Hiscox Dedicated Corp Member v. Suzan Taylor ( 2022 )

United States Court of Appeals
For the Eighth Circuit
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No. 21-3534
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Hiscox Dedicated Corporate Member, Limited
lllllllllllllllllllllPlaintiff - Appellee
v.
Suzan E. Taylor
lllllllllllllllllllllDefendant - Appellant
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Appeal from United States District Court
for the Western District of Arkansas - Hot Springs
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Submitted: September 20, 2022
Filed: November 15, 2022
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Before LOKEN, ARNOLD, and KOBES, Circuit Judges.
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ARNOLD, Circuit Judge.
After Suzan Taylor's Arkansas home burned to the ground, her insurer, Hiscox
Dedicated Corporate Member Limited (a "capital provider" to an underwriting
syndicate doing business within the Lloyd's of London insurance marketplace),
declined to pay her for her loss and instead rescinded the insurance policy because
she had made material misrepresentations in her insurance application. Hiscox then
sued Taylor in federal court, seeking a declaratory judgment that it had properly
rescinded the policy and had no obligation to Taylor. The district court agreed with
Hiscox and granted it summary judgment on the ground that Taylor had
misrepresented that she had not had a foreclosure during the past five years, and, had
Taylor disclosed that foreclosure proceedings had been commenced against her home,
Hiscox would not have issued the policy. Taylor appeals the district court's grant of
summary judgment. We reverse and remand.
Taylor obtained the insurance policy with the help of an independent insurance
agent. Taylor and her agent completed what Hiscox calls "an industry standard
ACORD application form, which is used by retail agents to seek quotes from various
insurers and wholesale brokers." The form contained a question that asked, in all
capital letters, if the "applicant had a foreclosure, repossession, bankruptcy or filed
for bankruptcy during the past five (5) years." Taylor answered no. After receiving
Taylor's application, another entity with authority to issue the policy did so on
Hiscox's behalf.
Only six days before Taylor submitted her application, however, her mortgagee
had filed a "Notice of Default and Intention to Sell," which set a specific date and
time when it planned to sell Taylor's home. A lawyer representing Taylor had
corresponded with the mortgagee before Taylor submitted her insurance application.
Taylor did not disclose these events to Hiscox. She eventually reached an agreement
with the mortgagee, and her home was not sold.
A fire destroyed Taylor's home about six months after the policy went into
effect. Taylor submitted a claim under the policy, but Hiscox discovered during its
investigation of the claim that she had not disclosed the foreclosure proceedings
despite the question in her application that asked her if she had had a foreclosure. So
Hiscox rescinded the policy ab initio and did not pay Taylor's claim.
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After Hiscox sued her for declaratory judgment, Taylor asserted counterclaims
against Hiscox for breach of contract, bad faith, and improper rescission. Both parties
eventually moved for summary judgment on whether Taylor's response to the
application's question about foreclosure was a material misrepresentation entitling
Hiscox to rescind the policy as a matter of law. In siding with Hiscox, the district
court held that the question was "unambiguous because the filing of the foreclosure
against the Residence obviously constituted a foreclosure." It explained that "[t]he
property was in the process of being foreclosed upon and that fact should have been
disclosed on the Application, even if Taylor's plan was to cure her default."
"We review the district court's resolution of cross-motions for summary
judgment de novo." Grinnell Mut. Reinsurance Co. v. Dingmann Bros. Constr. of
Richmond, Inc., 34 F.4th 649, 652 (8th Cir. 2022). Arkansas substantive law applies
in this diversity case, see id., and under that law an insurer may rescind an insurance
policy if the policyholder made a material misrepresentation on the application, even
if the misrepresentation is unrelated to the loss sustained. See Nationwide Prop. &
Cas. Ins. Co. v. Faircloth, 845 F.3d 378, 382 (8th Cir. 2016). Insurance policies are
interpreted "in favor of the insured and strictly against the insurer," see Allstate Ins.
Co. v. Burrough, 120 F.3d 834, 838 (8th Cir. 1997), a rule that the parties appear to
presume applies, we think correctly under Arkansas law, to applications for insurance
as well. See Phelps v. U.S. Life Credit Life Ins. Co., 984 S.W.2d 425, 428 (Ark.
1999). So where the language used "is ambiguous, or there is doubt or uncertainty as
to its meaning and it is fairly susceptible of two interpretations, one favorable to the
insured and the other favorable to the insurer, the former will be adopted." See U.S.
Fid. & Guar. Co. v. Cont'l Cas. Co., 120 S.W.3d 556, 560 (Ark. 2003). But where the
language is clear and unambiguous, courts must apply the policy as written and not
rewrite it to favor the insured. See Allstate, 120 F.3d at 838.
