Commerce Insurance Co., Inc. v. Gentile, et al. (Lawyers Weekly No. 11-025-14)

SIKORA, J.  Commerce Insurance Company (Commerce) brought this action in Superior Court for a declaratory judgment of its obligation to pay substantial damages under the optional bodily injury provision of a standard Massachusetts motor vehicle policy.  Defendants Vittorio and Lydia Gentile are the policyholders.  The defendant Vittorio Gentile, Jr. (Junior), is their grandson.  Defendants Joseph Homsi and Janice Silverio, as guardian of Douglas Homsi, by separate suit have achieved verdicts and resulting judgments of substantial compensatory damages for severe personal injuries against Vittorio, Lydia, and Junior, by reason of Junior’s negligent operation of his grandparents’ vehicle and by reason, inter alia, of the negligent failure of Lydia and Vittorio to prevent Junior’s use of that vehicle.

At the time of the accident on December 10, 2006, an operator exclusion form, drafted by Commerce and signed by Lydia and Junior on December 7, 2004, provided that Junior would not drive any vehicle covered by the Gentiles’ policy.  Junior did operate his grandparents’ vehicle and, according to the verdicts in the separate personal injury litigation, negligently caused devastating injuries to the Homsi brothers.

In this litigation Commerce sought a judgment declaring that the Gentiles’ violation of the operator exclusion form relieved the insurer of any duty of indemnification of them under the policy clause for optional bodily injury coverage of $ 500,000.  A judge of the Superior Court concluded that Junior had violated the operator exclusion form as a material representation underlying the issuance of the policy and that Commerce therefore was relieved of its duty of optional coverage for bodily injury caused by their vehicle.  The Homsi parties have appealed.  For the following reasons, we now affirm the judgment.

Background.  The record presents the following undisputed facts.  Vittorio and Lydia owned and registered several vehicles from their address in Westwood.  They insured the vehicles under standard Massachusetts automobile insurance policy forms approved by the Division of Insurance.  On December 7, 2004, Lydia and Junior executed an operator exclusion form, also approved by the Division of Insurance as an adjunct term of a standard policy.  The final sentence of the form recited, “It is agreed that the person named below will not operate the vehicle(s) described below, or any replacement thereof, under any circumstances whatsoever.”  Lydia signed the form as the policyholder; Junior signed it as the “excluded operator.”  The proscribed vehicles included a 1999 Lexus.

The exclusion form provided additionally:

“I am aware that under the terms of my Massachusetts [a]utomobile [i]nsurance [p]olicy, if I or someone on my behalf provides false, deceptive, misleading or incomplete information in any application or policy change request, and if such false, deceptive, misleading or incomplete information increases the company’s risk of loss, the company may refuse to pay claims under any or all of the [o]ptional [i]nsurance [p]arts of this policy.”  (Emphasis supplied).

Lydia executed the operator exclusion form because her insurance agent had advised her that the premiums would increase significantly if Junior, by reason of his poor driving history, were to remain within coverage.  Commerce’s underwriting department later conducted a review of Junior’s record and concluded that, if he had stayed on the policy, the premium would have increased by $ 929 for the one-year policy period beginning in April of 2006.

The policy renewed each year on April 22.  A declaration page issued for the renewed year; for the period of April 22, 2006, to April 22, 2007, it identified Junior under the heading “Operator Status” as “E” for excluded.  The terms of the policy provided compulsory bodily injury coverage of $ 20,000 per person and $ 40,000 per accident; and optional bodily injury coverage of $ 500,000 per person and per accident.

The policy included the following general provision:

“If you or someone on your behalf gives us false, deceptive, misleading or incomplete information in any application or policy change request and if such false, deceptive, misleading or incomplete information increases our risk of loss, we may refuse to pay claims under any or all of the [o]ptional [i]nsurance [p]arts of this policy.  Such information includes the description and the place of garaging of the vehicles to be insured, the names of all household members and customary operators required to be listed and the answers given for all listed operators.”  (Emphasis supplied).

The parties do not dispute that, after the execution of the operator exclusion form on December 7, 2004, the policy renewed twice, from April 22, 2005, to April 22, 2006; and from April 22, 2006, to April 22, 2007.  The accident occurred as Junior drove the Lexus on the night of December 10, 2006.

