Oral Argument Preview: Are “May” and “Could” Good Enough to Warn Policyholder that Misstatement Will Void Policy? Nationwide Mutual Fire Insurance Company v. Pusser et al.

On September 11, 2019, the Supreme Court of Ohio will hear oral argument in Nationwide Mutual Fire Insurance Company v. Pusser et al., 2018-1137. At issue in this case is whether the words “may” and “could” clearly and unambiguously warn the insured that a misstatement will void the insurance policy ab initio, as required by Allstate Ins. Co. v. Boggs.

Case Background

On March 17, 2011, Diane Lapaze signed an application (“the Application”) with Nationwide Mutual Fire Insurance Company (“Nationwide”) for automobile insurance. The Application contained a statement indicating that, by signing, the applicant understood that “misrepresentation of information on this application, including failure to disclose a driver or member of the household, could void some or all of [the] coverages.” The Application included a section for the applicant to list “all household members of driving age and non-resident operators.” Although Lapaze’s sister, Barbara Pusser, was of driving age and had begun living with Lapaze in December of 2009, Lapaze listed only herself as a household member of driving age on the Application. Nationwide issued the automobile insurance policy (“the Policy”) to Lapaze.

On August 13, 2012, Pusser was operating Lapaze’s vehicle when she struck and killed Robert Boak as he was walking on the side of the road. A third party, Dennis Lehman (“Lehman”) was the driver of another car also involved in the accident. Pusser gave the police a false name at the accident scene. She later pled guilty to aggravated vehicular homicide, tampering with records and forgery.

The Policy was in effect at the time of the accident.

Nationwide filed a declaratory judgment action against Pusser, Lapaze through her legal guardian (Lapaze was diagnosed with Alzheimer’s in 2012), Lehman, and the Administrator of the Estate of Robert Boak (“the Estate”) seeking a declaration that it does not owe liability coverage to any of the defendants. Nationwide filed a motion for summary judgment, which was granted by Judge Maureen A. Sweeney of the Mahoning County Court of Common Pleas. Only the Estate appealed.

The Appeal

In a unanimous decision, the Seventh District Court of Appeals reversed the trial court’s judgment and entered summary judgment in favor of the Estate. Judge Gene Donofrio authored the opinion which was joined by Judges Cheryl L. Waite and Carol Ann Robb. Relying on the two-pronged test set forth in Allstate Ins. Co. v. Boggs, the Seventh District found that Lapaze’s misstatement did not void the insurance policy ab initio because the language employed by Nationwide in both the Application and the Policy did not constitute a plain warning that a misstatement as to the warranty would render the policy void from its inception. The Seventh District explained that Nationwide’s use of the words “may” and “could” in the Application and the Policy spoke merely of possibilities, not certainties, and, thus, did not clearly and unambiguously put Lapaze on notice that a misstatement would render the policy void ab initio.

The Seventh District also found that Nationwide never attempted to void the Policy by its own terms. Although the Policy states that if a policyholder makes an incorrect warranty the Policy “may be held void ab initio … upon return of the policyholder’s premium,” Nationwide never declared the Policy void nor returned Lapaze’s premium.

Votes to Accept the Case

Yes: Justices Kennedy, French, Fischer, DeWine, Donnelly, and Stewart

No: Chief Justice O’Connor

Key Precedential Case in this Appeal

Allstate Ins. Co. v. Boggs, 27 Ohio St.2d 216, 271 N.E.2d 855 (1971) (Opinion clarifies difference between representation and warranty. In order for an applicant’s misstatement in an insurance application to be a warranty that voids the policy ab initio, (1) the representation must plainly appear on the policy or must be plainly incorporated into the policy and (2) there must be a plain warning that a misstatement as to the warranty will render the policy void from its inception. If the statement is a representation, a misstatement will render the policy voidable.)

Other Key Precedent

Am. Family Ins. Co. v. Johnson, 2010-Ohio-1855 (8th Dist.) (Courts apply the two-pronged test set forth in Boggs to determine whether an applicant’s misstatement in an insurance application voids the insurance policy.)

James v. Safeco Ins. Co. of Illinois, 2011-Ohio-4241 (8th Dist.) (“[T]he policy language ‘we may void this policy’ is not a clear warning to the insured that a misstatement shall render the policy void.”)

