§ 1.5 Misrepresentations and Rescission

• Library: Guide to South Carolina Liability and Property Insurance Law (SCBar) (2019 Ed.)

§ 1.5 Misrepresentations and Rescission

Representations in an insurance application must be true and full because the insurer has the right to know the whole truth.³³ If a fact is specifically inquired about, or a question is framed to elicit a fact, the applicant must make a full disclosure and the insurer has the right to rely on the answer.³⁴ True disclosures put the insurer on guard to make its own inquiries to determine whether a risk should be assumed.³⁵ The applicant must make full answers without evasion, suppression, concealment, or misrepresentation.³⁶ An applicant who "undertakes to state the circumstances which can affect the risk, [ ] must do so fully and faithfully."³⁷ If the applicant makes a misstatement of material facts, the insurer's opportunity to estimate the risk under the contract is taken away.³⁸ With regard to binders, if an applicant fails to make a full disclosure, the binder may be rescinded.³⁹ The good faith of the insured is a vital consideration.⁴⁰

To rescind or void a policy, the insurer must show that the statements in an application were untrue and (1) that the falsity of those statements was known to the applicant; (2) that the statements were material to the risk; (3) that the statements were relied on by the insured; and (4) that the statements were made with the intent to defraud and mislead the insurer.⁴¹ Whether the misstatement of fact in an application was made with the intent to defraud or deceive the insurer is a question of fact for the jury.⁴² However, the court may infer an intent to deceive if there is no other plausible or reasonable explanation for the applicant's false representation.⁴³ Further, merely signing an application that contains allegedly false answers is not conclusive of fraudulent intent.⁴⁴

In South Carolina, the common law principally governs when an insurer may rescind a policy based upon information provided or not provided in an insurance application.⁴⁵ In order to rescind an insurance policy on the ground of fraudulent misrepresentation, the insurer must show by clear and convincing evidence: (1) the statement was false; (2) the falsity was known to the applicant; (3) the statement was material to the risk; (4) the statement was made with the intent to defraud the insurer; and (5) the insurer relied on the statement when issuing the policy.⁴⁶

Early South Carolina jurisprudence recognized the doctrine of uberrimae fidei, which stands for the principle that "[c]ontracts made between persons in a particular relationship of confidence, as guardian and ward, or attorney and client, requiring the fullest information to be given beforehand by the person in whom the confidence is reposed to the person confiding, and perfect fairness in all dealing, or the Court will refuse to enforce the contract in favor of the former."⁴⁷ It appears this doctrine is oft cited in the context of contracts of marine insurance.⁴⁸ Although seemingly no longer referenced in South Carolina jurisprudence, South Carolina appears to continue to follow the spirit of the doctrine, as outlined below.

Under South Carolina law, "[r]epresentations in an application for a policy of liability insurance should not only be true but full."⁴⁹ Further, "[t]he insurer has the right to know the whole truth" because "[i]f a true disclosure is made, it is put on guard to make its own inquiries and determine whether or not the risk should be assumed."⁵⁰ The court reasoned "a misstatement of material facts by the applicant takes away its opportunity to estimate the risk under its contract."⁵¹ Specifically, the court explained:

Where a fact is specifically inquired about, or a question so framed as to elicit a desired fact, a full disclosure must be made, and the insurer has the right to rely upon the answer. An applicant is required to make full answers without evasion, suppression, misrepresentation or concealment of materials facts so that such statements will represent his knowledge of the hazards of loss. Appleman, Insurance Law and Practice, Vol. 12, section 7292, page 392. If an applicant undertakes to state the circumstances which can affect the risk, he must do so fully and faithfully.⁵²

Further, "[u]nder South Carolina law, misrepresentations in insurance applications are actionable only if they are fraudulent misrepresentations."⁵³ To avoid coverage under an insurance policy, an insurer must establish by "clear and convincing" evidence:

(1) that the insured made a false statement in the insurance application; (2) that the insured knew was false when made; (3) that was material to the risk covered in the policy; (4) that the insurer relied on; and (5) that was made with the intent to deceive and defraud the insurer.⁵⁴

In Chavis, the Supreme Court of South Carolina addressed whether a misrepresentation would be fraudulent as well as whether an insurer would have a duty to investigate. The insurer brought a declaratory judgment action to determine whether it could rescind the policy issued to the insured for fraudulent statements he made in connection with the application for automobile insurance. The court noted that the "insured was not called as a witness and offers no explanation or reason for his failure to make a true and full disclosure of all his driving violations."⁵⁵ The court reasoned:

We do not see how any reasonable inference could be drawn from the record, other than it was the intent of [the insured], in making false and untrue answers to the questions asked, to deliberately deceive the appellant and, thereby, procure the liability insurance. The intent with which misrepresentations of fact are made in an application for automobile liability insurance, may be deduced from the facts and circumstances surrounding the making of the misrepresentations. The testimony on behalf of the appellant is that if [the insured] had answered the questions propounded in the application truthfully, it would not have accepted the risk and issued the policy of insurance in question.⁵⁶

The Court rejected the argument that the insurer was under an obligation to investigate and not rely upon the statement made by the insured in...