Riсhard D. KLOPP and Sylvia J. Klopp v. KEYSTONE INSURANCE COMPANIES, Charles F. Grimm and the North Central Motor Club Insurance Agency.
Supreme Court of Pennsylvania.
July 2, 1991.
595 A.2d 1
Appeal of KEYSTONE INSURANCE COMPANIES. Argued May 8, 1990.
James Casale, for Klopp.
Norman M. Lubin and J. David Smith, Williamsport, for Grimm, et al.
Before NIX, C.J., and LARSEN, FLAHERTY, McDERMOTT, ZAPPALA, PAPADAKOS and CAPPY, JJ.
OPINION
NIX, Chief Justice.
This is an appeal from an order of the Superior Court affirming in part and reversing in part the order of the Court of Common Pleas of Lycoming County granting appellees Richard D. and Sylvia J. Klopp‘s Motion for Summary Judgment which denied appellant Keystone Insurance Companies the right to rescind a policy of automobile insurance. The issue presented by this appeal is whether an automobile insurance carrier may rescind an insurance binder and policy on the grounds that the contract was void ab initio because of a misrepresentation of fact made by the intended insured at the inception of the policy.
In this declaratory judgment action, the parties have stipulated to the material facts of the case. On February 7, 1985, the Klopps applied to the appellants for automobile insurance and were issued a binder the same day for a 1981 Subaru. The following day the Subaru, driven by Sylvia Klopp, was involved in an accident.1
On April 4, 1985, appellant Keystone notified the Klopps that it was rescinding its automobile policy and binder, and returned the Klopp‘s premium deposit. On the basis of that notice Keystone refused to provide insurance coverage fоr the February 8, 1985, accident because of misrepresentations made by the Klopps during the application process. These misrepresentations, which were not discovered until after the February 8, 1985, accident, include failure to disclose two speeding violations received by Richard Klopp on April 27, 1982, and August 27, 1982, respectively, and
Keystone next unsuccessfully appealed to the Superior Court which relied upon the reasoning of the lead opinion of Mr. Justice McDermott in Metropolitan Property and Liability Ins. Co. v. Ins. Comm‘r (Bonnie Beck), 517 Pa. 218, 535 A.2d 588 (1987) (hereinafter “Bonnie Beck“),2 to conclude that
The Klopps counter Keystone‘s argument by relying on Justice McDermott‘s lead opinion of this Court‘s plurality decision in Bonnie Beck, supra, which held, inter alia, that the pervasive and comprehensive nature of Act 78 indicated
Keystone responds that Act 78 does not completely abrogate rescission rights in regard to policies issued under the Pennsylvania Motor Vehicle Responsibility Law. Kеystone contends the protection afforded by Act 78 cannot be invoked until 60 days after coverage is initiated, see
The issue we are now called upon to decide is whether the legislature intended to exclude rescission altogether as a remedy by the passage of Act 78. For the following reasons we hold that Act 78 does not abrogate an automobile insurer‘s common law right to rescind a policy for sixty days after the policy is written.
This case is most simply resolved by direct reference to the unambiguous language of
Nothing in this act shall apply:
* * * * * *
(3) To any policy of automobile insurance which has been in effect less than 60 days ... except that no insurer shall decline to continue in force such a policy of аutomobile insurance on the basis of grounds set forth in subsection (a) of section 3, footnote one [i.e. race], hereof and except that if an insurer cancels a policy of automobile insurance in the first sixty days, the insurer shall supply the insured with a written statement of the reason for cancellation (footnote omitted) (emphasis added).
If we were to follow the interpretation urged upon us by the Klopps, a situation would result whereby insurers who are victimized by fraud could resort only to thе prospective relief of cancellation without the ability to engage the retrospective relief of rescission.6 Consequently, in cases
In this case, the Klopps applied to Keystone for insurance on February 7, 1985. They were seeking to insure themselves from financial losses arising from the use of their automobile. Keystone is a writer of insurance which issues, or declines to issue, policies based on a driver‘s propensity to incur losses as measured by that driver‘s past experience. The Klopps failed to disclose to Keystone the truth about their checkered driving history. As noted previously, the stipulation of the parties indicates that had Keystone been aware of the Klopps’ driving record, coverage would not have been extended. Under basic contract principles, the omission was a material misrepresentation whiсh would certainly justify the rescission of the contract. See, e.g., Metropolitan Property and Liability Co. v. Ins. Comm‘r of Pennsylvania (Edgar Miller), 525 Pa. 306, 580 A.2d 300 (1990). Prudential Ins. Co. v. Pagano, 407 Pa. 473, 181 A.2d 319 (1962); Allstate Ins. Co. v. Stinger, 400 Pa. 533, 163 A.2d 74 (1960); Kizirian v. United Benefit Life Ins. Co., supra; Knepp v. Nationwide, supra; Safeguard Mutual Insurance Co. v. Huggins, supra; A. G. Allenbach, Inc. v. Hurley, 373 Pa.Super. 41, 540 A.2d 289 (1988); Baldwin v. Prudential Ins. Co., 215 Pa.Super. 434, 258 A.2d 660 (1969). Keystone notified the Klopps on April 4, 1985, within sixty days of the application date. The applicability of the comprehensive scheme for cancellation and notification contained in Act 78 was expressly deferrеd until the expiration of that sixty-day period.