The relevant question is whether Taylor "had a foreclosure, repossession,
bankruptcy or filed for bankruptcy during the past five (5) years." Taylor maintains
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that the district court erred in concluding that the phrase "had a foreclosure" meant
the initiation of foreclosure proceedings. She says that the phrase "had a foreclosure"
unambiguously refers to a foreclosure sale, or, at a minimum, that the question is
ambiguous and so should be construed in her favor. Hiscox, on the other hand, agrees
with the district court that the term "foreclosure" refers unambiguously to the
institution of foreclosure proceedings.
We agree with Taylor that the question is ambiguous. Under Arkansas law we
are to read the question in its "plain, ordinary, and popular sense," as "the common
usage of terms should prevail." See ProAssurance Indem. Co. v. Metheny, 425 S.W.3d
689, 703 (Ark. 2012). The term "foreclosure" commonly means different things
depending on the context in which it appears. Sometimes people use the word
"foreclosure" to mean the foreclosure sale itself, which is the event that terminates or
"forecloses" someone's rights to property. The word can also reasonably mean the
process leading up to that sale.
We are not alone in this view. See Provident Bank v. Tenn. Farmers Mut. Ins.
Co., 234 F. App'x 393 (6th Cir. 2007) (unpublished). There, both the homeowners
and their mortgagee were listed as insureds on a home-insurance policy. The
insurance agreement told the mortgagee that, if the insurer denied a claim from the
homeowners, that denial would not apply to a valid claim from the mortgagee if the
mortgagee had notified the insurer "of any . . . foreclosure" that the mortgagee was
aware of before the loss. After the mortgagee initiated foreclosure proceedings
against the homeowners, the home burned down and the mortgagee filed a claim with
the insurer; but the insurer rejected it because the mortgagee had not told the insurer
about the commencement of foreclosure proceedings. See id. at 394–95. The Sixth
Circuit held that the term "foreclosure" was ambiguous. See id. at 394. It observed,
as do we, that "[t]he word 'foreclosure' sometimes refers simply to a foreclosure sale,"
and so it "is capable of two reasonable interpretations and therefore is ambiguous."
See id. at 397.
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Hiscox wants us to distinguish Provident Bank on the ground that the court
there adverted to Tennessee statutes to support its conclusion, whereas Arkansas
statutes, Hiscox asserts, support its view. It maintains that Arkansas statutes refer to
a foreclosure as a legal proceeding. For example, it cites a statute stating that a
"mortgagee may not initiate a foreclosure" unless certain conditions are met, such as
the giving of notice. See Ark. Code Ann. § 18-50-103. It cites another statute that
dictates the contents of a mortgagee's notice of default and intention to sell, including
a requirement that the notice state "[t]he default for which foreclosure is made" and
the contact information "of the party initiating foreclosure." See id. § 18-50-
104(b)(4), (7). It also points out that "Arkansas statutes define and use the term 'sale'
to reference the sale, and use the term 'foreclosure' without 'sale' to refer to the
statutory process prior to the sale."
We don't think Hiscox's reliance on Arkansas statutes carries the day. For one
thing, the fact that the Provident Bank court adduced Tennessee statutes to support
its conclusion that the term "foreclosure" was ambiguous does not mean that, without
those statutes, the court's conclusion would have been different. We agree with
Provident Bank that the term "foreclosure" "sometimes refers simply to a foreclosure
sale," see 234 F. App'x at 397, regardless of whether the statutes in the jurisdiction
where the contract was entered do as well.
Second, it appears that relevant Arkansas statutes sometimes cut against
Hiscox's position. As Taylor points out, an Arkansas statute also says that, if the
mortgagee follows the proper procedures, its sale of property "shall foreclose and
terminate" the mortgagor's interest in the property. See Ark. Code Ann. § 18-50-
108(a)(1). So it doesn't seem like much of a stretch for someone to refer to that
occurrence as the "foreclosure."
Third, and perhaps most important, we see no indication in any case that the
parties meant to adopt Arkansas statutes as the standard to determine the meaning of
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the words in the application question. The question on its face does not refer to
Arkansas statutes, and neither party has directed us to a different part of the
application to suggest that the meaning of "foreclosure" was meant to track Arkansas
(or any other state's) statutes. Keeping in mind that the "first rule" of contract
interpretation in Arkansas "is to give to the language employed the meaning that the
parties intended," see Couch v. Farmers Ins. Co., 289 S.W.3d 909, 913 (Ark. 2008),
we see no reason to believe that the parties intended Arkansas statutes to be relevant
in deciding what the parties meant when they used the term "foreclosure."
