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Insurance policy void ab initio where not owner occupied.

Encompass Home & Auto Ins. Co. v. Harris
Harris (D. Md. March 17, 2015)

by Gregory S. Emrick, Associate
Semmes, Bowen & Semmes (

Available at:

On August 2, 2011, Mr. and Mrs. Harris purchased real property located at 2700 Classen Avenue, Baltimore, Maryland in a foreclosure sale for $7,500. Approximately nine months later, the Harrises contacted Jayne Clark, an insurance agent working with Encompass Home and Auto Ins. Co., through whom the Harrises had purchased insurance for their vehicles and primary residence. At that time, the Harrises indicated they had performed substantial renovations to the property and the interior had been updated. Clark viewed the property using Google Street View and observed that the roof was bent and the stairs were in need of repair. Mr. Harris indicated that the roof had been repaired but the stairs continued to need repair. The Harrises also indicated that it was their intention to move to this property and make it their primary residence. At no time did the Harrises indicate that the property had been purchased for $7,500. Based on these representations, Clark issued an owner-occupied insurance policy application with a replacement value limit of $180,000, which the Harrises signed and returned same on or about June 8, 2012. Encompass required as part of its underwriting both that the policy be owner occupied and that the amount of the policy not exceed 70 percent of the market value.

Eleven (11) days later, on June 19, 2012, a fire occurred at the property, for which the Harrises submitted a claim on or about June 23, 2012.

During the course of the investigation of the fire, concerns were raised regarding the Harrises’ claim for the fire loss. The concerns were based on the fact that 1) the property was a “newly added” endorsement; that the property was vacant and unoccupied at the time of the fire; that the property was void of all contents; that the insurance coverage for the property had been acquired approximately one year after the purchase of the property, but only about two (2) weeks before the fire; and that the cause of the fire was determined to be an apparent intentional incendiary. The matter was forwarded to Encompass’s Special Investigation Unit, who further determined there was no furniture or personal property in the property at the time of the loss and that the heat pump was missing. Further, during an interview, Mr. Harris indicated that the utilities had never been turned on at the property and there had never been a decision to move to the property to make it the primary residence. As a result of the investigation, Encompass issued a denial of coverage letter and a separate “Material Misrepresentation” Notice, which voided the policy.

Encompass filed suit in the United States District Court for the District of Maryland seeking a declaratory judgment that the insurance policy was void ab initio. The Harrises filed a counterclaim for breach of contract for not covering the fire loss. The matter was forwarded to Magistrate Judge Sullivan who conducted a one (1) day bench trial. Judge Sullivan first reviewed the Court’s jurisdiction under the Declaratory Judgment Act, 28 U.S.C. § 2201(a), which permitted the court to entertain a declaratory judgment action “when the judgment will serve a useful purpose in clarifying and settling the legal relations in issue, and when it will terminate and afford relief from uncertainty, insecurity, and controversy giving rise to the proceeding.” Quoting Penn America Ins. Co. v. Coffey, 368 F.3d 409 (4th Cir. 2004). After determining that Maryland law applied, Judge Sullivan evaluated the insurer's burden to succeed in voiding an insurance policy ab initio. Where the insurer relied upon a material misrepresentation in the application, the insurer may void the policy ab initio. The Court must determine 1) that there was a misrepresentation and 2) that the misrepresentation was material to the risk assumed by the insurer. Materiality is determined by “whether reasonably careful and intelligent men would have regarded the fact, communicated at the time of the effecting the insurance, as substantially increasing the chances of the loss insured against.” Quoting Metro. Life Ins. Co. v. Samis, 172 Md. 517 (1937). Materiality may affect both the estimation of scope of the insurance and whether to issue a policy in the first place. In this case, Judge Sullivan determined that the insureds misrepresented the value of the property and its status as owner-occupied, both of which were material to the underwriting process for Encompass, as stated in its guidelines. The Court further held that Encompass had no obligation under the circumstances to conduct an investigation before issuing the policy, and had not waived its right to void the policy ab initio. Based on this finding, the Court held that Encompass was not liable for breach of contract. The Court then issued a declaration that the policy insuring the Harrises’ property was void ab initio.