Story Case

When Mr. Silas Arthur applied for insurance on his property, a frame house, the company asked certain questions; among others was the question as to the distance of his property from other frame buildings. Mr. Arthur answered that the only buildings dangerously near were two others like his own and a shed, but that the burning of the latter could not endanger his house. The insured property was destroyed by fire, which originated in the shed. The company denies liability on the ground that Mr. Arthur had warranted that the burning of the shed would not affect his residence. Is this position sound?

Ruling Court Case. National Bank Vs. The Insurance Company, Volume 95, United States Reports, Page 675

W. D. Oldham was the owner of certain mill property, including a building and machinery. He applied to the defendant company for insurance on this property. In the application which he was requested to fill out, among other things, he was required to state separately "the estimated value of personal property and of the building to be insured - the value being estimated by the applicant." Oldham estimated the value of the building at $15,000 and the machinery at $15,000. The policy was issued in which it was stated that the application and all matters therein contained, were a part of the policy, and constituted warranties on the part of Oldham. The building was destroyed by fire, and this action was brought by the National Bank as assignee of Oldham. By way of defense, the company showed that the estimates placed upon the property were not true and accurate: that the building was worth only about $8,000, and the machinery, $12,000.

Mr. Justice Harlan said: "It will be observed from an examination of the questions propounded to the insured, that among other things he was asked whether the building was stone, or brick, or wood, etc. These and similar questions refer to matters of which the insured had actual knowledge, or about which he might with propriety be required to speak with perfect accuracy. They are matters capable of precise ascertainment, and in no sense depending upon estimate, opinion, or mere probability. But his situation and duty were wholly different when required to state the cash value of his property. He was required to give its "estimated value." His answers concerning such value were, in one sense, and perhaps in every just sense, only the expression of an opinion. The ordinary list of the value of property is the price it will command in the market if offered for sale. But that list cannot, in the very nature of the case, be applied at the time application is made for insurance."

Since these estimates were made in good faith, and were not unreasonable under the circumstances, the court was of the opinion that the policy was not voided. Judgment was given for the National Bank.

Ruling Law. Story Case Answer

A warranty is a part of the contract of insurance itself. While a representation is a statement made while the contract is being made, a warranty must be in the contract of insurance, or in the application, and referred to in the policy, and made a part of the policy. Warranties usually follow in a statement beginning, "I warrant." A warranty must be strictly complied with by the insured. Because of this, there is a tendency on the part of the courts to construe statements as representations, and not as warranties, unless it is very clear that they were intended to form a part of the contract.

As a general rule, when the company asks for information which must of necessity be a matter of opinion, the courts are liberal with the answers made by the insured. Persons may reasonably differ over the value of property, or other matters of opinions, and the courts will not declare void a policy in such cases unless the answers are unreasonable or made in bad faith to deceive the company.

In the Story Case, the company cannot escape liability on the ground that Mr. Arthur warranted that the shed would not be dangerous to his house. Such a statement could, in the nature of things, be no more than an opinion for an expression of which the policy cannot be voided.