Litigation Defenders

When does activity transform from storage of items to running a business? This was a recent question addressed by the Honorable Shalina D. Kumar in the U.S. District Court for the Eastern District of Michigan.

The insurer issued a homeowners policy to Mr. Smith. As part of the application, Mr. Smith confirmed that no business was conducted at the property. However, two months after the policy was issued, a fire destroyed part of the property, possibly caused by a grinder used by a tree service employee. Investigation revealed that Mr. Smith’s son parked tree service trucks on the property. Further, employees of the son’s tree service company would report to the home daily to retrieve the trucks and would use a garage on the property to sharpen blades for their equipment.

The insurer determined business was being conducted at the property and, therefore, Mr. Smith had made a material misrepresentation in his insurance application. The policy was rescinded, and all premiums were refunded.

During the suit that followed, Mr. Smith argued in opposition to the insurer’s dispositive motion that any misrepresentation was not material because the insurer could not prove it would not have issued the policy if it knew about the son’s business. Further, he insisted there were no business operations being conducted by his son’s tree trimming service on the property, and any tree trimming, and maintenance occurred at customers’ homes. 

In finding for the insurer, the court ruled the following points constituted “business conduct:”

• The sharpening of tools in the garage
• Employees reporting daily to property.
• Tools being maintained while on the property.
• Storing trucks and other equipment on the property

In making the ruling the court also relied upon an affidavit from the insured’s underwriter swearing that, if the full extent of the conduct at the property would have been known, the policy would not have been issued.

While this case presents a straightforward example of a recession due to misrepresentation during the application, it provides a road map for understanding how litigation can succeed or fail based on the pre-litigation investigation.

The insurer aggressively and thoroughly investigated this claim. It performed a cause and origin investigation. It also had a special investigation unit confirm numerous facts about the business being conducted as part of preparing a disposition analysis report before rescinding the policy.  While these actions gave the insurer more than sufficient evidence to support the rescission of the policy, they also provided the evidence needed for the dispositive motion.

From the filing of the complaint, the road to summary judgment was plainly marked.

• Confirm at Mr. Smith’s deposition that every one of the activities which the court found were “business activities.”
• Obtain an underwriting affidavit regarding the material impact on the risk the “business activities” would have caused.
• Produce pre-litigation documentation proving a basis to rescind the policy and the inapplicability of any policy exceptions.

While straightforward, this case is a good reminder that not every claim has complicated solutions. A client conducting a thorough pre-litigation investigation is often enough to carry the day in litigation.