While the Homsis’ personal injury action was pending, the judge in this action allowed Commerce’s partial summary judgment motion to void the optional bodily injury coverage of the 1999 Lexus.  She reasoned, “[W]hen [Junior] retrieved the keys for the 1999 Lexus, opened the driver’s door, and turned the key in the ignition, he was providing false, deceptive, or misleading information to Commerce because the representation he made on the [o]perator [e]xclusion [f]orm . . . was a continuing representation that he would not, under any circumstances, operate that vehicle.  See Hanover Ins. Co. v. Leeds, 42 Mass. App. Ct. 54, 57 (1997) (‘Statements made in an application for insurance are in the nature of continuing representations and speak from the time the application is accepted or the policy is issued’) (Leeds).”  She concluded that the violation of the continuing representation by Junior entitled Commerce to refuse coverage under the optional insurance parts of the policy.

At the conclusion of the trial of the separate personal injury action resulting in large verdicts for the Homsis, the trial judge entered final judgment in Commerce’s declaratory suit limiting recovery against the insurer to compulsory coverage.  The Homsis received coverage and payment of $ 300,000 under the provision for underinsurance contained in their own automobile policy with the Arbella Company.  (Acknowledgment at oral argument.)

Analysis.  1.  Standard of review.  We examine the record and ask whether the evidence, in the light most favorable to the nonmoving party, establishes all material facts and entitles the moving party to a judgment as a matter of law.  Augat, Inc. v. Liberty Mutual Ins. Co., 410 Mass. 117, 120 (1991).  Roman v. Trustees of Tufts College, 461 Mass. 707, 710-711 (2012).  From the same materials presented to the motion judge, we proceed de novo.  Miller v. Cotter, 448 Mass. 671, 676 (2007).  Eastern Holding Corp. v. Congress Financial Corp., 74 Mass. App. Ct. 737, 740 (2009).  We may affirm on any ground visible in the record even if the parties did not present it and the motion judge did not adopt it.  Augat, Inc. v. Liberty Mutual Ins. Co., supra.  Aetna Cas. & Sur. Co. v. Continental Cas. Co., 413 Mass. 730, 734-735 (1992).  Rasheed v. Commissioner of Correction, 446 Mass. 463, 478 (2006).  Hanover Ins. Co., v. Leeds, supra at 54.  And we bear in mind that summary judgment disposition is often appropriate for solution of disputes turning on the application of contractual documents.  See Lumber Mut. Ins. Co. v. Zoltek Corp., 419 Mass. 704, 707 (1995); LoCicero v. Hartford Ins. Group, 25 Mass. App. Ct. 339, 341 (1988).

2.  Continuing representation; continuing promise.  a.  Representation.  The Homsi parties contend that no breach of representation, or misrepresentation, arose so as to invalidate coverage under the concept of continuing representation applied by Leeds, supra.  In that case the court held that the failure of the operator to report on a policy renewal application the principal garage relocation of her automobile from her family residence in one part of the Commonwealth to her college residence in another.  It carried material importance because the new location brought an increased risk of loss to the insurer and required a higher premium from the insured.  Id. at 59-60.  Even in the absence of intent to deceive, the materiality of the inaccuracy relieved the carrier of the duty of coverage.

The Homsi parties propose that the “continuing representation” language of Leeds applies only during the pendency of an insurance application.  They cite the language of Chicago Ins. Co. v. Lappin, 58 Mass. App. Ct. 769, 780 (2003).  “Thus, an applicant has a duty to inform the insurer of any known changes rendering his or her initial representations untrue until such time as the policy becomes ‘operative.’”  Ibid.  In full context and practical sense, we read that passage to mean that an insured, at a minimum, has a duty to inform the company of a material change during the application period.  It does not relieve the policyholder of a duty to do the same during the coverage period.

The exclusion of Junior was a continuous material term of the policy.  If knowledge of a fact would naturally influence the judgment of the underwriter in the formation of the contract at all, or in the estimation of the character or degree of risk, or in the calculation of the premium, the fact is material.  See Daniels v. Hudson River Fire Ins. Co., 66 Mass. 416, 425 (1853) (seminal decision of Shaw, C.J.); Barnstable County Ins. Co. v. Gale, 425 Mass. 126, 128 (1997), and cases cited.  Modern legislation embodies and confirms this long-standing common-law definition of misrepresentation by an applicant for coverage.

