Illegal Apartments and Insurance Law

First, what state law will govern the insurance contract? Is it written into the policy (insurance contract)? If not, does everything fall within one state? The insurance company's main office is in State A, the insurance broker (if there was one) is in State A? The purchaser is in State A? The building at issue is in State A? If these are all answered 'yes' then the law of State A would likely govern the dispute. However, rarely will that occur.

So in most cases, unless the contract says what state law will govern and/or the parties agree to be bound by one state's law as a preliminary matter (and the agreement is valid), then your question will not have a clear answer unless all the potential states with law that may govern are in agreement. This too is unusual.

The next question, the one that seems mor eone of substance, is whether the insurance company will be bound to honor an agreement where some of the information is false. Some states will say that the contract must be honored unless there was a 'material misrepresentation' in the application. One then has to find out what that means - and various states again will have various ways of assessing what is material. Perhaps it would not be material if in a car application, one failed to note that her driving history was perfect (an omission). Since the fact that it was perfect would not INCREASE the risk to the insurer in the event that an accident later occurred, a court would be hard-pressed to say that such an omission was material. However, by contrast, say a person fills out an application for car insurance and fails to disclose that he has had three drunk driving convictions. . . Since this information alters the risk to the insurance company, and is false even if by omission, the insurance company would not likely be obligated to cover an accident that the applicant might later get into. In some states, the court might rule that the insurance company would not be obliged to pay for damages associated with an accident involving alcohol. But most would probably say that the entire insurance contract was invalid because it was procured by fraud: the relevant time being the moment of contract formation - whether truthful answers were given at this time. You can imagine that any party to a contract should not be obliged to honor it if another party to the contract lied to get the desired promises. A system of justice could not operate like that.

So - to your question. It appears that the owner failed to disclose that the house was being used as two apartments. I am guessing that this would be considered a material misrepresentation in most states and therefore a basis for an insurance company denying coverage. In fact, the company would probably 'rescind' the contract (consider it null and void at its inception) because it was procured by fraud. Again, while I am guessing, I believe an application would ask for a specific answer regarding the type of property sought to be insured. If it a single family owner occupied housee, for example, versus a two-family. A similar issue that is frequently dicsussed in terms of whether the insurance company should be obligated under this kind of scenario is the fact that it is entitled to charge fees appropriate for the risk.

Most likely, the insurance company would have issued a policy whether the property was a two-family or a one family, but the risk would have been considered different and the rates offered for the policy would also have varied.

In the end, you can't beat telling the truth.

Not a chance as to your first 'correction' Joe. You are, in fact, applying state law when you say that the question is the location of the risk.

Most states look at several factors. That is one of them, but it is not necessarily decisive. It depends on the state that is reviewing the issue. Frankly it can also depend largely on the court where suit is filed - hence why people forum shop (or one reason at least). I have had this issue in your state (Illinois - well known for its incongruous court opinions on various insurance matters) and I have had it in Florida, Georgia, Texas and had to review the law of other states that were potential sources of law. No one wants to litigate this - but this kind of conflict of law is huge and well-loved by law professors. That is not to say there are always problems with what law applies. We are talking here about coverage that will likely be declined. And where I am suggesting a carrier may want to rescind. What law governs will be critical to the insurer and if arguable it will likely attempt to persuade a court that the most favorable law (to it) should apply. Naturally, if clear, there won't be litigation over it. I stand by what I wrote earlier with the understanding that I am not and was not intending to give a definitive legal analysis but rather, point out some issues in response to scenario where many facts are not known. Ciao. SS

The owner of a single-family house subdivides it into apartments that he rents to unrelated persons. He does not advise any governmental authority of the rentals because they are in violation of the zoning code. He purchases standard fire insurance through an insurance company. The house has a fire that starts in one of the illegal apartments.

Is the fire insurance company liable?