptance of the risk, and giving it access to the information it needs to underwrite, without giving it arbitrary power over the insured through application of the harsh common law doctrines.

Legislative Committee Comment--1975, Wis.Stat.Ann. sec. 631.11 (West 1980) (emphasis added). Clearly, the committee's recommendations were aimed at misrepresentations and affirmative warranties made as part of the negotiation for, or in the application for, an insurance policy. ³ Misrepresentations made in the proof of loss have no effect on an insurer's decision to underwrite the risk in the first instance.

A survey of other jurisdictions to determine whether reliance is considered an element of an insurer's defense of material misrepresentation in the proof of loss indicates that only Nebraska requires proof of reliance. In Omaha Paper Stock Co. v. California Union Ins. Co., 200 Neb. 31, 262 N.W.2d 175, 179 (1978), the Nebraska Supreme Court noted that the rule in its state was that "reliance and resulting injury are essential elements of materiality ... it must appear that the defendant acted upon such false statements, or was in some manner prejudiced or affected by them." The Omaha Paper court applied this rule even where false statements were made in a ledger book supporting the insured's proof of loss. The Omaha Paper holding has been strongly criticized by at least one commentator. See 13A COUCH ON INSURANCE In contrast, in Rayis v. Shelby Mut. Ins. Co., 80 Mich.App. 387, 264 N.W.2d 5 (1978), the Michigan Appellate Court upheld the trial court's decision to separate the insurer's allegations of fraud into fraudulent procurement and fraudulent proof of loss. "Fraudulent procurement has all the normal fraud elements, while fraudulent proof of loss, also called "false swearing", does not have justifiable reliance as one of its elements ... the element of justifiable reliance is what distinguishes fraudulent procurement from fraudulent proof of loss." Id. at 7-8 (citing Campbell v. Great Lakes Ins. Co., 228 Mich. 636, 200 N.W. 457 (1924), and Bernadich v. Bernadich, 287 Mich. 137, 283 N.W. 5 (1938)). The Rayis decision was cited for this proposition of law by two federal appellate courts in Kelly's Auto Parts v. Boughton, 809 F.2d 1247, 1256 (6th Cir.1987) (interpreting Michigan law), and Vitale v. Aetna Cas. & Surety Co., 814 F.2d 1242, 1251 (8th Cir.1987) (interpreting Missouri law).

2D § 49A:63 (1982) ("Such a position is untenable as the insured nevertheless intended to defraud the insurer and as such must be barred from any recovery as would be consistent with the policy language respecting fraud and false swearing.").

We are persuaded by the reasoning of the Rayis court and conclude...