The Gentiles received substantially reduced premiums as a result of the exclusion of Junior from the policy.  While no intent to deceive may have existed at the formation of the exclusion, the Gentiles were unable to keep their promise to exclude Junior “in all circumstances whatsoever.”  That failure ripened into a misrepresentation affecting the degree of risk and the level of the premium.

b.  Promise.  A realistic characterization of the operator exclusion representation as a bargained for promise provides a more direct solution.  In exchange for a reduced premium, Vittorio and Lydia promised to exclude Junior from operation of the 1999 Lexus.  To complete the quid pro quo, Commerce received a reduced risk of loss.  Junior, by intention, and Vittorio and Lydia by adjudicated negligence, breached the promise of exclusion, “an essential and inducing feature of the contract[].”  DiPietro v. Sipex Corp. 69 Mass. App. Ct. 29, 38 (2007), quoting from Bucholz v. Green Bros. 272 Mass. 49, 52 (1930).  Very simply, that breach of a material term of the policy, as a matter of elemental contract law, excused Commerce from performance of its duty of coverage.  See, e.g., National Overall Dry Cleaning Co. v. Yavner, 321 Mass. 434, 440 (1947); New England Canteen Serv., Inc. v. Ashley, 372 Mass. 671, 676 (1977); Clamp-All Corp. v. Foresta, 53 Mass. App. Ct. 795, 810 (2002).

3.  Annual renewal.  The Homsi parties accurately point out that, in contrast with the insured in Leeds, the Gentiles did not execute annual renewal applications containing a material omission.  The accident here occurred during the second annual renewal period after execution of the exclusion form.  Upon that distinction, they assert the authority of Quincy Mutual Fire Ins. Co. v. Quisset Properties, Inc., 69 Mass. App. Ct. 147, 152-156 (2007) (Quisset Properties).  In that instance the insured failed to notify his insurer through a period of four renewal years of the dissolution of his business entity as the owner and registrant of the covered vehicle.  The commercial character of the coverage provided a substantially lower annual premium.  The insured’s son (a listed operator on the commercial policy) drove the automobile into a collision causing catastrophic injury to a third party.  As appears here, the insurer at annual renewals had not sent the insured an application or questionnaire requesting updated information or changes relevant to coverage.  Id. at 150.

This court, in Quisset Properties, reversed the entry of summary judgment absolving the insurer of coverage.  We reasoned (1) that at renewal an insurer carried a burden of an initiating inquiry about material changes; (2) that in the absence of such an inquiry an insured’s silence about changed circumstances of a material nature did not constitute a misrepresentation relieving the insurer of coverage because (a) ministerial renewals are not “negotiations” of coverage comprehending a duty of disclosure by the insured, and (b) an insured does not have knowledge, comparable to the insurer’s, of the material nature of a changed circumstance, unless (c) the insurer and insured have a “special agreement” or “express agreement” otherwise.  Id. at 153-156.

For several reasons the present case does not fall within the holding of Quisset Properties.  First, the annual renewal declarations page placed an “E” beside Junior’s name so as to inform the Gentiles of his continuing exclusion, an expression beyond a renewal inquiry and one in the form of an assertion.  Second, the Gentiles had comparable knowledge of the materiality of the exclusion of Junior by reason of its importance, the declarations page symbol, and the ongoing lower premium.  Third, the exclusion constituted an exceptional “special agreement” or “express agreement” of the nature contemplated by the Quisset Properties reasoning.  Such an exclusionary provision continues through renewal in the absence of inquiry by the company.  In short, our case falls within the orbit of the Leeds decision, and not the Quisset Properties decision.

4.  Operation of G. L. c. 175, § 113A(5).  Finally, the Homsi parties contend that G. L. c. 175, § 113A(5), as amended by St. 1998, c. 155, § 1, prevents Commerce from disclaimer of coverage.  In substance, that section provides that no misstatement in an application nor any violation of a policy term by an insured will bar recovery under a policy to an innocent judgment creditor (such as an injured third party in the position of the Homsis).  This contention does not appear in the Superior Court papers.  It is waived.  If it were properly open on appeal, it would not succeed because § 113A(5) applies only to compulsory, and not optional, coverages.  See G. L. c. 175, § 113A, first par. (assimilating the definition of “motor vehicle policy” of G. L. c. 90, § 34A, as amended by St. 1998, c. 273, §§ 12 & 14, a designation specifically to the $ 20,000 per person and $ 40,000 per accident limits of compulsory coverage).  That text reflects a purposeful legislative balance between financial protection for the injured judgment holder and financial exposure of the responsible driver’s insurer reasonably calibrated to its acceptance of risk and level of premiums.

Judgment affirmed.

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