Nazareth Mut. Ins. Co. v. Pa. Ins. Dep't

298 A.3d 140

NAZARETH MUTUAL INSURANCE COMPANY, Petitioner

v.PENNSYLVANIA INSURANCE DEPARTMENT, Respondent

No. 730 C.D. 2022

Commonwealth Court of Pennsylvania.

Argued March 6, 2023

Decided May 12, 2023

Publication Ordered July 6, 2023

Joseph M. Toddy, Philadelphia, for Petitioner.

Steven T. Williams, Allentown, for Intervenor Earl J. Muth.

Jennifer Brown-Sweeney, Department Counsel, Harrisburg, for Respondent.

BEFORE: HONORABLE MICHAEL H. WOJCIK, Judge, HONORABLE STACY WALLACE, Judge, HONORABLE BONNIE BRIGANCE LEADBETTER, Senior Judge

OPINION BY JUDGE WOJCIK

Nazareth Mutual Insurance Company (Insurer) petitions for review of an order of the Acting Insurance Commissioner of the Commonwealth of Pennsylvania (Commissioner) concluding that Insurer's cancellation and nonrenewal of Earl J. Muth's (Intervenor) homeowners’ insurance policy (Policy) violated the Unfair Insurance Practices Act (Act)¹ and directing Insurer to cease and desist from terminating the Policy and to reinstate the Policy without any lapse in coverage. Insurer contends that the Commissioner erred in applying the Act to the policy termination, determining that Insurer failed to establish a material misrepresentation, and finding that Insurer's notice of nonrenewal failed to comply with the Act. Discerning no error, we affirm.

I. Background

Since May 6, 1998, Intervenor maintained the Policy with Insurer for his home at 6269 Route 309 in New Tripoli, Pennsylvania (Property), which he owned and shared with his wife, Marie Muth (collectively, the Muths). On December 2, 2019, following a fire at the Property, which caused substantial damage to the home, Intervenor submitted an insurance claim.

On April 9, 2020, after an investigation, Insurer denied the claim upon determining that "no coverage exist[ed]" because the Property was placed in an irrevocable trust on March 22, 2010, and no longer met the Policy's definition of "insured premises." Reproduced Record (R.R.) at 121a, 125a.

In a follow up "Cancel Statement" dated April 13, 2020, Insurer informed Intervenor that the Policy was cancelled effective March 22, 2010, for the stated reason: "Dwelling not eligible for coverage." R.R. at 127a. Insurer refunded premium payments made from March 22, 2010, onward.

In April 2020, Intervenor requested the Insurance Department's (Department) Bureau of Consumer Services (Bureau) to investigate the retroactive cancellation and filed a complaint with the Department. On April 29, 2020, Insurer issued another Cancel Statement with a slightly more specific reason: "Dwelling not eligible for coverage due to ownership change." R.R. at 148a.

Following an investigation, the Bureau determined that the Policy termination violated the Act and ordered Insurer to continue the Policy with no lapse in coverage. R.R. at 169a. On June 8, 2020, Insurer appealed.

On June 24, 2020, Insurer sent Intervenor a Nonrenewal Notice, advising that the Policy would terminate on July 30, 2020, and would not be renewed because the Property is no longer owner-occupied, but was deeded to a trust in 2010. R.R. at 291a. On July 14, 2020, Intervenor challenged the Nonrenewal Notice. The retroactive termination and prospective nonrenewal matters were consolidated for hearing and review.

At the hearing held November 9, 2021, the Commissioner heard testimony from Richard Sitkus (Sitkus), Insurer's representative in charge of insurance operations, Intervenor, and his wife, Marie Muth. Based on the testimony and other evidence presented, the Commissioner made the following findings.

Insurer acted to terminate Intervenor's Policy twice. Insurer's reason for terminating the Policy was the transfer of the Property into a trust in 2010. With the assistance of a trust company, the Muths created a revocable living trust, known as the Earl J. and Marie E. Muth Family Trust (Trust), in December 2009. The Muths were named as settlors and trustees of the Trust. The Trust was revocable and allowed for all assets to be transferred into and out of the Trust. Within the Trust, the Muths created an irrevocable asset protection sub-trust (sub-trust), which was designed to limit the use of principal for the Muths’ benefit and avoid a governmental "spend down" of the estate before eligibility for governmental entitlement programs. At the time the Trust was created, no assets were scheduled as being placed in the sub-trust. Commissioner's Adjudication and Order, 6/17/22, at 9-10.

