Tempelis v. Aetna Cas. and Sur. Co.

• Decision Date: 17 June 1992
• Docket Number: No. 90-2525,90-2525
• Citation: 485 N.W.2d 217,169 Wis.2d 1
• Parties: Zoe TEMPELIS, A/K/A Zoe Tempeli and his wife Sally Tempelis, Plaintiffs-Appellants, v. AETNA CASUALTY AND SURETY COMPANY, Defendant-Respondent-Petitioner.
• Court: Wisconsin Supreme Court

Page 217

485 N.W.2d 217

169 Wis.2d 1

Zoe TEMPELIS, A/K/A Zoe Tempeli and his wife Sally Tempelis Plaintiffs-Appellants, v. AETNA CASUALTY AND SURETY COMPANY, Defendant-Respondent-Petitioner.

No. 90-2525.

Supreme Court of Wisconsin.

Argued April 28, 1992.

Decided June 17, 1992.

For the defendant-respondent-petitioner there were briefs by Robert J. Terhaar and Cosgrove, Flynn, Gaskins & Haskell, Minneapolis, Minn., and oral argument by Robert J. Terhaar.

For the plaintiffs-appellants there was a brief by James L. Cirilli and Peterson, Cirilli, Gondik & Moldenhauer, Superior and oral argument by James L. Cirilli.

BABLITCH, Justice.

Aetna Casualty and Surety Company (Aetna) seeks review of a court of appeals' decision which awarded the Tempelises their full claim for losses incurred by them from a fire that damaged their home, its contents and caused additional living expenses. At trial, the jury concluded that the fire was not set by or at the direction of the Tempelises. However, the jury concluded that the Tempelises, by creating fraudulent receipts for living expenses, intentionally misrepresented material facts and made false statements regarding their insurance. Aetna argues that their policy unambiguously voided coverage of the Tempelises' entire insurance claim, including the claim for the destruction of the Tempelises' home, upon the jury's finding that the Tempelises made a material misrepresentation on their proof of loss form concerning additional living expenses. We conclude that the policy is ambiguous because a reasonable insured could interpret the policy as vitiating or canceling coverage only as to the subsection or element of the claim to which the material misrepresentation relates, as opposed to canceling coverage of the entire insurance claim. It is a longstanding principle of law that any ambiguity in an insurance contract must be construed in favor of the insured. We therefore hold that the portion of the Tempelises' insurance claim to which the fraud relates, i.e., the claim for additional living expenses, is void and coverage is denied. The remaining amounts of the insurance claim for the damage to the home and its contents are due the insured. Accordingly, we modify the judgment of the court of appeals and, as modified, affirm.

The relevant facts are undisputed. In approximately July, 1988, the Tempelises purchased a home for $20,000 and subsequently insured the home through Aetna for $100,000. On January 28, 1989, while the Tempelises were out of town, the house was destroyed by a fire. On March 28, 1989, the Tempelises submitted a proof of loss claim to Aetna. Included in their loss claim was a request for reimbursement for additional living expenses. Additional living expenses are any necessary increases in living expenses incurred by an insured in order for the insured's household to maintain its normal standard of living in the event the premises are uninhabitable. As to their living expenses, the Tempelises included in their proof of loss fifty-one fraudulent receipts which purported to represent their living expenses of $6,354.55. After investigating the claim, Aetna denied coverage of the entire claim on the grounds of arson, intentional concealment and misrepresentation of material facts concerning the claim.

The Tempelises brought an action to recover under the policy. A jury trial was held in July and August of 1990. As stated in Aetna's brief, the jury found that the fire was not set by or at the direction of the Tempelises. "However, the jury unanimously concluded that plaintiffs, by creating fraudulent receipts for living expenses, intentionally misrepresented material facts and made false statements regarding their insurance." Petitioner's Brief, pp. 8-9. The jury assessed the amount of damages sustained by the Tempelises as a result of the fire as follows: (1) the building--$100,000; (2) the contents of the building--$26,364.90 and; (3) additional living expenses--$1,951.65.

Aetna moved the circuit court for judgment on the special verdict arguing that under the policy intentional misrepresentation voids coverage of the entire insurance claim and thus the Tempelises should not receive money for the building, its contents, nor additional living expenses. Aetna relied on the following policy language:

SECTION I and SECTION II--CONDITIONS

. . . . .

2. CONCEALMENT OR FRAUD. WE DO NOT PROVIDE COVERAGE FOR ANY INSURED WHO HAS:

a. INTENTIONALLY CONCEALED OR MISREPRESENTED ANY MATERIAL FACT OR CIRCUMSTANCE;

b. MADE FALSE STATEMENTS OR ENGAGED IN FRAUDULENT CONDUCT; RELATING TO THIS INSURANCE.

