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Attorney(S)

Merrimon Merrimon for plaintiff. F. A. Sondley and T. H. Cobb for defendant.

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Case Summary — C. C. McCarty et al. v. Imperial Insurance Co.; C. C. McCarty v. Scottish Union and National Insurance Co. (Supreme Court of North Carolina, June 5, 1900)

Factual and Procedural Background

Two separate actions were brought on two different fire insurance policies issued to the plaintiff by two defendant fire insurance companies covering the same property which was destroyed by fire. The actions were tried before Starbuck, J., at the March Term, 1899, of Buncombe County. The causes had been referred to a referee, H. B. Carter, who made findings of fact and law. Both policies were issued by the same insurance agent and contained a clause that they should be void "if the interest of the insured be not truly stated herein."

At the time the policies were issued there existed a deed of trust to R. McBrayer, trustee, to secure a $960 debt incurred by the plaintiff in purchasing property; that trust deed constituted a lien on the insured property and on another, more valuable tract. The plaintiff did not notify the agent of the McBrayer deed of trust; the defendants (insurance companies) had no knowledge of it.

The referee found that the plaintiff was unaware that the McBrayer deed covered the burned property (he believed it covered only the other tract) and found that the plaintiff did not fraudulently or purposely conceal the deed from the defendants' agent. The referee concluded, as a matter of law, that the policies were valid and subsisting and had not been voided or suspended by anything done or omitted by the plaintiff.

The trial court (His Honor) declined to adopt the referee's conclusions of law and rendered judgment dismissing both actions. The plaintiff excepted and appealed. The Supreme Court (Clark, J.) reviewed the referee's findings and the legal issues presented.

Legal Issues Presented

Whether concurrent insurance on the same property is permissible and whether notice of concurrent insurance (and of incumbrances) to the same agent constitutes a waiver of related objections by the insurers.
Whether a misrepresentation or omission in the application or policy will avoid recovery when the misrepresentation or omission is not fraudulent and not material to the risk.
Whether failure to disclose a deed of trust (an incumbrance) to the agent rendered the policies void under the clause that the policy would be void if the insured's interest "be not truly stated herein," given the factual findings about the plaintiff's knowledge and intent.
Who bears the burden of proving that a misrepresentation was material or fraudulent and whether such questions are for the jury or for the court.

Arguments of the Parties

Defendants' Arguments

The defendants' defense (as stated in the opinion) was that there existed an additional incumbrance (the McBrayer deed of trust) that was not disclosed to the insurance agent, and that because the policies contained a provision voiding them if "the interest of the insured be not truly stated herein," the policies should be voided and recovery barred.

The opinion does not contain a detailed account of any other specific arguments advanced by the plaintiff or additional argumentation by the defendants beyond the described defense.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Insurance Co. v. Chase, 72 U.S. (5 Wall.) 509	That whether disclosure of an insurer's interest (or interest of the insured) is material to the risk and would have enhanced the premium is a question of fact for the jury.	The court relied on this principle to support the view that materiality of the nondisclosure (the McBrayer trust deed) is a question of fact and not a judicial determination absent adequate findings.
Albert v. Insurance Co., 122 N.C. 92	Construes the state statute (Laws 1893, ch. 299, sec. 9): misrepresentations are representations not warranties; misrepresentations do not vitiate a policy unless they materially contribute to the loss or are fraudulent to evade increased premium.	The court applied this rule to hold that absent a finding that the omission was fraudulent or material, the insurer had not met its burden to avoid liability; such issues are ordinarily for the jury.
Bank v. Fidelity Co., ante, 320	Supports the allocation of the burden of proof upon the insurance company to demonstrate fraudulent intent or materiality to avoid the policy after it has received the premium.	The court referenced this authority to underscore that the insurer bears the burden of proof to show grounds for release from its obligation to pay.
Collingham v. Ins. Co., 168 N.C. 261	This case is cited in the opinion (citation only in the text).	The opinion lists this citation without elaboration; it is noted as cited at the end of the opinion.

