Auto Coverage: “Absolute” & “Frozen” Liability under the Minnesota No-Fault Act

1273a11By Greg Johnson. A parent completes a personal auto application for automobile insurance and does not disclose that there are any other licensed drivers in the household that will operate the insured vehicle. Later, after the policy is issued, a minor child who was a licensed driver and resided with the parent at the time of the application, permissively operates the insured vehicle and causes an accident injuring an innocent third party. Is the insurer entitled to rescind the policy after the occurrence of the accident based on alleged fraud in the procurement of the policy to avoid coverage for the accident?

Many states have statutes which allow an insurer to cancel a policy based on misrepresentations, omissions, or concealment of facts which are fraudulent and material to the acceptance of the risk, or allow cancellation where the insurer in good faith would have either not issued the policy or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer.

The answer to this question depends in part on where the policy was issued and whether the jurisdiction has enacted a compulsory financial responsibility law as well as a “frozen-liability” (a/k/a “absolute-liability”) statute which makes the coverage “absolute” after an accident. Mandatory liability insurance coverages hold a special status under the law. Like many other jurisdictions, the Minnesota No-Fault Automobile Insurance Act contains a “frozen liability” statute. Minnesota’s statute provides:

(a) The liability of the insurance carrier with respect to the insurance required by this chapter becomes absolute whenever injury or damage covered by the policy occurs. The policy may not be cancelled or annulled as to such liability by any agreement between the insurance carrier and the insured after the occurrence of the injury or damage. No statement made by the insured or on behalf of the insured and no violation of the policy defeats or voids the policy.

Minn. Stat. § 65B.49, subd.3(3)(a).

Statutory frozen-liability provisions bar rescission after an accident has occurred and require the insurer to pay statutorily required liability coverage to an innocent accident victim regardless of an insured’s conduct. See Nimeth v. Felling, 282 Minn. 460, 165 N.W.2d 237 (1969) (applying similar, pre-No-Fault Act absolute liability statute and holding that insured’s failure to comply with policy condition requiring notification of change in vehicles could not defeat injured party’s claim under the policy). The language of the Minnesota frozen liability statute is clear: (1) no “agreement between the insurance carrier and the insured” can defeat or void the policy; (2) no “statement made by the insured” can defeat or void the policy; and (3) no “violation of the policy” by an insured can defeat or void the policy. In short, nothing the insured did or said prior to the accident and nothing the insured does or says after an accident provides a basis for the insurer to avoid liability coverage. Thus, even if the insured misrepresents the risks insured under the policy, violates a policy condition or the insurer fails to collect a premium commensurate with the risks insured, the policy will afford coverage. The liability coverage contained in the policy as written (or as required to be provided by law) is “frozen” after an accident occurs.

Many other states (27 in addition to Minnesota) have enacted similar “frozen- liability” statutes. See e.g., Torres v. Nev. Direct Ins. Co., 353 P.3d 1203 (Nev. 2015 (insured’s violation of notice and cooperation provisions of policy was not binding on injured party as no post-injury violation of a policy releases insurer under the absolute-liability statute); Cowan v. Allstate Ins. Co., 357 S.C. 625, 594 S.E.2d 275 (2004) (noting that breach of a policy’s notice requirements by the insured did not release the insurer from liability); National Ins. Ass’n v. Peach, 926 S.W.2d 859 (Ky. App. 1996) (insurer required to extend mandatory liability limits to accident victim despite fact that insured misrepresented on his application that he would be the sole operator of the motorcycle); Midland Risk Mgmt. Co. v. Watford, 179 Ariz. 168, 876 P.2d 1203 (Ariz. Ct.App.1994) (requiring insurer to indemnify the insured despite misrepresentations on the insurance application because of absolute-liability statute); Harris v. Prudential Prop. & Cas. Ins. Co., 632 A.2d 1380 (Del.1993) (holding that non-cooperation of insured cannot defeat application of absolute-liability statute where innocent third-party is injured); Odum v. Nationwide Mut. Ins. Co., 101 N.C.App. 627, 401 S.E.2d 87 (1991); Safeway Ins. Co. v. Harvey, 36 Ill.App.3d 388, 343 N.E.2d 679 (1976); Allstate Ins. Co. v. Dorr, 411 F.2d 198 (9th Cir.1969).

These holdings are consistent with the public policy underlying mandatory automobile liability systems. Compulsory auto insurance systems are based on an interest in protecting accident victims and were enacted to benefit the public as well as the insured. States that require liability insurance have a strong public policy interest in assuring that individuals who are injured in motor vehicle accidents have a source of indemnification. Frozen-liability statutes are consistent with these purposes by providing a mechanism for an injured party to recover his or her damages despite any wrongdoing or breach of contract on the part of the policy insureds. Allowing rescission of an insurance contract after an accident would strike at the heart of compulsory liability insurance and would operate as the functional equivalent of a contractual exclusion. The result would likewise defeat minimum coverage, with the consequence that an innocent, injured third-party would bear the burden of intentional misrepresentations by the insured. It would shift the loss to one who was entitled to rely on obedience to the law and one who was without any means of determining whether a policy had been fraudulently procured. As between an injured third-party and the insurer, the latter is in the far superior position to protect itself.