The circuit court concluded that the above language precluded recovery on the entire claim where the insured intentionally misrepresents material facts or commits fraud in the proof of loss and granted Aetna's motion. The Tempelises appealed to the court of appeals raising the questions of whether the circuit court erred in failing to include reliance as an element of misrepresentation when instructing the jury and whether it was error to submit the issue of misrepresentation at all in light of the evidence produced at trial. The court of appeals asked for letter briefs addressing whether it should sua sponte review the policy language relating to concealment or fraud and if so, whether the policy language applied to fraud in a proof of loss as well as in an application of insurance. The court of appeals concluded that, although the Tempelises had not raised on appeal the issue of the interpretation of the contract, the court could undertake a sua sponte consideration of that issue. It further concluded that the insurance policy was ambiguous "in that it could be read by a reasonable person to apply to statements made prior to the signing of the policy, as in the application for insurance, or to apply more expansively, including statements made later in a proof of loss." Tempelis v. Aetna Casualty & Surety Co., 164 Wis.2d 17, 29 473 N.W.2d 549 (Ct.App.1991) (footnote omitted). We granted Aetna's petition for review to address the following: (1) whether the court of appeals sua sponte review was appropriate and if so; (2) what is the appropriate construction of the insurance policy.

The first issue we address is whether the court of appeals exceeded its authority by reviewing the "concealment or fraud" clause of the insurance contract. We conclude that it did not.

The court of appeals concluded that its sua sponte review was appropriate because:

where the provisions of a contract are uncontested, the supreme court has ruled that it can undertake a sua sponte consideration of the legality of a contract when the illegality is apparent on the face of the contract and when the issue posed is of a serious nature. Shea v. Grafe, 88 Wis.2d 538, 545-46, 274 N.W.2d 670, 674 (1979). Because the provisions of the Aetna policy are uncontested, and because the doctrine allowing wholesale avoidance of a policy upon proof of any degree of material misrepresentation works a substantial hardship on insureds who are not notified of the effects of such misrepresentation, we may consider this issue sua sponte. Id., 164 Wis.2d at 28, 473 N.W.2d 549.

Aetna claims that the court of appeals' reliance on Shea v. Grafe, 88 Wis.2d 538, 274 N.W.2d 670, 674 (1979), as support for its authority was misplaced. Specifically, Aetna contends that under Shea, sua sponte review is appropriate only where a contract is illegal on its face and the issue posed is of a serious nature. Shea, 88 Wis.2d at 545-46, 274 N.W.2d 670. Since the court of appeals concluded that the contract was ambiguous, and there was no contention by the parties or by the court of appeals that the Tempelises' insurance contract was illegal, Aetna reasons that review by the court of appeals was inappropriate. We disagree.

Regardless of the exact parameters of the holding in Shea, a recent opinion of this court indicates that the court of appeals' review in this case was appropriate. In Waushara County v. Graf, 166 Wis.2d 442, 480 N.W.2d 16 (1992), we indicated that the court of appeals has the discretion to correct a circuit court's error of law, regardless of whether either of the parties raised the issue presented by the error. In discussing the appropriateness of the court of appeals' review of an issue of law not raised by the litigants, we stated that "[w]hile the court of appeals had no obligation to look beyond the issues presented by Basic Bible, it was within the court's discretion to do so." Id. at 453, 480 N.W.2d 16.

There was no indication in Waushara County that the issue reviewed was of a serious nature, nor did the issue deal with the illegality of a contract. Our conclusion that discretionary review was appropriate was without qualification. Clearly, if discretionary review was appropriate in Waushara County, it was similarly appropriate in this case where the court of appeals exercised its discretion and corrected what it viewed as a gross, unjust error of law made by the circuit court. Furthermore, the court of appeals gave both parties in this case an opportunity to address the issue of the appropriate construction of the policy terms. We conclude that the court of appeals did not exceed its authority by reviewing sua sponte the "concealment or fraud" clause of the contract.

We now turn to the issue of the appropriate construction of the insurance contract. We must address whether, under the terms of the insurance policy, the Tempelises' intentional misrepresentations and false statements concerning additional living expenses canceled coverage of their entire fire insurance claim. We begin with an overview of the rules governing the interpretation of insurance policies.

Contracts of insurance are controlled by the same principles of law that are applicable to other contracts. Caporali v. Washington Nat. Ins. Co., 102 Wis.2d 669, 675, 307 N.W.2d 218 (1981) (quoting Garriguenc v. Love, 67 Wis.2d 130, 134-35, 226...