Nationwide’s Argument

It is a bedrock principle of insurance law that giving a false answer to a material question in an insurance application can vitiate the policy. The Court should reverse the Seventh District’s ruling because the decision misapplied Boggs by holding that the words “may” and “could” do not clearly and unambiguously put the insured on notice that a misstatement will render the policy void ab initio. The Court’s decision in Boggs does not require insurers to use any particular words like “shall” or “will” to warn the insured about the consequences of misstatements. Rather, in Boggs, the Court only looked to whether the policy clearly and unambiguously incorporated the insured’s statements as warranties. Nationwide did so in the policy at issue in this case. The Policy expressly stated that the insured’s statements regarding household members was a warranty, which if incorrect, could render the Policy void ab initio, thus, satisfying Boggs. Ms. Lapaze’s statements in the Application were incorporated as a warranty, allowing Nationwide to void the policy ab initio where, as here, these statements were misstatements.

May/could language in a policy, like the language used in the Policy in this case, satisfies Boggs, and is sufficient to warn the insured of the consequences of a misstatement incorporated into the policy. Further, it was entirely appropriate and accurate for Nationwide to employ the words “may” and “could” in the Policy because a misstatement must be material in order to void a policy ab initio. Nationwide’s use of the words “may” and “could” are consistent with this need to determine the materiality of the misstatement.

Additionally, Nationwide was not required to void the Policy and return Ms. Lapaze’s premium before filing a declaratory judgment action. Chapter 2721 of the Ohio Revised Code plainly authorizes insurers to file declaratory judgment actions before voiding a policy and returning premiums to the insured. Further, the Court recognized the appropriateness of an insurer using a declaratory judgment action to resolve insurance coverage disputes in Ohio Farmers Indemnity Co. v. Chames. Nationwide was entitled to seek a declaration regarding the parties’ rights and obligations under the insurance policy before voiding the policy or taking any other action detrimental to the insured.

Requiring insurers to void the policy and return the premium before filing a declaratory judgment action is also impractical and leads to absurd results. If the insured prevails in the subsequent declaratory judgment action, the insurer would then be entitled to demand the return of the premium from the insured. Moreover, if the decision were subsequently reversed on appeal in favor of the insurer, the insurer then would be required to return the premium to the insured for the second time. This result is contrary to the purpose of declaratory judgment actions to allow for the orderly and economical disposition of insurance coverage disputes without the need to first void the policy.

Finally, in this case, the Estate has no standing to request the return of the premiums paid by Ms. Lapaze, who did not appeal the judgment against her in the case.

The Estate’s Argument

The Seventh District’s decision should be affirmed because the Policy did not include language that clearly and unambiguously warned that a misstatement would render the Policy void ab initio, as required by Boggs. The Policy merely provided that if there is a misstatement, the Policy “may be held void ab initio” and it “could [be] void from the beginning.” The Policy did not include an unequivocal warning that a misstatement shall render the policy void ab initio. The distinction between “may” and “shall” is not meaningless. Unless the contracting parties clearly and unequivocally intend to the contrary, “shall” means mandatory and “may” means discretionary. Because the parties evidenced no such intention, the Seventh District correctly concluded that the Policy’s mere warning that a misstatement “may” or “could” render the Policy void ab initio does not satisfy the second prong of Boggs. The Policy lists nine categories of statements that are warranties. “Household members of driving age” is not one of those. And at the time Ms. Lapaze applied for the Policy, she was the only driver and operator in the household.

Also, Nationwide’s arguments confound void ab initio with voidable. While a voidable contract is one in which a defrauded party can choose either to perform under the contract or rescind the contract, a contract that is void ab initio is null from the beginning such that a party cannot choose to void the contract because the contract never existed in the first place. Although Nationwide argues the Policy was void ab initio, it claims that it had the option but not the obligation to void the Policy. A contract cannot be both void ab initio and voidable and, according to the language of the Policy and Nationwide’s own arguments, the Seventh District was correct in holding that the Policy is voidable rather than void ab initio.

The Seventh District’s holding does not demand the use of particular “magic words.” Consistent with Boggs, the Seventh District simply required language that clearly and unambiguously warned that a misstatement would render the Policy void ab initio. An abundance of case law demonstrates that other insurance companies have had little problem including such language in their policies without the use of “magic words.”

The plain language of the Policy and the Ohio Revised Code required Nationwide to return the premium in order to cancel the Policy. This has no effect on the filing of a declaratory judgment action. Nationwide failed to comply with either the terms of its own Policy or the Ohio Revised Code by not returning the premium to Ms. Lapaze. Therefore, no effective cancellation of the Policy occurred, and Nationwide is obligated to cover any losses that arose during the period of insurance.

Remaining Defendants

No briefs were filed on behalf of Pusser, Lapaze or Lehman, so they will not be permitted to participate in oral argument.

Nationwide’s Proposed Proposition of Law No. 1

An insurance policy sufficiently warns the insured of the consequences of warranty misstatements where the policy states that it “may be held void ab initio.”

Nationwide’s Proposed Proposition of Law No. 2

An insurer is not required to void a policy and return an insured’s premium before bringing a declaratory judgment action regarding whether the insurance policy is void ab initio.