On March 22, 2010, the Muths signed a "Quit Claim Deed" (Deed) for their Property to their daughter, Michelle Eidle, as trustee, and placed the Property in the Trust's irrevocable sub-trust. The trustee's address was the Property address. Intervenor was informed by the trust company that the transfer of Property would not take place until after the Muths passed away. Their daughter was not aware of the Deed. Intervenor was not aware of the transfer until after the fire loss investigation. Commissioner's Adjudication and Order, at 10.

Per the terms of the sub-trust, the Muths retained ownership of a life estate in the Property as well as special powers of appointment. Although Intervenor and his wife may not have been title owners following execution and recording of the Deed, they retained ownership of important property rights. In addition, the Muths continued to reside at the Property and paid for all utilities, real estate taxes, homeowners’ insurance, and all maintenance for the Property. The Property continued as the Muths’ primary residence through the time of the hearing. Through the years, Insurer looked to Intervenor for inspections and to make necessary repairs. The Muths continued to act as the occupying owners of the Property. Commissioner's Adjudication and Order, at 10-11.

The Commissioner found that Insurer's termination of the Policy constituted a cancellation and nonrenewal subject to the Act's compliance provisions, not a rescission as asserted by Insurer. Insurer's Cancel Statements failed to comply with the Act's procedural requirements. In addition, the termination substantively violated the Act because the stated reason – "Dwelling not eligible for coverage due to ownership change" – was not a permissible reason to cancel the Policy under the Act. The Act requires material misrepresentation by the insured, a substantial increase in hazard, or nonpayment of a premium to cancel a Policy, none of which were stated on the notices. Thus, the Commissioner found that Insurer's termination was both procedurally and substantively noncompliant with the Act. Commissioner's Adjudication and Order, at 13-15.

Notwithstanding the notice defects, the Commissioner found that Insurer failed to prove the existence of material misrepresentation. To prove material misrepresentation, an insurer must prove that (1) the declaration was false; (2) the subject matter of the misrepresentation was material to the risk; and (3) the declarant knew the statement to be false or made the statement in bad faith. The Insurer failed to establish a declaration, relying instead on an implied assertion of ownership. The implied assertion of ownership was not false because the Muths retained a life estate and special powers of appointment. It was not material to the risk. Although Insurer offered evidence that the Property under the Trust would require a more expensive dwelling policy, the Commissioner found that increased cost alone was not sufficient to demonstrate increased risk. Insurer needed to show potential casualty and liability exposure caused by the transfer, such as a vacant or tenant-occupied property. Such was not the case here because the Muths continued to reside at the Property. Lastly, the Commissioner found that Intervenor did not know that any implied representation of ownership was false because he owned a life interest in the Property, maintained special power of appointment over it, and believed the actual transfer would not occur until he and his wife both passed. Commissioner's Adjudication and Order, at 16-24.

As for the nonrenewal, the Commissioner found that, although it satisfied the procedural requirements of the Act, it did not meet the substantive requirements. The reason for nonrenewal stated:

Property No Longer Owner Occupied

The [P]roperty was deeded to a Trust in 2010 and [Insurer] was not notified. Entities are ineligible as Named Insureds on Homeowner policies.

Commissioner's Adjudication and Order, at 25; see R.R. at 291a. Although Insurer relied on an implied material misrepresentation about the transfer and increased exposure to risk, those reasons were not articulated in the Nonrenewal Notice. Insurer did not establish material misrepresentation or that change in ownership was material to the risk. Commissioner's Adjudication and Order, at 25-27.

Accordingly, the Commissioner determined that Insurer's retroactive cancellation and prospective nonrenewal violated the Act in multiple ways. By order dated June 17, 2022, the Commissioner ordered Insurer to reinstate the Policy with no lapse in coverage. Insurer's petition for review in this Court now follows.²

II. Issues

Insurer raises three issues. First, Insurer contends that the Commissioner erred in applying the Act to the Policy termination because Insurer rescinded, rather than cancelled or refused to renew, the Policy. Second, Insurer asserts that the Commissioner erred in finding that Insurer failed to establish a material misrepresentation to justify rescission of the Policy when Insurer showed that Intervenor knowingly made false representations to Insurer that were material to the risk insured against. Third, Insurer argues that the Commissioner erred in finding that Insurer's June 24, 2020, Nonrenewal Notice failed to substantively comply with the Act when the Notice stated a specific reason for the refusal to renew and complied with the requirements of the Act.

III. Discussion

A. Cancellation or Rescission

First, Insurer contends that the Commissioner erred by applying the Act to the...