Hiscox emphasizes in its brief that "foreclosure" is a process. It cites Black's
Law Dictionary, which defines "foreclosure" as a "legal proceeding to terminate a
mortgagor's interest in property, instituted by the lender (the mortgagee) either to gain
title or to force a sale in order to satisfy the unpaid debt secured by the property."
Foreclosure, Black's Law Dictionary (11th ed. 2019). We take no issue with that
definition. The difficulty for Hiscox, however, is that it is unclear whether the
application was asking about the commencement of that process or its completion by
sale. See Provident Bank, 234 F. App'x at 396. And so we are not much moved by
Hiscox's argument that Black's Law Dictionary describes foreclosure as a process.
Hiscox identifies a case that it says supports its position that the application
question was unambiguously referring to the commencement of a foreclosure process.
See Buford v. S. Pioneer Prop. & Cas. Ins. Co., No. 06-1076-T/An, 2007 WL
9709924 (W.D. Tenn. Aug. 6, 2007). There a homeowner answered "no" on an
insurance application that asked if she "had a foreclosure, repossession, bankruptcy,
judgment or lien during the past five years." It turns out that her mortgagee had
commenced the foreclosure process two days earlier, and after the home burned a few
weeks later, the insurer refused to pay the homeowner's claim. The district court there
granted summary judgment to the insurer because of her alleged misrepresentation.
See id. at *2, *4.
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We don't find Buford apposite for two reasons. First, the court there did not
address the issue of whether the question was ambiguous, and, as far as we can tell,
the parties did not ask it to. Second, the application question before us is slightly, but
materially, different from the one in Buford. Notice that the question here asked not
only whether the applicant had had a foreclosure but also whether the applicant had
had a "bankruptcy or filed for bankruptcy." Bankruptcy resembles foreclosure in that
it is a procedure that culminates in an event that alters the rights of the parties
involved. But notice, too, that the application question was careful to distinguish
between the commencement of that process ("filed for bankruptcy") and the
culmination of it (just "bankruptcy"). The application doesn't draw a similar
distinction for foreclosures. Perhaps the application is phrased this way for
bankruptcy to ensure that an applicant disclosed both voluntary and involuntary
bankruptcies. But a reasonable applicant might understand the difference in treatment
between foreclosures and bankruptcies as an invitation to disclose only foreclosures
that were completed with a sale, as the question did not similarly ask the applicant if
someone had "filed for foreclosure" against her. This additional contextual clue
supports our view that the phrase could reasonably refer to a foreclosure sale, see
Singletary v. Singletary, 431 S.W.3d 234, 240 (Ark. 2013), and it further
distinguishes our case from Buford.
Hiscox also points out that it was important for it to know if foreclosure
proceedings had been commenced because it "indicates financial distress, lack of
ability to pay the mortgage, an[] inability to maintain the property, and the prospect
of the insured losing possession and control of the property." That may well be true,
but that doesn't mean that Hiscox asked her for this information or that Taylor
misrepresented her circumstances. If Hiscox wanted certain information so it could
make an informed insurance decision, it should have asked Taylor for it in a clear,
unambiguous way.
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Finally, Hiscox says that there's no reason to apply the typical rule that
ambiguities are construed in favor of the insured, see U.S. Fid., 120 S.W.3d at 560,
because it did not draft the form in question; rather, Taylor and her agent selected this
"industry standard ACORD application" to submit to Hiscox. But Hiscox admitted
that it regularly used the form in question and relied upon it. In fact, it appears to have
conceded, or at least did not dispute at the appropriate time, that it required applicants
to submit an ACORD form or something similar. The rule about construing
ambiguities in favor of the insured applies not only when the insurer drafts the words
in question but also when it "chooses" those words. See Southall v. Farm Bureau
Mut. Ins. Co. of Ark., 632 S.W.2d 420, 421 (Ark. 1982). On this record, we think
Hiscox chose the relevant language on the subject of foreclosures by prodding
applicants to submit this very form, and so the ambiguity should be resolved in
Taylor's favor.
We therefore hold that the question asking Taylor whether she had "had a
foreclosure" was ambiguous and so her response in the circumstances was not a
misrepresentation entitling Hiscox to rescind the policy. Hiscox asserts that we
should nonetheless affirm the judgment because Taylor made other
misrepresentations entitling it to rescind the policy. The district court touched on
these other supposed misrepresentations but did not decide whether they entitled
Hiscox to summary judgment. We therefore leave those matters to the district court
to sort out in the first instance on remand.
Reversed and Remanded.
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