(Reuters) - A standard insurance form that asks whether an applicant “had a foreclosure ... during the past five years” does not clearly require disclosure of pending foreclosures, a federal appeals court held Tuesday in a case of first impression.

The 8th U.S. Circuit Court of Appeals reversed a ruling by a federal judge in Arkansas, who allowed a Hiscox Ltd insurance unit to void Suzan Taylor’s $2.6 million property insurance policy after her lakefront house in Hot Springs National Park burned to the ground.

While investigating Taylor’s claim, the insurer learned that her lender had initiated foreclosure proceedings a week before she applied for the policy in February 2018.

Taylor had reached an agreement to stop the foreclosure, but the lower court judge said her failure to mention the pending foreclosure proceeding on her insurance application was a material misrepresentation that voided any coverage she might have under the Hiscox policy.

Reversing that ruling, the 8th Circuit said the phrase “had a foreclosure” is ambiguous, since it might refer to the foreclosure sale or to the entire process leading up to the sale. (The panel noted that the 6th Circuit reached a similar conclusion in a non-precedential opinion in 2007.)

“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,” Circuit Judge Morris Arnold wrote for the panel. He was joined by Circuit Judges James Loken and Jonathan Kobes.

Hiscox also argued that it was not to blame for any ambiguity because it did not draft the application. Rather, Taylor’s insurance agent had used an “industry standard ACORD application form, which is used by retail agents to seek quotes from various insurers and wholesale brokers,” the company said.

However, the 8th Circuit said Hiscox effectively “chose the relevant language on the subject of foreclosures by prodding applicants to submit this very form.”

It sent the case back to the lower court to review Hiscox’s other defenses to coverage.

Hiscox and its attorney did not immediately respond requests for comment on Tuesday. Neither did the Association for Cooperative Operations Research and Development (ACORD), a standards-setting body for the insurance industry.

One of Taylor’s attorneys, Wes Christian of Christian Levine Law Group, said he expects the decision “will result in most applications being redrafted,” and believes it will also protect policyholders from cancellation or rescission “based on answers to ambiguous questions.”

The case is Hiscox Dedicated Corporate Member Ltd v. Taylor, 8th U.S. Circuit Court of Appeals, No. 21-3534.

For Hiscox: Scott Stirling of Walker Wilcox Matousek

For Taylor: Jennifer Doan of Haltom & Doan; and James (Wes) Christian of Christian Levine Law Group

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