Some jurisdictions, which have enacted automobile financial responsibility statutes but not frozen-liability statutes, have likewise prohibited rescission of an auto policy after the occurrence of damage or injury to an innocent third-party. See e.g, Erie Ins. Exch. v. Lake, 543 Pa. 363, 671 A.2d 681 (1996); Munroe v. Great American Ins. Co., 234 Conn. 182, 661 A.2d 581 (1995); Van Horn v. Atlantic Mut. Ins. Co., 334 Md. 669, 641 A.2d 195 (1994); Continental Western Ins. Co. v. Clay, 248 Kan. 889, 811 P.2d 1202 (1991); Ferrell v. Columbia Mut. Cas. Ins. Co., 306 Ark. 533, 816 S.W.2d 593 (1991); Fisher v. New Jersey Auto. Full Ins. Underwriting Ass’n, 224 N.J.Super. 552, 540 A.2d 1344 (App.Div.1988); American Underwriters Group v. Williamson, 496 N.E.2d 807 (Ind.Ct.App.1986); United Sec. Ins. Co. v. Commissioner of Ins., 133 Mich.App. 38, 348 N.W.2d 34 (1984). Cf Colonial Penn Ins. Co. v. Guzorek, 690 N.E.2d 664 (Ind.1997) (holding that financial responsibility act did not abrogate common law right of rescission even after an accident and injury to an innocent third-party because minimum compensation protection for an accident victim could be satisfied by the injured party’s uninsured motorist (UM) coverage).

Whether an insurer can pursue an action against its insured for any amounts it is required to pay an innocent, injured party due to a frozen-liability statute is an open question in most jurisdictions. Some states have statutes which directly address the issue by allowing insurers to recoup such losses. For example, North Carolina G.S. § 20–279.21(h) states: “Any motor vehicle liability policy may provide that the insured shall reimburse the insurance carrier for any payment the insurance carrier would not have been obligated to make under the terms of the policy except for the provision of this Article.” Minnesota does not contain a similar statutory provision. Of course, whether a claim against the insured would be significant or illusory would depend upon the financial resources of the insured. It may not be worth the effort.

In addition, some states have held that their frozen liability statutes bar rescission only to the extent of the minimum liability insurance limits required by law, at least in cases of fraud in the procurement of the policy. Stated another way, an insurer is not barred from asserting the defense of fraud as to any coverage in excess of the statutory minimums. See Prudential v. Estate of Rojo–Pacheco, 192 Ariz. 139, 962 P.2d 213 (1997); Harris v. Prudential Prop. & Cas. Ins. Co., 632 A.2d 1380 (Del.1993); Farmers Ins. Exch. v. Anderson, 206 Mich.App. 214, 520 N.W.2d 686 (1994); Odum v. Nationwide Mut. Ins. Co., 101 N.C.App. 627, 401 S.E.2d 87 (1991); Dairyland Ins. Corp. v. Smith, 646 P.2d 737 (Utah 1982). These holdings are often based on statutes which bifurcate a policy’s stated limits of liability between the minimum liability amounts required by the compulsory financial responsibility law and amounts in excess of those minimum amounts. A North Carolina statute, for example, states that “Any policy which grants the coverage required for a motor vehicle liability policy may also grant any lawful coverage in excess of or in addition to the coverage specified for a motor vehicle liability policy and such excess or additional coverage shall not be subject to the provision of this Article. With respect to a policy which grants such excess or additional coverage the term “motor vehicle liability policy” shall apply only to that part of the coverage which is required by this section.” North Carolina G.S. § 20–279.21(g).

The Minnesota No-Fault Act contains a somewhat similar statute, but it distinguishes between mandatory and optional “benefits” and “coverages,” not between minimum and excess amounts for mandatory coverages that have been purchased. Minnesota Statute § 65B.49, subd. 7, entitled, “Additional benefits and coverage not prohibited,” states: “Nothing in sections 65B.41 to 65B.71 shall be construed as preventing the insurer from offering other benefits or coverages in addition to those required to be offered under this section.” Unlike the North Carolina statute, the Minn. Stat. § 65B.49, subd. 7, does not specifically state that the portion of liability coverage in excess of the minimum liability amounts required by the No-Fault Act may be treated differently than the portion included within the minimum amounts. On the flip side, Minnesota’s frozen-liability statute states that “The liability of the insurance carrier with respect to the insurance required by this chapter becomes absolute whenever injury or damage covered by the policy occurs,” Minn. Stat. § 65B.49, subd.3(3)(a), which could be read to suggest that an insurer is not barred from asserting the defense of fraud as to liability coverage in excess of the statutory minimums.

So is the parent’s insurer entitled to rescind the policy after the accident based on the parent’s alleged fraud in the procurement of the policy to avoid coverage for the accident? As noted above, the answer depends, in part, on the jurisdiction where the policy was issued. In many states, the insurer will not be able to avoid coverage, at least for the minimum liability limits mandated by state law, due to the frozen-liability statute.

But that is not the end of the inquiry. One also has to look into whether the parent’s non-disclosure of the minor-child actually had any material effect on the insurer’s acceptance of the risk and/or whether the insurer would not have issued the policy or adjusted the premium had the true facts had been made known to the insurer. The internal underwriting guidelines of insurance companies vary. Some only require an adjustment of premium when a resident relative will be a “primary” or “occasional” operator of a vehicle and define those terms based on certain usage of a vehicle. In the case of a minor child of divorced parents, some will only require the parent who has primary custody of the minor child to list the child as a driver on their policy. As noted in one insurance website: Now when teenagers split time between divorced parents on a regular basis it is a common question of which parent should include the teen on his or her auto insurance policy. Many insurance providers suggest the parent, who has custody of the teen the most, should add the child to his or her policy. In some cases, insurance companies say it is whichever parent has custody of the teen when the child is attending school.”

So what’s the answer? Can the insurer avoid coverage (or limit coverage to the minimum limits)? Since insurance companies’ underwriting guidelines, rating manuals and insurance policies differ, the ultimate answer is: it depends. Typical attorney answer.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney licensed in your jurisdiction. © All rights reserved. 2016.

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