Amici in Support of the Estate

Rutter & Russin, LLC

The law firm of Rutter & Russin, LLC represents policyholders in disputes with insurance companies, including consumers involved in Boggs disputes.

This case involves the very narrow question of what language constitutes “a plain warning that a misstatement as to the warranty will render the policy void from its inception.” Quite simply, the language chosen by Nationwide did not.

Nationwide was on notice that its use of “may” and “could” warning language did not, in the opinions of three Ohio courts of appeals, satisfy the second prong of Boggs and that the “shall” warning language used by several other insurance companies does, in the opinion of every Ohio court of appeals that has examined the language, satisfy the second prong of Boggs. Therefore, Nationwide should have adopted the “shall” warning language to ensure its policy complied with the second prong of Boggs and the Seventh District was correct in holding that Nationwide’s use of equivocal “may” and “could” warning language did not clearly and unambiguously put the insured on notice that a misstatement would render the policy void ab initio.

Additionally, Boggs should apply equally to both insurance applications and policies. Because a consumer is more likely to read the application than the actual policy and because the application exists well before the actual policy, a warning provided in the application is more important and more helpful to a consumer than a warning in the actual policy. Therefore, courts should require that insurance applications also satisfy the two-pronged Boggs test.

Ohio Association for Justice

The Ohio Association for Justice’s (“OAJ”) mission is to preserve the legal rights of all Ohioans by protecting their access to the civil justice system.

At the time Ms. Lapaze signed the Application, her sister, Ms. Pusser, was not a driver, user or operator of the vehicle. Ms. Pusser had moved in with her sister after Ms. Lapaze’s husband died, and helped Ms. Lapaze with many things, but driving was not one of those things. Ms. Pusser had not driven in over 15 years and did not intend to drive again. Ms. Pusser only began driving again after Ms. Lapaze’s Alzheimer’s made it unsafe for her to drive.

Even if Ms. Pusser can be deemed an undisclosed driving household member, Nationwide failed to satisfy Boggs because neither the Policy nor the Application clearly and unambiguously warned that an applicant’s failure to disclose a household member of driving age would render the Policy void ab initio, as required to create a warranty under Boggs. Although the Policy lists nine categories of statements as warranties, statements regarding the identity of household members of driving age is not one of the listed categories. Further, the Policy’s use of the conditional phrases “may” and “could” did not provide a plain warning that a misstatement or misrepresentation shall render the policy void ab initio. Almost every Ohio court that has ever considered the issue at hand has held that conditional language such as “may” or “could” is insufficient to satisfy the second prong of Boggs.

Nationwide’s argument that its use of the words “may” and “could” is consistent with its need to determine the materiality of a misstatement reflects a fundamental misunderstanding of warranties. Unlike a representation, a warranty is by definition material and a breach of warranty always renders the policy void ab initio. This distinction is crucial because if the misstatement is a representation rather than a warranty, it may be grounds to cancel the policy, but not to avoid liability after there is an accident.

Ordinarily, the requirement that an insurer must deem the insurance contract void ab initio and return all premiums collected to the insured when a warranty is breached deters insurers from filling their policies with unfair, technical, or trivial warranties because insurers want to avoid forfeiting years’ worth of premiums due to an insured’s minor typographical error. However, if Nationwide is permitted to determine which warranty breaches to enforce, this deterrent is removed. Nationwide will be free to fill its policies with warranties designed to trip up insureds and then choose whether to return the premiums collected or pay the claim depending on which sum is larger.

Amicus in Support of Nationwide Mutual Fire Insurance Company

Ohio Insurance Institute

The Ohio Insurance Institute (“OII”) is the professional trade association for property and casualty insurance companies in the State of Ohio.

Boggs does not mandate the use of specific “magic words” such as “shall” or “will” to warn prospective insureds that statements in the policy application are warranties capable of rendering the policy void ab initio. Rather, Boggs indicates that the existence of a warranty turns on whether the policy as a whole contains any unequivocal language making the particular representation a part of the policy. Therefore, Nationwide’s policy language clearly satisfies Boggs by incorporating the Application on the face of the Policy, stating that representations concerning drivers in the household are warranties, and warning that false information provided in the Application would render the Policy void ab initio.

Additionally, the Seventh District’s decision imprudently destroys the declaratory judgment action option in cases concerning potentially void insurance policies by obligating all insurers to cancel policies and return premiums regardless of whether the policies say that the insurer “will” or “can” or “shall” or “would” or “may” void a policy when there is a material misstatement in an application. This result harms both insureds and innocent third parties, such as the Estate, because it increases costs for insureds and creates unnecessary logistical challenges associated with the reinstatement of hastily cancelled policies.

Student Contributor: Madeline Pinto