Court's Reasoning and Analysis

The Supreme Court's analysis proceeded from the factual findings made by the referee and the legal effect of the applicable statute and precedent. The opinion emphasizes several points:

The policies were issued by the same insurance agent, and concurrent insurance on the same property is permissible. The companies had notice of the incumbrance to the Building and Loan Association (which is mentioned in the policies as "payable as their interests may appear"), and notice to the issuing agent of incumbrances or concurrent insurance operates as a waiver of objections on those grounds.
The court relied on the state statute in force at the time the policies were taken (Laws 1893, ch. 299, secs. 8 and 9), which the opinion treats as part of the contract: section 8 deems applications taken within the State to be subject to its law; section 9 declares statements in applications or policies to be representations (not warranties) and provides that misrepresentations do not prevent recovery unless material or fraudulent.
Applying these provisions and controlling authorities, the court noted that there was no finding of fraudulent misrepresentation. The referee found the plaintiff honestly believed the McBrayer trust did not cover the burned lot and did not fraudulently conceal it. The court concluded the omission was not shown to be material (it did not enhance the risk because the trust deed also covered another tract sufficient to discharge the debt) and that the Building and Loan Association named in the policy had no knowledge of the McBrayer deed.
The court stressed the allocation of burden: the insurer, having accepted the premium, bears the burden of proving fraudulent intent or that the misrepresentation was material, and ordinarily such factual issues are for the jury (citing Insurance Co. v. Chase and Albert v. Insurance Co.).
The trial court had overruled the referee's factual finding regarding the plaintiff's knowledge, but did not find fraudulent intent nor materiality; the Supreme Court held that in the absence of findings that the omission was fraudulent or material, it was error for the trial court to enter judgment for the defendants.
The opinion also notes a statutory context point: the two statutory sections (8 and 9 of Laws 1893, ch. 299) had been inadvertently omitted from the codified insurance law of 1899 (ch. 54); the court characterizes that omission as inadvertent and expresses the view those protections should be restored by the Legislature. It observes that the repeal did not affect the present insurance because the policy was taken while the former law was in force.

Holding and Implications

Holding: The Supreme Court set aside the judgment dismissing both actions and ordered a new trial. The court held that, because the referee's factual findings as to lack of fraudulent intent and lack of materiality were not effectively disturbed by a contrary finding that established fraud or material omission, it was error to enter judgment for the defendants without a proper finding that the omission was material or fraudulent.

Implications:

The immediate consequence is that the prior judgment in favor of the defendants was vacated and a new trial was ordered.
The opinion reinforces that, under the law in force when these policies were issued (Laws 1893, ch. 299, secs. 8–9), statements in an application or policy are representations rather than warranties, and that misrepresentations will not bar recovery unless they are material or fraudulent; materiality and fraud are typically factual questions for the jury and the insurer bears the burden of proof to avoid the policy after receiving the premium.
The court also noted a legislative concern: sections 8 and 9 (Laws 1893, ch. 299) had been omitted from the 1899 codification; the court recommended restoration of those protections but explicitly stated that the repeal did not affect the policies here because they were issued while the 1893 law remained in effect.

Disposition: Judgment set aside; new trial ordered.

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1. C. C. McCARTY ET AL. v. IMPERIAL INSURANCE CO. 2. C. C. McCARTY

Fire Insurance — Concurrent Insurance — Misrepresentations, Not Fraudulent, or Immaterial — Inadvertent and Unintentional Omissions — Notice of Incumbrance — Waiver.

1. Concurrent insurance is permissible. Notice of such insurance to the same agent who issues the policies in both companies, and of incumbrances stated in the policies or communicated to him at the time of insurance, is a waiver of all objections on those grounds.

2. A misrepresentation, unless fraudulent or material, will not prevent a recovery. Neither will an omission, inadvertent and unintentional, have that effect.

3. Misrepresentations, to be material, must contribute materially to the loss, or fraudulently evade the payment of the increased premium, otherwise they do not vitiate the policy, life or fire — the burden of proof being upon the company, and the jury to decide the fact.

4. The restoration of sections 8 and 9, Laws 1893, ch. 299, inadvertently omitted in the codified system of 1899, ch. 54, warmly recommended.

The two causes had been referred to H. B. Carter, Esq., referee, and the cases were heard upon exceptions, identical in both, filed by defendants. Both policies were issued by the same insurance agent, and contained a provision that they should be void, if the interest (821) of the insured be not truly stated therein. At the time of insurance there was a deed in trust to R. McBrayer, trustee, to secure a debt of plaintiff, for $960, incurred in purchase of the property, and which constituted a lien on it, as well as on another piece of property of still greater value. This incumbrance plaintiff failed to notify the agent of, and defendants knew nothing about it.

