Barrera v. State Farm Mutual Automobile Insurance Company

Facts

In April 1958 Mr. Alves purchased a Chevrolet from a used-car salesman. The salesman arranged with Pucci, D's agent, that he come to the agency in order to obtain insurance for Alves's car. Both Alves, who was 24 years old at the time, and Pucci testified that Alves did not read the application and that Pucci filled in the answers to the questions. Question 18 stated: 'Has your license to drive or registration been suspended, revoked, or refused, to the applicant or any member of his household in the last five years?' Contrary to the Department of Motor Vehicles (hereinafter 'DMV') report on Mr. Alves which evidenced one suspension and two probation orders within the five years preceding April 1958, a 'No' answer appeared on the application in response to question 18. On April 29, 1958, Mr. Alves signed an application for automobile insurance prepared by Mr. Pucci, D's agent, and on that same date, D issued a policy insuring Alves against public liability for $10,000, for any one person's injury. Alves paid premiums on the policy in April 1958, October 1958, and April 1959. On November 28, 1959, Mrs. Alves struck P. On December 4, 1959, P's attorneys notified D of the claim. On December 8, 1959, D sent a reply letter. On April 22, 1960, D rescinded the insurance policy and returned all premiums paid. On July 26, 1960, P sued the Alveses, and Alves forwarded a copy of the summons and complaint to D. On August 2, 1960, D advised the Alveses that it would not defend the action. On November 3, 1960, judgment was entered in favor of P against the Alveses. P sued D to recover on the policy. Alves testified that Pucci did not call this question to his attention and, further, that he showed Pucci his driver's license, which bore a 'Probation' stamp on it. Pucci testified that although he did not specifically recall asking this question, he always, as a matter of practice, made such an inquiry and a related one concerning prior cancellations of insurance. Pucci further testified that he did not see Alves's driver's license and that he could not remember the manner in which he obtained the license number that he had included in the application. Alves and Pucci further testified that in November 1959, prior to the accident injuring P, Alves called Pucci and requested a transfer of his policy to a Lincoln automobile which he had just purchased. In reliance on the April 1958 application, Pucci filled in the transfer application. Following company practice, Pucci did not require that Alves sign the application. Maurice Hammer, an insurance broker for the previous two years, testified that the general custom and practice of the insurance industry was to obtain DMV reports in connection with applications, either as a basis for determining rates or insurability of the risk. Pucci testified that D always issued a policy when he gave a binding receipt to the applicant. The binding receipt provided for insurance coverage for 30 days from the date of the receipt, even if the company subsequently refused to approve the risk. Pucci handed Alves a binding receipt on April 28, 1958. Daniel Priest, an underwriting superintendent of D stated that D orders DMV reports and makes other inspections 'on a judgment basis.' In some cases State Farm does check on statements made by its applicants; but 'in other cases, the underwriting people just passed on the risk based on the statement on the application as submitted.' He further stated that once a claim has occurred, the claims, rather than the underwriting, department, determines whether the claim is sufficiently 'significant' to warrant an investigation. In April 1958 Alves, then being under 25 years of age, fell within the class of applicants who received the greatest number of spot checks. D did not begin its investigation until February 4, 1960, more than two months after P was injured, and almost two years after the initial application. On March 2, 1960, it obtained a DMV report. Prior to obtaining the report, and in response to an underwriter's question about whether to cancel Alves's policy, the claims department on February 16 responded that it was in the process of developing evidence for rescission. On April 22, State Farm notified Alves of the rescission of his policy. Not until P's attorneys notified D of a $10,000 claim under the personal liability provision of the policy did D attempt to check Alves's driving record. The court ruled in D’s favor for its cross-claim claiming that the policy was void ab initio. P appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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