Accordingly, we reverse the judgment of the Superior Court and enter an order declaring the policy void ab initio.
LARSEN, and CAPPY, JJ., join the majority opinion and file separate concurring opinions.
FLAHERTY, J., concurs in the result.
McDERMOTT, J., files a dissenting opinion.
LARSEN, Justice, concurring.
I join the majority opinion with the proviso that the fraudulent policyholder is estopped from making any personal claims arising out of the policy. Third parties suits and derivative suits are permitted.
CAPPY, Justice, concurring:
I join in the opinion of Mr. Chief Justice Nix and the rationale therefor, but only insofar as it applies to the facts of the case sub judice. I have no difficulty concluding on the facts prеsented in this case that, where X has intentionally defrauded the insurer with respect to facts material to the risk insured, any claims made by X against the insurer within the first 60 days must fail. Because of X‘s fraud, the policy is void ab initio with respect to claims made by X.
This overriding governmental interest, which is apparent from the very definition of “financial responsibility,” would dictate that common law concepts of the rights of third party beneficiaries,2 to-wit, the innocent and injured third party, be rendered inapplicable. In effect, the rights of third party beneficiaries would be considered to be original, rather than derived from the rights of the insured. I believe that this result would be consistent with the main concern of the legislature in enacting the MVFRL, that is, to protect the innocent and injured public.
Thus, I agree with the result reached by the majority as it is applied to the facts of this case. It is contrary to common sense and to the law to conclude that the legislature would intend to reward a policy holder who has de-
Likewise, it would be preposterous to conclude that, with regard to innocent and injured third parties who participated in no way in the fraud perpetrated on the insurance company, the legislature would have intended that they be denied protection as a result of the policy holder‘s fraud where the Act itself has been created for their protection and benefit. Thus, it is my view that, with regard to innocent and injured third parties, the insurance company would be bound to honor the liability provisions of the insurance contract and may cancel said provisions only pursuаnt to
McDERMOTT, Justice, dissenting.
Through the use of cases from dissimilar areas of the law, the majority has succeeded in reading into Act 78 the common law right of rescission, a right which was determined earlier by this court in, Metropolitan Property and Liability Insurance Company v. Insurance Commissioner of the Commonwealth of Pennsylvania and Bonnie Beck et al., 517 Pa. 218, 535 A.2d 588 (1987), not to have survived the legislature‘s passage of that Act. In Beck, id. оur holding that rescission was not a remedy available to the subject Insurer was aided by the fact that the legislature passed Act 78 shortly after our Superior Court determined that the remedy was still viable. See Safeguard Mutual Insurance Co. v. Huggins, 241 Pa.Super. 382, 361 A.2d 711 (1976). Similarly, the Statutory Construction Act1 provides certain presumptions in ascertaining legislative intent. One of which is that the General Assembly intends to favor the public interest as against any private interest.
Accordingly, I dissent.
Notes
Cancellation, refusal to renew, notice
No cancellation or refusal to renew by an insurer of a policy of automobile insurance shall be effective unless the insurer shall deliver or mail, to the named insured at the address shown in the policy a written notice of the cancellation or refusal to renew. Such notice shall:
(1) Be approved as to form by the Insurance Commissioner prior to use;
(2) State the date, not less than sixty days after the date of such mailing or delivering on which such cancellation or refusal to renew shall become effective, except that such effective date may be fifteen days from thе date of mailing or delivery when it is being cancelled or not renewed for the reasons set forth in clauses (1) and (2) of section 4;
(3) State the specific reason or reasons of the insurer for cancellation or refusal to renew;
(4) Advise the insured of his right to request in writing, within thirty days of the receipt of the notice of cancellation or intention not to renew, аnd of the receipt of the reason or reasons for the cancellation or refusal to renew as stated in the notice of cancellation or of intention not to renew, that the Insurance Commissioner review the action of the insurer;
(5) Either in the notice or in an accompanying statement advise the insured of his possible eligibility for insurance thrоugh the automobile assigned risk plan;
(6) Advise the insured that he must obtain compulsory automobile insurance coverage if he operates or registers a motor vehicle in the Commonwealth, that the insurer is notifying the Department of Transportation that the insurance is being cancelled or not renewed, and that the insured must notify the Department of Transportation that he has replaced said coverage;
(7) Clearly state that, when coverage is to be terminated due to nonresponse to a citation imposed under 75 Pa.C.S. § 1533 (relating to suspension of operating privilege for failure to respond to citation) or nonpayment of a fine or penalty imposed under that section, coveragе shall not terminate if the insured provides the insurer with proof that the insured has responded to all citations and paid all fines and penalties and that he or she has done so on or before the termination date of the policy.
Rescission of a contract and cancellation of a cоntract are two separate and distinct legal concepts. A rescission amounts to the unmaking of a contract and is not merely a termination of the rights and obligations of the parties towards each other, but is an abrogation of all rights and responsibilities of the parties towards each other from the inception of the contract. It is a form оf retroactive relief. Cancellation is an act destroying the force and effectiveness of the contract, and is a form of prospective relief, affecting the future rights and obligations of the parties towards each other. The General Assembly is cognizant of the difference between these legal concepts.