The referee found as a fact that the plaintiff was not himself aware that the incumbrance covered the burned property, and supposed it only covered the other more valuable piece. He also found that the plaintiff did not fraudulently or purposely conceal from the defendant the existence of said deed of trust.

The referee found as a conclusion of law in each case, that at the date of the destruction by fire of the property insured, the policy was a valid and subsisting contract, and had not been rendered void or suspended by anything done or omitted by the plaintiff.

His Honor, making no finding as to the plaintiff's intent overruled the conclusions of law of the referee, and rendered judgment dismissing both actions. The plaintiff excepted, and appealed in both cases.

CLARK, J.

The plaintiff's house was insured in the defendant companies, and was destroyed by fire. Concurrent insurance was permitted, and policies in both these companies were issued to the plaintiff by the same agent. The companies had full notice of the incumbrance to the Building and Loan Association, and it is mentioned in the policies with the provision "payable as their interests may appear." The defense (822) is that there was another incumbrance in favor of McBrayer, trustee, which was not made known to the insurance agent, and there was a provision in the policies that they should be void "if the interest of the insured be not truly stated herein."

In Insurance Co. v. Chase, 72 U.S. (5 Wall.), 509, it is said: "Whether the disclosure of interest was material to the risk incurred and would have enhanced the premium, is always a question of fact for the jury." And our statute (Laws 1893, ch. 299), which was in force when this policy was taken out, and which therefore enters into and makes a part of the contract, provides:

"SEC. 8. All contracts of insurance, the application for which is taken within this State, shall be deemed to have been made within this State, and subject to the law thereof.

"SEC. 9. All statements or descriptions in any application for a policy of insurance, or in the policy itself, shall be deemed and held representations and not warranties; nor shall any misrepresentation, unless material or fraudulent, prevent a recovery on the policy."

There is no fraudulent misrepresentation found, and it is clear that failure to inform the company of the McBrayer trust deed was not material, and did not in anywise enhance the risk, for the trust deed embraced another tract of land which was alone sufficient to discharge it. Besides, the Building and Loan Association, named in the policy as the primary beneficiary of the insurance, had no knowledge of the McBrayer trust deed.

In Albert v. Insurance Co., 122 N.C. 92, it is said (at page 95), construing the above-cited statute (1893, ch. 299): "This law applies to all policies of insurance, both of fire and of life; and unless such misrepresentations materially contribute to the loss, or fraudulently evade the payment of the increased premium, they do not vitiate the policy. (823) Ordinarily these are questions of fact for the jury, and not for the court." The burden of proving the fraudulent intent or the materiality of the misrepresentation, is upon the company who, after receiving the premium, must pay the loss, unless it shows good ground for its release from the discharge of the obligation it assumed. Bank v. Fidelity Co., ante, 320.

The evidence would seem to indicate an inadvertent and unintentional omission by the plaintiff in stating the incumbrances upon the property. The referee found that the insured, when he took out the insurance, did not know that the trust deed to McBrayer covered the lot on which the insured building stood, and that he did not fraudulently conceal its existence from the defendant's agent, but acted honestly and in good faith. The court, upon exceptions to the referee's report, overruled that finding of fact, but expressly refrained from passing upon "the plaintiff's intent, deeming it immaterial," and neither does he find that the omission of reference to the McBrayer trust deed was material; in fact, his other findings in effect indicate that it was not. In the absence of any finding that there was a fraudulent or material omission in the application, it was error to give judgment in favor of the defendant.

The wise and just provisions contained in the above sections 8 and 9, ch. 299, Laws 1893, were repealed, together with all previous legislation upon insurance, in adopting a codified system, by chapter 54, Laws 1899. The omission to reenact said sections 8 and 9 was doubtless an inadvertence on the part of the Legislature. The protection given by those provisions against technical forfeitures of policies, taken out without fraudulent or material misstatement of facts in the application, will doubtless be restored when the matter is properly called to the attention of the General Assembly. The repeal does not affect this (824) insurance which was taken out while the law was in force.

The findings of fact being insufficient, the judgment is set aside.

New trial.

Cited: Collingham v. Ins. Co., 168 N.C. 261.

McCARTY v. INSURANCE COS